Engineering every day
Annual Report 2019
Financial Statements
Independent Auditor’s Report
Consolidated Statement of
Financial Position
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Statement
of Changes in Equity
Consolidated Statement of
Cash Flows
Notes to the Consolidated
Financial Statements
Company Statement of
Financial Position
Company Statement of
Changes in Equity
Notes to the Company
Financial Statements
Corporate Information
Our global operations
Officers and advisers
139
149
150
151
151
153
154
197
198
200
207
212
Strategic Report
Contents
Strategic Report
Our Company purpose
Engineering every day
Financial summary 2019
Our Group at a glance
The industries we serve
Our business model
Our business model in action
Business drivers and investment case
Risk management
Key performance indicators
10 year financial summary
Chair’s Statement
Strategic Review
Review of Operations
– Performance at a glance
– Steam Specialties
– Electric Thermal Solutions
– Watson-Marlow
Financial Review
Sustainability Report
Governance Report
Our governance
1. Board leadership and
Company purpose
– Board of Directors
– Chair’s introduction
– Our approach to governance
– Engaging with our stakeholders
(including Section 172 Statement)
– Employee Engagement
Committee Report
2. Division of responsibilities
3. Composition, succession
and evaluation
– Nomination Committee Report
– Board evaluation
4. Audit, risk and internal control
– Audit Committee Report
– Risk Management
Committee Report
01
01
02
04
06
08
12
18
20
26
28
30
33
41
43
44
49
52
54
59
72
74
74
76
78
79
82
85
89
89
92
93
93
98
5. Remuneration
102
– Remuneration Committee Report 102
– Remuneration at a glance 2019
106
– Annual Report on
107
Remuneration 2019
– Remuneration Policy 2020
122
Regulatory disclosures
133
Statement of Directors’ Responsibilities 137
Read about our business model
on pages 8-17
Read more about our strategic progress
in the Strategic Review on pages 33-40
Read about the activities of our Board
during the year on pages 72-137
Our Company
purpose
Engineering
every day
Our Company purpose is to create
sustainable value for all our stakeholders
as we engineer a more efficient, safer and
sustainable world.
Our purpose unites us, guides our decisions
and inspires us wherever we operate.
We create sustainable value for:
• our shareholders who benefit from strong
financial returns and a progressive dividend
policy that has delivered over 50 years of
dividend growth;
• our customers who use our products and
services to increase operating efficiency,
improve product quality, optimise plant
safety, meet sustainability targets and
reduce costs;
• our employees who advance
their careers in safe, inclusive and
collaborative workplaces;
• our suppliers that we engage with for
continuous improvement and responsibly
sourced materials and services;
• our communities that we support through
employee volunteering and charitable
contributions; and
• the environment, which benefits from
the solutions we provide to customers to
reduce their carbon emissions, water and
waste, and the activities we undertake to
reduce our own environmental impacts.
We are engineering a more efficient,
safer and sustainable world. For everyone.
Every day.
For more information visit
www.spiraxsarcoengineering.com
Spirax-Sarco Engineering plc is a multi-
national industrial engineering Group with
expertise in the control and management
of steam, electric thermal solutions,
peristaltic pumping and associated fluid
path technologies.
Our technologies play a critical role across
multiple industries from food and beverage
to pharmaceuticals, power generation to
paper production. With customers in 130
countries, wherever you live in the world
we provide the engineered solutions that sit
behind the production of many of the items
you use every day.
Examples of how we are
engineering every day:
Spirax Sarco
helps improve
energy efficiency
during egg
production
See pages 12-13
Chromalox
delivers precise
temperature control
for pharmaceutical
production
See pages 14-15
Watson-Marlow
increases process
efficiency during
confectionery
manufacture
See pages 16-17
1
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Financial summary 2019
for the year ended 31st December 2019
• Reported revenue growth of 8%, organic revenue growth of 6%
• Adjusted operating margin of 22.8%, up 10 bps organically*
• Strong organic sales growth in Steam Specialties and Watson-Marlow
• Chromalox operating margin increased to 15.1% in H2
• Net debt‡ of £295.2 million as at 31st December 2019, 0.9x EBITDA*
• Statutory operating profit down 18% due to non-recurring gain on disposal in 2018
• Final dividend increased by 10% to 78.0p
2019 key figures
Adjusted*
Revenue
Adjusted operating profit*
Adjusted operating profit margin*
Adjusted profit before taxation*
Adjusted basic earnings per share*
Cash conversion**
Statutory
Revenue
Operating profit
Operating profit margin
Profit before taxation
Basic earnings per share
Dividend per share
2019
2018
£1,242.4m £1,153.3m
£264.9m
23.0%
£254.6m
250.0p
91%
£282.7m
22.8%
£274.5m
265.7p
84%
2019
2018
£1,242.4m £1,153.3m
£299.1m
25.9%
£288.8m
303.1p
100.0p
£245.0m
19.7%
£236.8m
226.2p
110.0p
Organic†
+6%
+7%
+10 bps
Reported
+8%
+7%
-20 bps
+8%
+6%
Reported
+8%
-18%
-620 bps
-18%
-25%
+10%
* All profit measures exclude certain items, which totalled a charge of £37.7 million (2018: credit £34.2 million), as set out in Note 2.
** Cash conversion measures the percentage of adjusted cash from operations to adjusted operating profit, as set out in Note 2.
† Organic percentage growth measures are at constant currency and exclude contributions from acquisitions and disposals, as set out in Note 2.
‡ Net debt includes total borrowings, cash at bank and bank overdrafts but excludes IFRS 16 lease liabilities, as set out in Note 24.
Segmental reporting
Our segmental reporting is consistent with how we present management information to the Board. A detailed segmental breakdown is
provided in Note 3 of the Consolidated Financial Statements on pages 164 to 167. A performance review by operating segment is set out
on pages 43 to 53.
2019
EMEA††
Asia Pacific
Americas
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total
†† Europe, Middle East and Africa.
2019
Revenue
£335.7m
£249.8m
£169.9m
£755.4m
£186.1m
£300.9m
Change
Reported
-3%
+7%
+9%
+3%
+20%
+13%
Organic
+2%
+7%
+11%
+6%
-1%
+12%
£1,242.4m
+8%
+6%
2019 Adjusted
operating
profit*
Change
Reported
Organic
£67.0m
£72.5m
£38.4m
£177.9m
£24.7m
£95.8m
(£15.7m)
£282.7m
-3%
+14%
+4%
+5%
+8%
+13%
+4%
+13%
+18%
+10%
-19%
+11%
+7%
+7%
* All profit measures exclude certain items, which totalled a charge of £37.7 million (2018: credit £34.2 million), as set out in Note 2.
2
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Revenue £m
£1,242.4m
2019
2018
2017
2016
2015
1,242.4
1,153.3
998.7
757.4
667.2
Adjusted operating profit* £m
£282.7m
2019
2018
2017
2016
2015
282.7
264.9
235.5
180.6
152.4
Basic adjusted earnings per share* p
265.7p
2019
2018
2017
2016
2015
265.7
250.0
220.5
171.5
142.6
H&S over three-day lost time
injury rate per 1,000 employees
3.6
2019
2018
2017
2016
2015
3.6
4.9
4.6
6.0
6.2
Revenue by segment %
61%
27%
20%
24%
15%
14%
Steam Specialties
EMEA
Asia Pacific
Americas
Electric Thermal Solutions
Watson-Marlow
KPI
Organic
growth %
6
7
6
4
2
KPI
Margin %
22.8
23.0
23.6
23.8
22.8
KPI
Adjusted operating profit by segment* %
Before corporate expenses of £15.7 million.
60%
23%
32%
24%
KPI
8%
13%
Steam Specialties
EMEA
Asia Pacific
Americas
Electric Thermal Solutions
Watson-Marlow
* All profit measures exclude certain items, which totalled a charge of £37.7 million
(2018: credit £34.2 million), as set out in Note 2.
* All profit measures exclude certain items, which totalled a charge of £37.7 million
(2018: credit £34.2 million), as set out in Note 2. The Group’s three operating
segments, as defined by IFRS 8, are Steam Specialties, Electric Thermal Solutions
and Watson-Marlow.
3
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our Group at a glance
A world-leading industrial engineering Group
Thermal Energy Management
Steam Specialties
Electric Thermal
Solutions
Watson-Marlow
First for Steam Sol uti ons
EMEA Asia Pacific Americas
See pages 44-48
See pages 49-51
See pages 52-53
Core product expertise
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Industrial and commercial steam systems,
including condensate management,
controls and thermal energy management
products and solutions
Electrical process heating and temperature
management solutions, including industrial
heaters and systems, heat tracing and
a range of component technologies
Peristaltic and niche pumps and associated
fluid path technologies, including pumps,
tubing, specialty filling systems and
products for single-use applications
Typical uses: heating and curing, cleaning
and sterilising, hot water generation, space
heating and humidification
Characteristics of steam: high energy
content, easy to control, environmentally
safe, clean and sterile
Typical customer benefits: improved
process efficiency, product quality
and safety; reduced waste; lower CO2
emissions, energy and water use; less
maintenance downtime; and compliance
with industry standards
Typical uses: electrical heating for
industrial processes, freeze protection and
component heating for industrial heaters
and systems
Typical uses: fluid transfer in a wide
range of pumping applications from those
requiring sterility and accuracy to high
volume pumping of corrosive materials
Characteristics of electrical solutions:
easy to incorporate, install and maintain,
high temperatures, controllable, no
emissions at point of use
Typical customer benefits: more
efficient industrial processes through
improved thermal energy management and
control systems
Characteristics of peristaltic pumps:
fluid is contained within a tube: a sterile
tube makes a sterile pump, and abrasive
or corrosive fluids cannot damage the
pump; gentle and highly accurate pumping;
low maintenance
Typical customer benefits: more
accurate, reliable and efficient fluid transfer
4
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Global operations*
A diverse and expanding Group with a
presence in all key industries and markets
We operate in both mature and emerging economies and in almost
all industrial sectors. We have a unique global coverage and serve
customers in 130 countries worldwide. We have 130 operating
units in 47 countries and a resident direct sales presence in a
further 19 countries. A further 64 countries are serviced indirectly by
distributors or non-resident direct sales.
* Global operations at year end 2019.
Further reading
Details of the industries we serve and our geographical expansion in 2019.
See pages 6-7 and 37
Map key
Operating units
Sales offices
Indirect presence
Our diverse business
People
8,000+
Countries with a resident
direct sales presence
66
** Operating units are business units that invoice locally.
‡ Actively purchasing in the last 24 months.
Sales and service engineers
Operating units**
1,600+
130
Core product lines
1,600+
Direct buying customers‡
110,000
5
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
The industries we serve
We apply our products, solutions and expertise
across a diverse range of industrial sectors and
end users – increasing efficiency, safety and
sustainability in those industries, every day.
Food
17% of Group
revenue
Beverage
3% of Group
revenue
Pharmaceutical
& Biotechnology
18% of Group
revenue
Steam is used for blanching, cooking,
baking, packaging, cleaning and sterilising.
Electric heating elements are used in
commercial food equipment. Pumps are
used to meter ingredients, deliver food to
process lines and handle process waste.
Steam is essential for brewing and distilling
processes. It is used to protect product
quality and flavour, and ensure compliance
with industry standards. Pumps are used to
transfer fruit, juice, concentrates, yeast and
other additives.
Clean steam reduces the risk of product
and process contamination; electrical
heating is used in a wide range of process
heating applications; our peristaltic pumps,
valves and single-use components enable
precise flow control and fluid isolation.
OEM Machinery
13% of Group
revenue
Oil & Gas
7% of Group
revenue
Chemical
6% of Group
revenue
Original Equipment Manufacturers (OEMs)
are companies that build and supply
machines for use in industry. Our activities
with OEMs vary from simple product supply
to advising on machine performance
improvements and process plant design.
Electrical heating products increase fluid
viscosity, deliver freeze protection and help
separate natural gas, crude oil and water
during extraction. Our steam products
enable optimum steam system
performance and reduce energy use
during oil and gas production.
Steam and electricity are widely used as an
energy source in chemical production and
product processing, while our pumps are
used to safely and accurately transfer and
dose critical chemical components.
6
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Power Generation
Healthcare
5% of Group
revenue
4% of Group
revenue
Buildings
3% of Group
revenue
Electrical heating technologies are widely
used to optimise power generation.
Steam turbines transfer chemical energy in
fuel into electrical energy and steam is used
to distribute and reuse waste heat formed
during the power generation process.
Steam is used in hospitals and clinics
for space heating, hot water production,
humidification and sterilisation. Pumps
and associated equipment are used
in the manufacture of products for the
Healthcare industry.
Steam is used to provide space heating,
humidification and hot water in public
and private buildings, while our electrical
products are used for hot water and heat
generation, snow melting, gutter and roof
de-icing, and frost-heave prevention.
Mining & Precious
Metal Processing
3% of Group
revenue
Water & Wastewater
Pulp & Paper
3% of Group
revenue
2% of Group
revenue
Peristaltic pumps reduce water, energy
and chemical use and increase productivity
while moving and processing abrasive
ores and slurries. Electrical heating is used
for temperature maintenance and space
heating for workers.
Peristaltic pumps are used to dose
chemicals during water treatment
processes and to transfer viscous and
abrasive slurries. Electrical heating solutions
provide freeze protection, temperature
maintenance and space heating in water
treatment plants.
Our steam, electric and pump products
facilitate the accurate control of critical
processes, such as washing, bleaching,
dyeing, drying and finishing, in the
manufacture of paper and a wide range
of domestic and industrial tissues.
7
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Our business model
Creating value through meeting customer needs
1. Our competitive strengths
2. Our core activities
Customer
closeness
Applied
engineering
Innovate & design
Customer
needs
Regional
manufacturing
Wide
product
range
At the heart of our value creation, and
our key competitive differentiator, is our
deep engagement with and understanding
of our customers and their processes,
which is achieved through our direct
sales approach. This closeness enables
us to meet our customers’ needs as we
combine our specialist knowledge and
locally-available, industry-leading products
and services to deliver value-adding
engineered solutions.
Manufacture
Sell
Monitor & measure
Apply & solve
Educate
Read more on page 10
Read more on page 10
8
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
3. Our routes to market
Sales companies
Over 100 sales
companies, supplied by
our manufacturing facilities,
holding stock locally.
Over 1,600 specialist sales
and service engineers calling
on end users, identifying their
requirements and designing
engineered solutions.
l
s
e
n
n
a
h
c
s
e
a
s
t
c
e
r
i
D
l
l
s
e
a
s
t
c
e
r
i
d
n
I
End users
42%
OEMs
20%
Contractors
& consultants
10%
28%
End users of our
products and services
Industrial and commercial
steam, electrical process
heating and peristaltic and
niche pump users, across
a wide range of markets,
purchasing from us directly,
specifying our products,
or buying from distributors.
Unique benefits to our approach
Bridge the knowledge gap
Many users of our products and services do not have the in-house
knowledge or engineering resources to understand and fix their
problems. We bridge that knowledge gap.
Focus on value-creating solutions
We act as a trusted adviser to identify efficiency improvement
opportunities and provide value-creating solutions to customers.
Read more on page 11
Self-generate growth opportunities
Our sales engineers use their wide industry experience and knowledge
to identify often unrecognised problems or efficiency opportunities, self-
generating sales growth.
Develop innovative products and solutions
Our deep understanding of end user processes drives product
innovation. We lead the way in developing convenient, effective and
reliable ready-to-install packaged solutions.
Leverage information from our unique databases
Leveraging information from our large and unique customer databases
enables our sales engineers to establish relationships with key decision
makers and positions us well to achieve sales growth.
4. Creating value for our stakeholders
Customers
7.2m
tonnes of CO2 saved annually
from products sold in 2019
Suppliers
£545m
paid to suppliers for materials
and services in 2019
Read more overleaf and on pages 59-71
Employees
£365m
paid in wages, salaries and
pension contributions in 2019
Communities
£600,000
cash, in-kind donations and
employee time to community
engagement activities
worldwide in 2019
Shareholders
£76m
paid as dividends in 2019
Environment
2%
reduction in our water use
intensity in 2019
9
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Our business model continued
1. Our competitive strengths
2. Our core activities
Our direct sales approach
is our most important
differentiator, enabling us
to meet customer needs,
create value and drive
sales growth.
1
2
3
4
Our core activities are those
things we do that enable us
to meet the needs of our
customers and achieve our
Company purpose.
1
2
3
4
Customer closeness
Our direct sales business model creates a unique
understanding of our customers’ needs. We build deep,
long-term relationships as we help our customers solve
their difficult productivity, control and energy efficiency
problems, and improve their operational performance, safety
and sustainability.
Applied engineering
It is not our products alone that provide value to our
customers, but also the application of our extensive
knowledge of systems design, operations and maintenance.
Our customers increasingly rely on our expertise to deliver
unique engineering solutions to achieve enhanced and
sustainable operating efficiencies.
Wide product range
The breadth of our product offering is unmatched by our
competitors and our one-stop shop approach simplifies the
procurement process for our customers who are increasingly
seeking partnerships with competent full-service suppliers.
We are committed to research and development (R&D)
to further widen our range of products and pre-fabricated
engineered packages.
Regional manufacturing
Local availability of a wide range of products, which meet
applicable regional design codes, is critical to our business
model and enhances top-line revenue growth. We have
strategically located our major manufacturing plants across
the world in Europe, North America, Latin America and Asia.
Customer
closeness
Applied
engineering
Customer
needs
Regional
manufacturing
Wide
product
range
10
Innovate & design
Through innovative R&D we develop and enhance our already
broad range of products, pre-fabricated packages and site
services, ensuring that we meet customers’ changing needs.
Our technically-expert direct sales force allows us to leverage
these new products and develop new applications for existing
products, which increases the amount of plant spend that
we can capture in the small-scale projects and maintenance
activities that lie at the heart of our business.
Manufacture
We manufacture industrial and commercial steam system
products, electrical process heating and temperature
management products, and peristaltic and niche pumps
and associated fluid path technologies. We manufacture
over 1,600 core product lines in over 30 manufacturing sites,
located across four continents.
Sell
With a resident direct sales presence in 66 countries and non-
resident direct sales or distributors in a further 64 countries,
we serve customers in 130 countries worldwide. Our offering
to customers ranges from single products to bespoke
engineered solutions or full system design and supply. We also
provide site surveys and audits, and customer training.
Monitor & measure
We offer a comprehensive range of site audits, maintenance
services and digital monitoring solutions, to keep our
customers’ systems operating efficiently. Approximately 50%
of our revenue is derived from our end users’ maintenance,
repair and overhaul activities.
Apply & solve
We combine our specialist knowledge with our industry-
leading products and services to deliver value-adding
engineered solutions to customers, who increasingly rely on
our service, solutions and expertise to achieve enhanced and
sustainable operating efficiencies.
Educate
We help our customers to identify in-house engineering
knowledge skill gaps and offer a wide range of training
courses, delivered in our 59 training centres worldwide, to help
plug those knowledge gaps.
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
3. Our routes to market
Our direct sales approach is instrumental in creating value-adding opportunities
for self-generated growth.
1
2
3
4
Routes to market
Our direct sales approach plays an important role in all routes
to market – whether direct or indirect – as our engineers call on
end users to highlight the benefits of our products, solutions and
services. End users can then purchase from us directly, specify
our products in OEM equipment, request that contractors specify
our products, or purchase from a distributor.
Direct sales
Our specialist sales and service engineers visit end users
in over 60 countries, offering expert advice and providing
products and solutions to optimise process efficiency, safety
and sustainability. Our territories are covered segmentally where
possible, geographically where not, with sector specialists
allocated to our core industries. We call this “sectorisation”.
Sectorisation enables us to provide industry-leading support to
end users.
As we combine a detailed understanding of our end users’
processes with our broad range of regionally-manufactured
products, engineered packages and services, we build deep,
long-term relationships with our customers who trust us as a
valued engineering partner and expert adviser. This customer
closeness further strengthens our ability to design and develop
products, services and solutions that deliver value to customers,
and self-generate growth.
Self-generated growth
Our sales and service engineers spend a lot of time in our
customers’ plants and are highly effective at self-generating
growth opportunities as they identify often unrecognised
customer needs and design solutions to meet those needs.
Importantly, these small improvement projects are generally
funded through operating expenditure budgets and have a short
pay-back period for the customer, meaning that they remain
attractive even during challenging economic times.
4. Creating value for our stakeholders
We recognise the importance of operating in a way that delivers long-term
sustainable value for our stakeholders. We engineer sustainable value creation as
we manage relationships in a way that reflects our Values; effectively use financial,
human and natural resources; understand our associated risks and opportunities;
and implement our strategy for growth.
Customers
Creating value for our customers is at the heart of our Company
purpose and is exemplified by our direct sales business model,
which is driven by our customer needs. We create sustainable
value for our customers as we provide products and services
that enable them to improve operational efficiency, productivity
and safety, meet regulatory requirements and increase
their sustainability.
Suppliers
We operate a regional manufacturing strategy and use a wide
range of local, national and international suppliers who adhere to
our Supplier Sustainability Code. Having a broad manufacturing
footprint, the beneficiaries of our value creation are geographically
widespread and they, in turn, create value for their stakeholders.
1
2
3
4
See pages 39, 65 and 80-81
See pages 12-17, 70 and 80-81
Employees
We have over 8,000 Company employees across 66 countries
worldwide. Our employees are our greatest asset and we
always aim to treat them with respect. We create value for our
employees by extensively investing in developing their knowledge
and skills, providing safe and inclusive working environments and
remunerating them fairly for the work that they do.
See pages 36, 62-64 and 80-84
Shareholders
As we focus on meeting our customers’ needs we consistently
achieve growth that outperforms our markets. This, in turn,
enables us to create and deliver a strong track record of
shareholder value. We have a progressive dividend policy that
has delivered over 50 years of dividend progress, with a 12%
dividend Compound Annual Growth Rate over the last 10 years.
See pages 28-29, 31, 56 and 79
Communities
We are committed to “Engineering better futures” for the people in
our local communities. We create value in our communities as we
offer support to charities, non-profit organisations and education
providers through employee volunteering, financial and in-kind
charitable donations and educational provision.
See pages 40, 71 and 80-81
Environment
We create value for the environment by providing products
and services that improve the sustainability of our end users’
operations, in particular reducing energy and water use, lowering
carbon emissions and reducing waste. We are also committed
to minimising our own environmental impacts through reducing
energy consumption, emissions, water use and waste.
See pages 12-13, 67-70 and 80-81
11
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Report
Our business model in action
The quality of the
MasoSine pumps and
An example of how
our strong level of
engineering expertise
service helped us gain
can help the agricultural
the customer’s trust,
sector use resources as
enabling us to deliver
efficiently and effectively
increased production
as possible.”
efficiency.”
Angelo Giambrone, Business Development Manager,
Spirax Sarco UK
Ricardo Costa, Sales Engineer,
Watson-Marlow Brazil
12
12
Spirax-Sarco Engineering plc
Annual Report 2019
Strategic Report Spirax Sarco
helps improve
energy efficiency
during egg
production
The challenge
In the agricultural industry, where margins on agricultural
produce are tight, farmers are becoming increasingly
conscious of their energy use and are looking for innovative
ways to cut costs and lower their environmental impacts.
At the same time, on poultry farms across the UK a mixture
of litter, soiled bedding and waste feed is generated as a
by-product of the production process, which requires removal
and disposal.
Biomass boilers, which use organic matter to fuel a heating
or hot water system, are gaining traction amongst industrial
users looking for sustainable, renewable fuel technologies.
As a result, a biomass heating company asked Spirax Sarco
to assist in the design and development of a fully-optimised
biomass heating system, utilising the waste litter mixture to
heat poultry sheds.
The solution
Spirax Sarco worked with the biomass boiler company to
design and develop a biomass heating system with integrated
steam technology, for use in the poultry industry. Four key
technologies provided by Spirax Sarco include a pressurised
de-aerator to raise the temperature of boiler feedwater and
lower fuel use, a condensate recovery unit to maximise steam
system efficiency, a plate heat exchanger package to control
the conversion of steam to hot water and metering to enable
end users to monitor their steam systems.
In addition, Spirax Sarco helped to integrate a micro-turbine
into the system that uses steam to generate small amounts of
electricity on site.
The result
Approximately two million chickens in the UK are housed in
steam-heated sheds utilising biomass. As a result of Spirax
Sarco’s solution, agricultural customers have reduced waste
removal from site, are achieving significant savings on their
energy bills and have reduced their environmental impacts,
increasing the sustainability of the eggs you eat.
Engineering every day
13
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Report
Our business model in action continued
Combining our thermal
energy management
expertise with
specialist products,
we delivered a reliable
heating solution to
ensure the quality of
essential medicines.”
Patrick Fee, Sales Engineer, Chromalox
1414
Spirax-Sarco Engineering plc
Annual Report 2019
Strategic Report Chromalox
delivers precise
temperature
control for
pharmaceutical
production
The challenge
Within pharmaceutical manufacturing, thermal management
is critical across a number of key processes to maintain
product quality and production efficiency. Planning to expand
its production facility, a biopharmaceutical company in Ireland,
which manufactures a range of biologics (drugs manufactured
in, extracted from or semi-synthesised from biological
sources), required an accurate, clean and safe heating solution
for a number of process applications, including the heating of
water-jacketed vessels. Accurate temperature management
is essential to prevent biopharmaceutical materials from
overheating, which would cause the material to degrade and
accumulate on the internal walls of the jacketed vessel.
The pharmaceutical company turned to a specialist OEM to
provide the necessary processing equipment, and the OEM
turned to Chromalox for its electrical thermal management
expertise and products. The OEM required a temperature
management solution that would seamlessly integrate with its
pharmaceutical equipment.
The solution
Engineers from Chromalox worked with the OEM to determine
the precise temperature load required by the customer
and then provided a range of heating and temperature
management components, such as a stainless steel circulation
heater and remote mounted SCR (silicon controlled rectifier)
control panel, to monitor and manage the heating system,
for integration with the OEM’s pharmaceutical process
equipment. Chromalox’s circulation heaters are certified to
ensure compliance with a number of standards, such as 32Ra
external polishing requirements, ensuring they are suitable for
use in a cleanroom environment.
The result
A compact and efficient heating system that is delivering
precise temperature control of water circulating in the jacketed
vessels, ensuring that the biologics produced are consistently
of the highest quality.
Engineering every day
15
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Report
Our business model in action continued
The quality of the MasoSine pumps and
our strong level of service helped us gain
the customer’s trust, enabling us to deliver
increased production efficiency.”
Ricardo Costa, Sales Engineer, Watson-Marlow Brazil
1616
Spirax-Sarco Engineering plc
Annual Report 2019
Strategic Report Watson-Marlow
increases
process
efficiency during
confectionery
manufacture
The challenge
In its Brazilian factory, a market-leading confectionery producer
was using lobe pumps to transfer ingredients such as liquid
sugar within its production process when manufacturing fruit
jelly sweets, marshmallows and fruit stick candies. However,
the mechanical seals of the lobe pumps, which are situated
around the rotating shaft to seal the process fluid inside the
pump, frequently became stuck by the glue-like sugar solution.
The pumps experienced frequent downtime and required
regular maintenance, with the confectioner having to use
standby pumps to maintain continuous production.
The solution
Designed to cope with viscous fluids that other pumps
struggle to process, Watson-Marlow’s MasoSine pumps have
a triple-lip seal system that is unaffected by sticky or viscous
fluids such as the hot sugar solution being pumped by the
sweet manufacturer. Watson-Marlow recommended the
installation of four new pumps at the plant to transfer the liquid
sugar at rates of up to 4,600 litres per hour.
The result
Since installing the MasoSine pumps from Watson-Marlow,
the confectioner reports that downtime has been significantly
reduced, maintenance costs are lower and process efficiency
has increased, ensuring that children and adults in Brazil can
continue to enjoy the sweet treats that they love.
Engineering every day
17
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Business drivers and investment case
We have a clear understanding of our customers and markets,
allowing us to understand where and how our revenues are
generated and where best to invest for future returns.
With the majority of our income coming from our customers’ maintenance activities and
small improvement projects…
85%* of Group revenue is generated from annual
maintenance and operational (opex) budgets,
50%
15%
rather than from capital (capex) budgets.
Why is this important?
Capex budgets are more likely to be cut during periods of slower
growth or recession. Therefore, the high proportion of revenue
deriving from opex budgets gives us resilience during economic
downturns. Additionally, through our direct sales approach,
we are able to self-generate business by providing bespoke
engineered solutions, typically with better margins.
* Based on internal estimates.
e x
g e t s
p
c a
b u d
opex bu d g
e ts
35%
Maintenance and repair sales
that maintain existing systems,
supported by the end users’ opex
budgets, with a typical invoice
value of around £1k
Small project sales that
improve existing systems,
supported by the end users’
opex budgets, with a typical
invoice value of £10k-£50k
Large project sales that build
new systems, supported by
the end users’ capex budgets,
with a typical invoice value of
over £100k
…and over a third of sales coming from self-generated opportunities…
35%* of revenue is derived from self-generated
opportunities. This reflects our overall strategic
objective to deliver growth that outperforms our markets.
We achieve this by staying close to our customers – through our
direct sales approach – understanding their system requirements
and providing them with innovative products and solutions to
solve their process challenges.
Why is this important?
By focusing on self-generated growth we identify problems and
design solutions that deliver significant operational benefits for
customers. Typically, these bespoke, engineered projects have
higher margins and relatively short sign-off timeframes as they
are funded by maintenance and operational budgets at plant
level. As we deliver engineered solutions we self-generate growth,
reinforce our customers’ trust in our engineering expertise and
forge sustainable business relationships.
Further reading
Our direct sales approach is our greatest competitive advantage and is covered
in more detail in our business model and customer case studies.
See pages 8-17
…our revenue is balanced across multiple less-cyclical industries…
50%* of Group revenue is derived from defensive,
less cyclical end markets, including: Food &
Beverage, Pharmaceutical & Biotechnology, Healthcare and
Water & Wastewater.
Why is this important?
Not only do we derive revenue from a diverse range of industry
sectors, we also have an excellent balance between higher-
growth end markets and those that are more defensive
and resilient.
1%
1%
2%
14%
3%
3%
3%
4%
5%
6%
17%
Food
Beverage
3%
18%
Pharmaceutical & Biotechnology
OEM Machinery
Oil & Gas
Chemical
Power Generation
Healthcare
Buildings
Mining & Precious Metal Processing
13%
7%
* Based on internal estimates. Where there is little visibility of end user industry sector
(primarily in sales via distributors), sales have been allocated across industries on a pro-rata
basis. In 2019 these “unknown” sales accounted for 20% of total revenue. OEM sales to
identifiable industries have been allocated to those industries. Sales to OEM customers
accounted for 20% of Group revenue in 2019.
18
Water & Wastewater
Pulp & Paper
Rubber & Plastic
Semiconductor
Other
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
…and our long-term market drivers remain positive.
14%* share of our addressable markets, which were
valued at £9.0 billion at the end of 2019.
Our markets have significant growth potential due to a number
of positive long-term market drivers (see the table below) at a
macroeconomic and sector level.
Long-term market growth drivers
Population growth
Increased consumption and demand in all our major
industry sectors.
Economic development in emerging markets
New markets and increased consumption.
Ageing population
Increased demand for healthcare and pharmaceutical products.
National and international climate change
mitigation strategies
Requirement for companies to manage energy more efficiently,
increasing demand for energy management products
and services.
Increase in global energy consumption
Increased investment in renewable and non-renewable energy
and power generation industries, with increased demand for
energy management solutions.
Industrial production
Our markets reflect changes in industrial production growth rates
but our sales have consistently outperformed them as we have
expanded our addressable markets, extended our geographic
penetration and grown our market share.
Our competitive landscape
As the global market leader in steam systems and peristaltic
pumping, and a significant player in the electric thermal solutions
market, we have a strong competitive position in relatively
fragmented markets.
Our competitors generally fall into two categories: system
specialists that supply a wide range of products and services,
and product specialists that compete on a small part of our
product range. Most system specialists are relatively small,
privately owned, regional players, while product specialists lack
the whole system expertise and application knowledge offered by
our direct sales force. Our broad product range, global presence,
applications knowledge and direct sales business model give us
a strong competitive advantage in our markets.
Why is this important?
Our long-term growth prospects are promising. Despite being
the market leader in Steam Specialties and pumps and fluid path
technologies, we have a relatively small market share of these
large addressable markets, at 16% and 20% respectively, and
with just a 7% share of the electric thermal solutions market we
have good opportunities for growth. We can grow by targeting
self-generated sales, extending our geographical reach and
increasing the size of our addressable market through innovative
product development. In addition, our addressable markets and
sectors continue to demonstrate headroom for long-term growth.
20%
£4.7bn
£1.5bn
7%
Total addressable
market size
£9.0bn
£2.8bn
16%
Steam Specialties addressable market
Steam Specialties market share
Electric Thermal Solutions addressable market
Electric Thermal Solutions market share
Watson-Marlow addressable market
Watson-Marlow market share
* Based on internal estimates. The increase in market size in 2019 reflects
underlying changes in market segment sizes, expansion of the addressable
market as a result of the acquisition of Thermocoax, product development
and the impact of exchange movements. Market share includes the full year
revenue of the acquisition made in 2019.
19
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Risk management
In 2019, we focused on the risks
and opportunities associated
with climate change, and
meeting customer needs, as
well as ensuring the Group is
well prepared for Brexit.”
Nicholas Anderson
Group Chief Executive and
Chair of Risk Management Committee
20
Risk likelihood, control and impact
S trategy
4
2
1
8
3
6
P
e
o
p
l
e
7
5
al
n
Operatio
Principal risks
1
2
3
4
5
6
7
8
Economic and political instability
Significant exchange rate movements
Cybersecurity
Failure to realise acquisition objectives
Loss of manufacturing output at any Group factory
Breach of legal and regulatory requirements (including ABC laws)
Inability to identify and respond to changes in customer needs
Solution specification failure
Likelihood
Trend
High
Low
Impact
No change
Decrease
from
FY2018
Increase
from
FY2018
Control
High
Medium
Low
High
Medium
Low
Further reading
The numbers relate to the principal risks.
See pages 22-25
Our approach and appetite for risk
We recognise risk as an inherent part of our business operations
and we approach risk with the same deliberate, strategic
consideration as other aspects of the business. The Risk
Management Committee monitors our risks, in particular those
identified as principal risks, on an on-going basis, while the Board
is responsible for the overall stewardship of risk management
and internal control. Using the information and evaluations
obtained from our regular top-down and bottom-up reviews,
alongside the Committee-led principal risk appetite ratings, the
Committee creates an effective system for monitoring, planning
and developing a Group-wide approach and culture regarding risk.
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
General Managers of our operating units are directly involved in the
risk assessment process and the evaluations of the Committee,
including the appropriate levels of risk, are communicated to all
Group companies.
The on-going monitoring and engagement contributes to the
Group’s risk register and the management of risks. Both the risk
register and the principal risks are dynamic and fluid. They provide
a reflection of current conditions across the Group and guidance for
on-going monitoring and mitigation activities.
Managing risks
Board
Audit
Committee
Reports to
Works with
Risk Management Committee
Oversees risk management processes and procedures
and monitors mitigating actions put in place by
the Group. Works with the Audit Committee to
monitor the effectiveness of internal controls and
the audit process
• Risk scoring: the scoring matrix was reviewed and revised to
enable a more precise measure of risks for the Group;
• Electric Thermal Solutions: the scope of the risk register was
extended to cover Thermocoax, coinciding with the appointment
of Dominique Mallet, President of the Electric Thermal Solutions
business, to the Committee in September 2019;
• Risk Appetite Statement: the Committee confirmed the
statement which can be found on pages 100 to 101; and
• Climate change: in recognition of it ascending in importance in
the global political and economic agendas, as well as increasing
global awareness of climate impacts, the Committee introduced
climate change as a new risk on the risk register, to be carefully
monitored over the coming year.
The Committee’s analysis of the principal risks affecting the Group,
before mitigation, is set out in the diagram on page 20.
How is the Group preparing for Brexit?
An on-going review and revision of the Group’s Brexit strategy was
overseen by the Committee in 2019. These actions, which will
continue into 2020 as necessary, include the following:
• holding an additional month’s raw material in stock in the UK;
• holding an additional two weeks’ stock of finished goods at
those businesses that purchase from the UK; and
• planning in respect of orders and demand in the
Top-down review
operating companies.
Risk review (external/internal)
Carried out at regular intervals
Risk assurance
Internal audit and external auditor (on-going review
of effectiveness by the Audit Committee and Risk
Management Committee)
Group-wide risk register
Maintained and reviewed by the Risk
Management Committee
Bottom-up review
Group operating companies
Key risk management actions during 2019
The Group undertook the following key actions during 2019 in
addition to the regular monitoring of existing and developing risks:
• Bottom-up risk review: the Committee received high quality
responses from its Group companies and determined that the
Group companies have sufficiently robust measures in place to
effectively mitigate the Group’s principal risks;
• Risk register: the bottom-up risk review informed the annual
review and update of the risk register;
Improved cybersecurity controls
In response to the growing risk of cyberattacks, we have rigorously
assessed and improved our controls. Within each control there is
a multi-faceted approach to risk reduction. The Group now has
mature cyber defences commensurate with a FTSE 100 company.
Emerging risks
In addition to the principal risks faced by our business, we
recognise that there are risks which are more uncertain in nature
and difficult to assess or that have the potential to develop and
increase in severity over time. The Committee monitors closely all
emerging risks that have the potential to increase in significance
and affect the performance of the Group and its ability to meet its
strategic objectives. Whilst we acknowledge that such risks are not
as easily accommodated on the risk scoring matrix or prescribed
risk appetite ratings, the Committee meetings and the risk register
are both used to identify and closely monitor such risks.
Solution specification failure, currently risk 8, demonstrates the
dynamic nature of our risk assessment processes. This risk was
elevated from an emerging risk to a principal risk in 2019.
The risk register recognises the importance of climate change as an
emerging risk. Risks associated with climate change will be closely
monitored, given the increasing likelihood of this risk impacting the
Group, as will the controls we have in place to address the risks
and opportunities that climate change presents.
The Board, the Group Executive Committee and the Committee
are monitoring the impact of the COVID-19 virus on our business
as an emerging risk.
21
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Risk management continued
Risk register review
Following the review of the risk register and principal risks, the
following changes were made:
• Health, safety and environmental risks: no longer a principal
risk as there has been a significant focus and good leadership on
EHS and improved performance in recent years;
• Loss of a critical supplier: no longer a principal risk as
measures are being put in place to identify suppliers presenting
the highest risk, to improve continuity of supply, with solutions to
minimise the loss;
• Solution specification failure: included as a principal risk.
The trend for each principal risk was assessed and updated and
our risk appetite process was extended to new and revised risks,
including the two new principal risks.
• Inability to identify and respond to changes in customer
needs: included as a principal risk;
Principal risks
The following table sets out the Group’s principal risks and
describes the links to strategy, the mitigation measures and the
appetite for each risk. The trend column sets out the direction of
change from 2018.
The table includes those risks that we have identified as currently
most relevant to the Group.
Key
Trend
Increased risk
No change to risk
Decreased risk
Link to strategy
Direct link
Indirect link
No link
Risk appetite ratings defined:
Very low
Following a marginal-risk, marginal-reward approach
that represents the safest strategic route available.
Low
Balanced
Seeking to integrate sufficient control and mitigation
methods in order to accommodate a low level of risk,
though this will also limit reward potential.
An approach which brings a high chance for success,
considering the risks, along with reasonable rewards,
economic and otherwise.
High
Willing to consider bolder opportunities with higher levels
of risk in exchange for increased business payoffs.
Very high
Pursuing high-risk, unproven options that carry with
them the potential for high-level rewards.
Principal risk and
why it is relevant
Trend
Key mitigation, sponsor
and explanation of change
1. Economic and political instability
Risk
appetite
rating
Rationale for rating
The Group operates worldwide
and maintains operations in
territories that have historically
experienced economic or political
instability. This type of instability,
which includes the uncertainties
of regime change, creates risks
for our locally based direct sales
operations and broader risks to
credit, liquidity and currency.
• Strong internal controls, including internal audit
and appropriate insurance.
• Operating in accordance with the Group
Treasury Policy.
• Externally-facilitated scenario planning.
• Resilient business model.
• Well spread business by geography and sector.
Executive sponsor: Nicholas Anderson
Change: This risk has increased due to various
factors including trade friction between the
USA and China in 2019, the deterioration in the
Argentine economy and continued tensions in the
Middle East.
Very high
High
Balanced
Low
Very low
We have the
background and
know-how to
successfully manage
the unique challenges
in economically and
politically volatile
territories. We are
willing to accept these
challenges where
opportunities for growth
exceeded the impact of
this risk.
Link to strategy:
1 2 3 4 5 6
22
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Principal risk and
why it is relevant
Trend
Key mitigation, sponsor
and explanation of change
2. Significant exchange rate movements
Risk
appetite
rating
Rationale for rating
The Group reports its results
and pays dividends in sterling.
Operating and manufacturing
companies trade in local currency.
With sales companies and
manufacturing spread across
the globe, the nature of the
Group’s business necessarily
results in exposure to exchange
rate volatility.
• Maintain the spread of manufacturing across
currency areas.
• Consideration of exchange rate exposures in the
manufacturing strategy.
• Forward cover where appropriate and in line
with the Group Treasury Policy.
• Focus on reducing manufacturing cost.
Very high
High
Balanced
Low
Very low
Executive sponsor: Kevin Boyd
Change: No change.
We take a balanced view
of this risk as the risk
arises as a direct result
of our global presence,
but our geographic
spread means we are
not wholly dependent on
any one currency.
3. Cybersecurity
Cybersecurity risks include
risks from malware, accident,
statutory and legislative
requirements, malicious actions
and other unauthorised access by
third parties.
• Global assessment of our IT environment
against UK cyber essentials framework and
prioritising actions for improvement.
• Deploying security tools to limit the impact and
spread of ransomware.
• Initiating a new centrally-managed
Firewall environment.
• Further strengthening of security for centrally-
managed systems for heightened protection
and consistency.
Executive sponsor: Shaun Mundy, Group
IS Director
Change: No change.
4. Failure to realise acquisition objectives
Whilst the Group mitigates this
risk in various ways, including
through comprehensive due
diligence, professional advisers
and contractual protections,
amongst others, there are some
variables that are uncontrollable
or difficult to control, such as
economic conditions, culture
clashes and employee movement.
Therefore, these could impact
acquisition objectives.
• Regular review of acquisition criteria in line with
strategic plan.
• Board approval of integration plans for
major acquisitions.
• Scrutiny of targets and implementation plans by
external advisers and internal key players.
• Use of retainer/escrow to provide protection
against warranty claims.
• Use of insurance as protection against seller
breach and non-disclosure.
• Ensuring valuation models show a healthy return
on investment.
• Regular monitoring of performance by the Board
against the approved investment case.
Executive sponsor: Nicholas Anderson
Change: No change.
Link to strategy:
1 2 3 4 5 6
Very high
High
Balanced
Low
Very low
Concerns of potential
impact on the business,
in addition to the
important considerations
surrounding protection of
personal data, reinforce
our commitment to
implement and maintain
robust security measures
across the Group.
Link to strategy:
1 2 3 4 5 6
Very high
High
Balanced
Low
Very low
Thorough planning and
proper due diligence
can mitigate many of the
potentially risky aspects
of an acquisition.
Implementation plans
must be well-developed
and carefully pursued to
achieve the full strategic
and financial benefits.
Link to strategy:
1 2 3 4 5 6
23
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Risk management continued
Principal risk and
why it is relevant
Trend
Key mitigation, sponsor
and explanation of change
5. Loss of manufacturing output at any Group factory
The risk includes loss of
output as a result of natural
disasters, industrial action,
accidents or any other cause.
Loss of manufacturing output at
any important plant risks serious
disruption to sales operations.
• Investing in modern flexible machining.
• Capacity planning and holding stock in
sales companies.
• Conducting audits/inspections.
• Annual Risk Assessments and business
continuity planning.
• Reviewing and maintaining appropriate
insurance cover.
• Continuing commitment to employee policies,
ensuring satisfactory benefits and regular
communication with all employees.
Executive sponsors: Neil Daws, Jay Whalen*
and Dominique Mallet
Change: No change.
Risk
appetite
rating
Rationale for rating
Very high
High
Balanced
Low
Very low
Whilst we have mitigated
this risk through a
geographic spread of
factories, calculated
replication of capacity
and management of
stock, the potential
negative consequences
to the Group and its
customers warrants a
low appetite for this risk.
Link to strategy:
1 2 3 4 5 6
6. Breach of legal and regulatory requirements (including ABC laws)
We operate globally and must
ensure compliance with laws
and regulations wherever we do
business. As we grow into new
markets and territories, we must
continually review and update
our operations and procedures,
and ensure our employees are
fully informed and educated in
all applicable legal requirements.
This is particularly important
with respect to anti-bribery and
corruption (ABC) legislation.
Breaching any of these laws or
regulations could have serious
consequences for the Group.
• On-going global monitoring of commercial
arrangements and agreements, with appropriate
professional advice.
• Established procedures to maintain
accreditations.
• Group-wide ABC training and whistle-
blowing hotline.
• Group Litigation Report and on-going monitoring
of cases.
• Regular updates on Corporate Governance and
Stock Exchange rules.
• General Data Protection Regulation compliance
plan implemented.
• Conducting supplier audits.
• Engaging suppliers to commit to compliance with
the principles of the Supplier Sustainability Code.
Executive sponsor: Andy Robson
Change: No change.
Very high
High
Balanced
Low
Very low
We respect the laws,
rules and regulations
of the jurisdictions
in which we operate
and believe we have
a duty to comply with
those requirements.
* Jay Whalen retired from the Board and its Committees on 31st December 2019. Andrew Mines, Managing Director, Watson-Marlow, was appointed to the Committee on 1st January 2020.
Link to strategy:
1 2 3 4 5 6
24
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Principal risk and
why it is relevant
Trend
Key mitigation, sponsor
and explanation of change
Risk
appetite
rating
Rationale for rating
7. Inability to identify and respond to changes in customer needs
This risk could lead to a loss of
business as a result of a failure
to respond rapidly to changes
in the needs of customers or
technology shifts.
• Stronger presence of sales engineers,
compared with competitors, in the
market place.
• Watson-Marlow instituting a product
development pipeline process which tracks
trends and changes in each industry sector.
• New product ideas generated by market
development managers from close alignment
with sales engineers and customers.
• Sales and competitor analyses undertaken to
identify any trends or technology shifts.
Executive sponsor: Neil Daws
Change: New principal risk given the importance
of changing customer requirements.
Very high
High
Balanced
Low
Very low
The Group continues
to focus on its market
awareness, invests in
technical and sales
knowledge via the Spirax
Sarco Academy and,
through Customer First
sectorisation, seeks to
be more closely attuned
to its customers. There is
therefore a good level of
control effectiveness, but
a low appetite for risk.
8. Solution specification failure
This risk relates to loss of
output at a customer plant due
to a faulty product potentially
leading to customer product
contamination and/or customer
loss of manufacturing output and
thereby contractual liability and
loss of sales.
• Product Lifecycle Management rolled out
across the Steam Specialties business providing
improved failure visibility and analysis.
• Product Data Management pilot to mid-2020
prior to wider roll-out.
• Electronic quality system project to commence in
2020 in Watson-Marlow.
• Strengthening compliance and quality resource in
2020 in critical areas including audit of localised
manufacturing and establishing global quality and
compliance activities to identify high risk.
• Additional buyer assumption of liability on Original
Equipment Manufacturer products.
• Customer approval process for complex orders
and engineered solutions.
Executive sponsor: Neil Daws, Jay Whalen* and
Dominique Mallet
Change: No change to trend. Now a principal
risk due to reassessment of the risk across
all businesses.
Link to strategy:
1 2 3 4 5 6
Very high
High
Balanced
Low
Very low
With our direct market
approach, our risk from
a control and mitigation
perspective is well-
managed as we are
able to respond to our
customers in a timely
manner. From a financial
standpoint, the price
(and hence the margin)
we command provides
a strong foundation for
some risk appetite.
* Jay Whalen retired from the Board and its Committees on 31st December 2019. Andrew Mines, Managing Director, Watson-Marlow, was appointed to the Committee on 1st January 2020.
Link to strategy:
1 2 3 4 5 6
What are the key areas of focus for 2020?
• Undertake top-down risk review and annual review of the
risk register.
• Implement our plans for Brexit.
• Monitor COVID-19 and take action to mitigate its effects.
• Emerging risks.
Further reading
Information on the Group’s approach to risk, including risk appetite, along with the
roles, responsibilities and actions of the Risk Management Committee.
See pages 98-101
Our Viability Statement.
See page 101
Our Going Concern Statement.
See page 136
25
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Key Performance Indicators
Our key performance indicators are used to measure
the successful implementation of our strategy.
1. Organic revenue growth†
%
2. Adjusted operating profit*
£m
3. Adjusted operating profit
margin* %
2019
2018
2017
2016
2015
6
6
7
2019
2018
2017
2016
2015
282.7
264.9
235.5
180.6
152.4
2019
2018
2017
2016
2015
4
2
22.8
23.0
23.6
23.8
22.8
Definition
Organic revenue growth measures
the change in revenue in the current
year compared with the prior year from
continuing Group operations. The effects
of currency movements, acquisitions and
disposals have been removed.
Definition
Adjusted operating profit is the profit
earned from our business operations
before interest, taxes, the share of profit
of Associate companies and certain
other items.
Definition
Adjusted operating profit margin is defined
as adjusted operating profit expressed as a
percentage of revenue.
Progress in 2019
Organic sales increased by 6%, with 6%
organic growth in the Steam Specialties
business, a 1% organic contraction in the
Electric Thermal Solutions business and a
12% organic increase in Watson-Marlow.
Progress in 2019
Adjusted operating profit increased by
7% to £282.7 million. The reported figure
reflects a 7% organic increase and a net
1% increase as a result of acquisitions
and disposals, partially offset by a
currency headwind.
Progress in 2019
The adjusted operating margin fell by 20 bps
to 22.8% due to the disposal of the highly
profitable but non-strategic HygroMatik
business and a negative exchange impact.
On an organic basis the adjusted operating
profit margin was up 10 bps.
Link to remuneration
Revenue growth is a key driver of profit
generation and a central element in the
annual planning process. Bonus targets
are driven off annual plans and therefore
revenue growth drives a key measure of
variable remuneration.
Link to remuneration
Executive Directors’ variable remuneration
is based on three financial components:
adjusted operating profit, return on
capital employed and cash generation.
Operating profit margin is a key driver of all
three bonus measures.
Link to remuneration
Executive Directors’ variable remuneration
is measured on three main indicators:
profit, return on capital employed and cash
generation. Operating profit margin is a key
driver of all three.
Link to risk
Link to risk
Link to risk
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
Direct link
Indirect link
No link
Direct link
Indirect link
No link
Direct link
Indirect link
No link
† Organic growth is at constant currency and excludes
* Based on adjusted operating profit. Adjusted operating profit excludes certain items as set out
contributions from acquisitions and disposals, see Note 2.
and explained in the Financial Review and in Note 2.
26
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
4. Adjusted basic earnings
per share (EPS)* p
5. Cash generation* £m
Further reading
More information about our remuneration measures.
See pages 102-132
More information about our principal risks.
See pages 20-25
6. H&S over three-day lost
time injury rate per
1,000 employees
2019
2018
2017
2016
2015
265.7
250.0
220.5
171.5
142.6
2019
2018
2017
2016
2015
296.6
276.4
237.6
214.0
176.4
2019
2018
2017
2016
2015
3.6
4.9
4.6
6.0
6.2
Definition
Earnings per share is a measure of the
profit performance of the Group, taking into
account the equity structure. EPS is defined
as the adjusted after-tax profit attributable to
equity shareholders divided by the weighted
average number of shares in issue.
Definition
Cash generation is adjusted operating
profit after adding back depreciation
and amortisation (excluding IFRS 16
depreciation), less cash payments to
pension schemes in excess of the charge
to adjusted operating profit, equity settled
share plans and working capital changes.
Progress in 2019
Adjusted basic earnings per share
increased by 6% to 265.7 pence as organic
growth and the net positive impact of
acquisitions and disposals, partially offset
by exchange headwinds, contributed to an
increase in earnings.
Progress in 2019
Cash generation increased by 7% to
£296.6 million, primarily as a result of an
increase in adjusted operating profit.
Link to remuneration
EPS measured over three-year periods
is one of the two components of the
Performance Share Plan.
Link to remuneration
Cash generation is one of three financial
measures on which Executive Directors’
variable remuneration is based.
Definition
The number of workplace injuries that
resulted in over three days of absence
per 1,000 employees. The workplace
is any location in which an employee is
present as a requirement of employment.
Employees include all permanent and
temporary staff and contractors. All injuries
that occur in workplaces, regardless
of cause, are included, as are road
traffic accidents.
Progress in 2019
Our over three-day lost time injury rate
improved during 2019, falling from 4.9 per
1,000 employees in 2018 to 3.6 per 1,000
employees in 2019.
Link to remuneration
The safety of our employees is central to
the sustainability of our business and has
an impact on the financial success and
profitability of the Group. Improving the
health, safety and sustainability of our
Group is one of the personal strategic
objectives of each Executive Director,
creating a direct link with remuneration.
Link to risk
Link to risk
Link to risk
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
1
2
3
4
5
6
2
8
Direct link
Indirect link
No link
Direct link
Indirect link
No link
Direct link
Indirect link
No link
* Based on adjusted operating profit. Adjusted operating profit excludes certain items as set out
and explained in the Financial Review and in Note 2.
27
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
10 year financial summary
Our financial performance demonstrates a strong trajectory
of growth and shareholder value creation.
2010
£m
2011
£m
2012†
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
2018
£m
2019
£m
Revenue
589.7
650.0
661.7
689.4
678.3
667.2
757.4
998.7 1,153.3 1,242.4
Operating profit
121.4
129.5
125.7
147.0
148.1
142.8
174.1
198.9
299.1
245.0
Adjusted operating profit*
119.1
134.0
136.2
151.6
153.0
152.4
180.6
235.5
264.9
282.7
Adjusted operating
profit margin*
20.2% 20.6% 20.6% 22.0% 22.5% 22.8% 23.8% 23.6% 23.0% 22.8%
Profit before taxation
123.5
132.3
124.1
145.7
144.8
139.7
171.4
192.5
288.8
236.8
Adjusted profit before taxation*
121.6
137.2
134.9
151.1
151.1
151.1
177.9
229.1
254.6
274.5
Profit after taxation
86.7
93.2
87.6
102.3
100.6
96.7
121.3
157.9
223.4
167.0
Basic earnings per share
112.5p 120.0p 112.2p 133.4p 132.8p 129.9p 165.0p 214.4p 303.1p 226.2p
Adjusted earnings per share*
109.5p 124.8p 122.2p 138.8p 140.4p 142.6p 171.5p 220.5p 250.0p 265.7p
Dividends in respect
of the year
Dividends in respect
of the year (per share)
52.6
38.1
119.5
44.5
139.9
50.6
55.8
64.4
73.6
81.1
43.0p
49.0p
53.0p
59.0p
64.5p
69.0p
76.0p
87.5p 100.0p 110.0p
Special dividend (per share)
25.0p
–
100.0p
–
120.0p
–
–
–
–
–
Net assets
379.5
400.1
436.5
403.5
441.9
398.3
524.4
609.5
766.9
826.3
Return on capital employed* †† 42.1% 41.1% 39.4% 44.4% 44.3% 44.1% 47.9% 52.9% 54.9% 56.2%
Return on invested capital* ††
25.3% 25.7% 24.8% 27.6% 27.4% 27.1% 28.7% 22.6% 19.3% 19.0%
* All profit measures exclude certain items as set out and explained in the Financial Review and in Note 2.
† The results for 2012 were restated to reflect IAS 19(R), prior years have not been restated.
†† The results for 2019 exclude the impacts of IFRS 16, which was adopted in 2019.
28
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Revenue and adjusted operating profit margin £m / %
Dividends and adjusted earnings per share p
30
28
26
24
22
20
18
16
14
12
10
i
%
n
g
r
a
m
t
fi
o
r
P
1,250
300
250
200
150
100
50
0
1,000
800
m
£
e
u
n
e
v
e
R
e
r
a
h
s
/
p
600
400
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
Sales
Reported profit margin
DPS
EPS
Special dividend
Return on capital employed and return on invested capital %
60
50
40
30
20
10
%
2010
ROCE
2011
ROIC
2012
2013
2014
2015
2016
2017
2018
2019
29
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Chair’s Statement
Another year of sustainable value creation
We have had another
successful year, delivering
record sales and adjusted
operating profit and welcoming
electric thermal solutions
specialist, Thermocoax,
into the Group.”
Jamie Pike
Chair
30
Introduction
2019 marked the 60th anniversary of Spirax-Sarco Engineering’s
listing on the London Stock Exchange. Throughout this period
we have consistently focused on delivering sustainable value
to shareholders, while providing products and services to help
engineer a more efficient, safer and sustainable world.
Against a backdrop of slowing industrial production growth rates
we have had another successful year, delivering record sales and
adjusted operating profit and welcoming electric thermal solutions
specialist, Thermocoax, into the Group. We are therefore proposing
a 10% increase in the final dividend, taking the total dividend
to 110.0p, an increase of 10%, ensuring that our shareholders
continue to benefit from the value we create. Throughout the year
we helped our customers to manage their industrial processes and,
by delivering small, bespoke engineered solutions to customers,
we created value for them as we improved the efficiency, safety
and sustainability of their existing systems. We estimate that energy
management products sold by our Steam Specialties business
in 2019 will save our customers 7.2 million tonnes of carbon
emissions a year – the equivalent of the annual carbon absorption
of approximately 327 million mature trees – thereby ensuring that
our value creation goes beyond our customers and the financial
markets to also help tackle the global challenge of climate change.1
Financial highlights
Sales for the year were £1,242.4 million, an organic increase of
over 6%, strongly exceeding global industrial production growth of
1.0%.2 Currency movements had no effect on sales during 2019,
while acquisitions and disposals resulted in a 1% net increase.
Thermocoax, which joined the Group on 13th May 2019, added
£27.9 million to sales. HygroMatik was divested on 30th November
2018 and as a result made no contribution to sales in 2019.
The Group’s reported sales were 8% higher than 2018.
Our Steam Specialties business, comprising Spirax Sarco and
Gestra, performed strongly, with sales up 6% organically and gains
in all three geographical reporting segments. Our Watson-Marlow
Fluid Technology business had an exceptional year, with organic
sales growth of over 12%. Sales in our Electric Thermal Solutions
business, comprising Chromalox and Thermocoax, were down
1% organically.
On an organic basis, Group adjusted operating profit increased by
7% to £282.7 million. The Steam Specialties business saw organic
adjusted operating profit growth of 10%, while Watson-Marlow
was up 11%. Chromalox saw an organic adjusted operating profit
decline of 19%, following a challenging first half of the year, but
recovered in the second half. Translation and transaction currency
movements reduced the Group adjusted operating profit by 1%,
while the net impact of the acquisition and disposal added 1%.
Total adjusted operating profit was also up 7% on a reported basis.
Statutory operating profit fell to £245.0 million (2018: £299.1 million)
and the statutory operating profit margin fell from 25.9% to 19.7%
due primarily to the non-recurring disposal in 2018.
The Group adjusted operating margin fell by 20 bps, to 22.8%, due
to the disposal of the highly profitable but non-strategic HygroMatik
business and a negative exchange impact. Organically, the
adjusted operating margin grew by 10 bps.
1 CO2 saving tree equivalent is based on the European Environment Agency’s estimated figure
of 22kg of carbon absorbed per mature tree each year.
2 Source for industrial production growth figures: Oxford Economics, February 2020.
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Revenue £m
£1,242.4m
2019
2018
2017
2016
2015
1,242.4
1,153.3
998.7
757.4
667.2
Adjusted operating profit £m
£282.7m
2019
2018
2017
2016
2015
282.7
264.9
235.5
180.6
152.4
KPI
Organic
growth %
6
7
6
4
2
KPI
Margin %
22.8
23.0
23.6
23.8
22.8
The Group adjusted pre-tax profit was £274.5 million, 8% ahead of
the prior year. Adjusted basic earnings per share was 6% ahead at
265.7 pence (2018: 250.0 pence).
The pre-tax profit on a statutory basis was £236.8 million, down
18% on 2018 (£288.8 million), which benefited from non-recurring
gains on disposals (£53.9 million). Further details can be found
in Note 2 to the Financial Statements. Over the last two years,
statutory pre-tax profit grew 23%. The statutory basic earnings per
share was 226.2 pence (2018: 303.1 pence).
Cash and dividends
Cash generation was robust throughout the year, with good
adjusted cash conversion of 84% (2018: 91%), reflecting the
strong organic revenue growth. On 13th May 2019 we acquired
Thermocoax for €156 million (£135 million) on a cash-free, debt-free
basis. The acquisition was financed from existing cash and debt
facilities. At 31st December 2019 we had a net debt balance of
£295.2 million, a net debt to EBITDA ratio of 0.9 times, compared
with net debt of £235.8 million at 31st December 2018.
The interim dividend for 2019, paid on 8th November 2019, was
raised by 10% to 32.0 pence per share (2018: 29.0 pence per
share). The Board is recommending an increase in the final dividend
of 10% to 78.0 pence per share (2018: 71.0 pence). Subject to
approval of the final dividend by shareholders at the Annual General
Meeting (AGM) on 13th May 2020, the total Ordinary dividend for
the year will be 110.0 pence per share, an increase of 10% over the
100.0 pence per share for the prior year.
Corporate governance
We were pleased to welcome Caroline Johnstone to the Board
as an independent Non-Executive Director on 5th March
2019. Caroline is a member of the Audit, Remuneration and
Nomination Committees, and Chair of the Employee Engagement
Committee. In her executive career she was a partner in
PricewaterhouseCoopers (PwC) until 2009, where she worked
extensively with large global organisations on turnaround, culture
change, delivering value from mergers and acquisitions and cost
optimisation programmes. Her financial, people and advisory
skills, together with her international business experience across a
range of different industries will benefit the further development of
the Group.
Clive Watson, Senior Independent Director and Chair of the Audit
Committee, stepped down from the Board following the conclusion
of the AGM, having served for nine years. On behalf of the Board, I
express my thanks to Clive for the valuable contribution he made to
the operations of the Board during his tenure.
As a result of Clive’s departure, Kevin Thompson joined the Board
as an independent Non-Executive Director and Chair of the Audit
Committee. Between 1998 and 2018, Kevin held the role of Group
Finance Director at Halma plc, before which he was their Group
Financial Controller, having qualified as a Chartered Accountant
with PwC. He brings a depth of financial, tax and treasury expertise
to the Board, as well as broad experience in other areas, including
mergers and acquisitions.
Dr Trudy Schoolenberg was appointed Senior Independent
Director, following the AGM in May.
On 31st December 2019, Jay Whalen, President of the Watson-
Marlow Fluid Technology Group and an Executive Director, retired
Dividend per share p
110.0p
2019
2018
2017
2016
2015
110.0
100.0
87.5
76.0
69.0
t
r
o
p
e
R
c
g
e
t
a
r
t
S
i
following 28 years with the Company, nine years as President and
over seven years on the Board. On behalf of shareholders and the
Board, I gratefully acknowledge the substantial contribution that Jay
has made to the Group. Under Jay’s leadership Watson-Marlow
experienced significant growth and development, becoming an
important and highly successful part of the Group.
Jay Whalen’s successor, Andrew Mines, joined the Group in
November 2019 becoming Managing Director of Watson-Marlow
on 1st January 2020 and joining the Group Executive Committee.
As of 1st January 2020 the composition of the Board returned to
nine members, six of whom are Non-Executive Directors.
On 11th March 2020 we announced that Kevin Boyd, Chief
Financial Officer and Executive Director, had informed the Board of
his desire and intention to retire from the Group before the end of
2020, following an orderly handover of his duties to a successor.
On behalf of shareholders, the Board acknowledges with gratitude
the significant contribution to the Group’s growth and prosperity
made by Kevin and we wish him a happy and healthy retirement.
The Board has initiated a process to search for a suitable external
candidate to succeed Kevin and will make a further announcement
concerning the appointment of a new Chief Financial Officer once
that process has been completed.
All Board changes were part of the succession planning
undertaken by the Nomination Committee to recruit Non-Executive
Directors with the skills and experience required to support the
implementation of our strategy for growth.
Employees
On behalf of the Board, I would like to thank all our employees
throughout the world for their individual and collective contributions
that have enabled us to deliver another strong set of results in
2019. I would also like to welcome our Thermocoax colleagues into
the Group.
The health, safety and well-being of our employees has been,
and will remain, our top priority throughout the duration of the
COVID-19 outbreak. To date, none of our employees globally, or
their immediate family, have tested positive for COVID-19. We have
taken multiple actions to protect employees and will continue to
monitor and respond accordingly, as the situation develops.
COVID-19
China is the largest territory within the Steam Specialties business
and the second largest in the Group, accounting for close to 11%
of global sales and 8% of our employee base. Approximately 75%
of what we sell in China is made in our two Chinese manufacturing
31
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Chair’s Statement continued
facilities, while only £10 million worth of materials is sourced
annually from China for use in our global manufacturing facilities.
Due to the COVID-19 outbreak in late January and the delayed
return to work following the Lunar New Year holiday, for both
ourselves and our customers, trading in China during February was
significantly down on expectations. The majority of this shortfall
came from our inability to interact with our customers, either
because they had not returned to work or due to travel restrictions.
By the end of February, our Chinese manufacturing operations
were rapidly returning to normal levels of activity, while working
closely with their local suppliers to restore our required levels of
inbound supply. With reported Chinese infection rates now in
decline and provided no resurgence occurs, we assume a return to
normal levels of business in China by the end of the second quarter
and some recovery of lost business in the second half of the year.
Throughout February, our supply chains outside China remained
robust, however the recent COVID-19 outbreak beyond China has
made it very difficult to assess the global impact on our business,
as the situation is evolving on a daily basis. We have modelled a
number of scenarios and currently assume the most likely is that
the impact on industrial production globally will be less intense than
China’s experience. This scenario also assumes the full impact to
be contained within the first half of the year with global industrial
production recovering in the second half of 2020. We have already
initiated a number of cost containment actions to mitigate the
adverse impact of COVID-19 on our business globally, without
compromising our ability to capitalise on growth opportunities in
the second half of this year. Based on the above assumptions, we
currently anticipate an impact on annual Group sales and adjusted
operating profit of around 2% and 4% respectively, almost entirely
affecting the first half of the year. Nevertheless, as the situation is
evolving rapidly, the final impact could be significantly different.
Outlook
Global industrial production growth rates, which are a good
indicator of our market conditions, slowed throughout the year
resulting in an annual growth rate of 1.0% in 2019, compared with
3.1% in 2018. Even before the global spread of the COVID-19
virus, there remained a degree of uncertainty regarding industrial
production growth rates in 2020. In their latest forecasts, published
in February, Oxford Economics suggested that global industrial
production would contract in the first quarter of 2020, before
recovering slightly in the second half of the year, with a global
growth rate for the year of 0.8%, comprising a 0.3% contraction
in developed markets and 2.4% growth in emerging markets.
However, given the global spread of the COVID-19 virus, we expect
a further deterioration in 2020.
While industrial production growth rates are a strong indicator
of conditions in our markets, we are enhancing our ability to
outperform our markets through the implementation of our strategy
and our focus on self-generated growth. Recent acquisitions within
the Electric Thermal Solutions market, but also those in the Steam
Specialties and Watson-Marlow businesses, provide opportunities
for future organic growth as we broaden their global presence,
strengthen their direct sales business model, improve efficiencies
and invest for growth.
Currency had little impact on the 2019 results. The currency
outlook for 2020 remains uncertain, as Brexit trade negotiations,
COVID-19 and US/China tariff negotiations continue to cause
volatility. If current exchange rates were to prevail for the remainder
of the year there would be a negative 2% impact on sales from
translation and a negative 3% impact on profit from translation
and transaction, compared with the full year 2019. Movements in
exchange rates are often volatile and unpredictable, therefore the
actual impact could be significantly different.
Modelling the effect of COVID-19 is extremely difficult; however
our current best estimate, based on the assumptions outlined
earlier, is that it will impact 2020 sales by 2% and profit by 4%, with
almost all the impact affecting the first half of the year. Nevertheless,
as the situation is evolving rapidly, the final impact could be
significantly different.
The full-year effect from the Thermocoax acquisition in May 2019 is
expected to add c.1% revenue growth to the Group in 2020.
Against a very uncertain macroeconomic backdrop, we currently
estimate that the combination of the twin headwinds of currency
and COVID-19 will offset the underlying organic growth in the
business. Despite these headwinds, we will strive to maintain the
Group adjusted operating profit margin in 2020 at a similar level
to 2019.
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 Annual Report for 2019, taken as a whole, is fair, balanced
and understandable, and provides the information necessary
for shareholders to assess the Group’s financial position,
performance, business model and strategy;
• the Directors have a reasonable expectation that the Company
will be able to continue in operation and meet its liabilities as
they fall due over the three-year period to 31st December 2022.
For the full Viability Statement, see page 101; and
• the Annual Report contains the information required for
compliance with the Companies, Partnerships and Groups
(and Non-Financial Reporting) Regulations 2016, see page 60.
The Strategic Report was approved by the Board on
10th March 2020.
Signed by:
Jamie Pike
Chair
on behalf of the Board of Directors
10th March 2020
Section 172 Statement
In accordance with the Companies Act 2006 (the Act) (as
amended by the Companies (Miscellaneous Reporting)
Regulations 2018), the Directors have prepared a statement
describing how they have had regard to the matters set
out in section 172(1) of the Act, when performing their duty
to promote the success of the Company, under section
172. The statement can be found on pages 80-81 of the
Governance Report.
32
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Review
Engineering every day
During 2019, progress
continued on the
implementation of our
strategic priorities and
we believe that this was a
significant contributing factor
to the good financial results
and strong organic growth
achieved during the year.”
Nicholas Anderson
Group Chief Executive
Engineering every day
As a result of our broad industrial and geographical reach, the
diversity of our products and our extensive process expertise,
our engineered products and solutions are deeply embedded in
industrial and commercial sites all over the world. Every day, our
engineering expertise contributes to the creation of a more efficient,
safer and sustainable world as we help our customers to increase
their operating efficiency, reduce their environmental impacts,
improve product quality, provide safer working environments for
their employees and achieve regulatory compliance. As we do this
we create sustainable value for all our stakeholders.
Business model
Our direct sales business model is highly effective at uncovering
opportunities to improve our customers’ processes. Our extensive
global network of over 1,600 sales and service engineers is
unique in number and expertise amongst our competitors.
As they walk our customers’ sites, our specialist engineers are
able to identify often unrecognised needs and design bespoke
engineered solutions to meet those needs. These engineered
solutions generally have a relatively short payback period of around
24 months or less and are typically paid for out of our customers’
operational budgets. Purchasing decisions are therefore made
at operational level from budgets which are less likely to be cut in
times of recession.
This “self-generated growth” element of our business, combined
with the high proportion of sales that derive from end users’
maintenance and operating budgets, and the wide diversity of the
markets we serve, both geographically and by industry sector,
makes our business highly resilient, although not immune, to
economic downturns.
Strategy for growth
Six years ago we undertook an extensive strategic review and
developed our business strategy, the aim of which is to deliver self-
generated growth that outperforms our markets. To accomplish this
we are focusing on six strategic themes that are designed to help
us do better what we already do well, increase the effectiveness of
our direct sales engineers, leverage our strengths in key sectors,
take advantage of the most attractive opportunities, expand our
addressable markets, and align and direct our resources more
effectively to improve business performance. Our six strategic
themes are outlined on page 34.
As we implement our strategy we ensure that we have the right
products, in the right places, at the right times and the highly skilled
people with the expertise to provide industry-leading solutions
to customers.
While our strategy is primarily one of organic growth, we
supplement organic growth through the acquisition of businesses
that meet stringent strategic and financial criteria. Acquisitions are
generally bolt-ons that expand the capabilities of our businesses
through new technologies, skills and geographic coverage, or that
increase our addressable market.
Our strategy remains relevant and appropriate for our
growing Group and, in 2019, we again saw the benefits of
its implementation as we achieved growth strongly ahead of
our markets.
33
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Review continued
Acquisition
During 2019, we acquired Thermocoax Developpement and all
of its group companies (Thermocoax) for a cash-free, debt-free
consideration of €156 million (£135 million). Thermocoax is a
leading designer and manufacturer of highly engineered electric
thermal solutions for critical applications in high added-value
industries. Its core technology is mineral insulated cable, which
comprises single or multiple conductor wires insulated by
magnesium oxide, all enclosed within a tubular metal sheath.
This construction is extremely robust compared with standard
polymer insulated cables and highly resistant to extreme
environments such as high temperatures, pressures, vibration
and radiation. These cables are transformed into bespoke high
value-added functional products, such as heaters and sensors,
for specialised, highly certified, critical applications. A particular
advantage of Thermocoax’s cable heaters is that they are small in
size and low in weight compared with conventional tubular heaters,
allowing precise delivery of heat.
Thermocoax is headquartered near Paris, France and has four
manufacturing facilities in Normandy, one in Georgia, USA and a
further facility in Heidelberg, Germany.
Upon acquisition, Thermocoax along with Chromalox, became
part of our newly named Electric Thermal Solutions business.
Both companies have a strong reputation amongst customers
and well-recognised brands, which they will retain. Thermocoax is
a good strategic fit for the Group, doubling our Electric Thermal
Solutions business in Europe and Asia. At the same time,
Chromalox has the scale, contacts and reputation in the USA that
will support faster penetration of Thermocoax into that market.
In September 2019, Dominique Mallet was appointed President
of the Electric Thermal Solutions business. Dominique was the
Chief Executive Officer of Thermocoax for over five years and has
a strong track record of successfully growing businesses in sectors
relevant to the Electric Thermal Solutions business.
Thermocoax was accretive to Group earnings in 2019.
Sustainable value creation
Throughout the year our diverse stakeholder base benefited from
our value creation as we utilised our direct sales business model
to meet customer needs, implemented our strategy for growth
and delivered a good financial return for investors. We achieved
this while operating sustainably, in a way that we believe preserves
value for future generations and takes into account the current and
future needs of all our stakeholder groups.
Strategy for growth
Our strategic objective
To deliver growth that outperforms our markets
Our strategic focus
Doing better what we already do well
Our six strategic themes
Increase direct sales
effectiveness through
market sector focus
Develop the knowledge
and skills of our expert
sales and service teams
Broaden our global presence
Leverage our R&D investments
Optimise supply
chain effectiveness
Operate sustainably
and help improve our
customers’ sustainability
Strategic implementation
During 2019, progress continued on the implementation of our
strategic priorities and we believe that this was a significant
contributing factor to the good financial results and strong organic
growth achieved during the year. Information on the implementation
of our strategy and examples of our strategy in action, can be
found on the following pages, with further information provided for
each business within the Review of Operations.
Further reading
Information on the implementation of our strategy and examples of our strategy
in action.
See pages 35-40
34
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Throughout the year our businesses exhibited at many specialist
trade shows. For example, Spirax Sarco USA attended an
important Food & Beverage trade show in Chicago; Thermocoax
exhibited at Semicon Europa, one of Europe’s leading expositions
for the Semiconductor industry; Hiter (acquired in 2016) and
Spirax Sarco together attended Brazil’s only Bioenergy event; and
Watson-Marlow exhibited at one of Europe’s most important fairs
for beverage customers in 2019.
We also delivered specialist training to customers in target
industries. For example, Spirax Sarco delivered “Steam as an
ingredient” workshops for Food & Beverage customers in Italy and
steam quality training to Food & Beverage and Pharmaceutical
customers in Ukraine.
During 2019, the Power Generation and Chemical industries,
important sectors for Gestra, were added to the Steam Specialties
business strategy as target industries.
Focus for 2020
• Developing industry and application-focused products and
engineered solutions to align our offering with the needs of
customers in our target industries.
• Watson-Marlow Group Business Development micro-
segmentation of industries and customers for stronger
alignment of product value propositions with customer
buying objectives.
Increase direct sales effectiveness
through market sector focus
As we sectorise our sales and service
engineers around key industries, and
align our products and services in
support of this, we increase our ability
to self-generate growth and provide
value to customers.
Progress in 2019
We have continued to increase the alignment between our direct
sales force and our target industries, with a number of new
products developed specifically to meet the needs of a particular
industry. For example, in 2019 Spirax Sarco launched its first Clean
Steam Generator designed specifically for the Healthcare industry
(see more detail below). We also benefited from the alignment of
recently-launched products with our target industries. For example,
during the year Watson-Marlow delivered strong sales growth in the
Pharmaceutical and Biopharmaceutical industry, with sales of the
Quantum pump (launched in 2017 for bioprocessing applications)
being an important contributor to that growth.
We continued to sectorise our sales engineers around our target
industries. For example, the addition of a dedicated Food &
Beverage sales engineer in Watson-Marlow Benelux led to an
increase in new business from end users and OEMs, with good
sales of products such as the Certa Sine® pump, launched in 2016
for food and beverage applications.
Strategy in action
Steam is widely used in the healthcare industry for a wide range
of applications, such as sterilisation, hot water generation and
humidification. During 2019, Spirax Sarco launched its first
Clean Steam Generator designed specifically for the healthcare
industry. Third-party validated to deliver steam that meets quality
standard EN285, the new generator offers healthcare customers
the highest steam quality when sterilising surgical equipment,
reducing contamination risk and improving patient safety.
The launch of the new generator is being supported by tailored
marketing materials and a “sterilise once” marketing campaign,
that demonstrates an understanding of our Healthcare customers’
steam applications and the challenges they face, and articulates
how we can help them overcome them. We have also delivered
additional training to our sales engineers to ensure they understand
the value that this product will deliver to customers.
By providing tailor made, sector focused products such as the
new Clean Steam Generator, we increase the effectiveness of our
direct sales engineers and offer superior value to customers.
35
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Review continued
Develop the knowledge and skills of
our expert sales and service teams
Elsewhere in the Group, during 2019, Chromalox launched a
video training library, with an initial 70 videos covering a range
of topics from products to business skills, for its field sales
employees. Watson-Marlow also developed its training content,
working with subject matter specialists to create engaging and
informative videos on a variety of topics, such as new products and
product applications.
In addition to online training, our companies delivered intensive
classroom-based and on-the-job training. For example, employees
from Spirax Sarco Peru participated in consultative selling
training, which was also a key focus at Spirax Sarco Brazil’s sales
conference in 2019.
Focus for 2020
• Continuing development and roll-out of the programmes of
the Spirax Sarco Academy.
• Formalisation of training matrices by job function and the
continued development of quality training content to develop
the skills of Chromalox employees.
• Further development of Watson-Marlow’s training materials.
The knowledge of our sales
and service engineers is a key
differentiator. We invest extensively in
the professional development of our
people, building a level of expertise
that is unrivalled by our competitors.
Progress in 2019
The success of our business model relies on the expertise of our
sales and service teams. Investing in the professional development
of our people is an essential element of our strategy. For example,
during 2019 we continued to develop and roll out the programmes
of the Spirax Sarco Academy. The Academy’s programmes are
structured in levels, called “belts”, with each “belt” being allocated a
colour and representing an increasing level of expertise. During the
year we completed the translation of the “Green belt” into 15
languages, in addition to English, and rolled these out across
the Steam Specialties business. We also developed the course
materials for the “Blue belt” in English and began to roll these out
in our English-speaking companies during the year. In addition,
we developed a “Consultative Selling” programme of materials
and rolled this out in English and began working on a “Sales
Management Development” programme, which we will continue to
develop further in 2020.
Strategy in action
LEAP (Leadership Excellence Acceleration and Performance)
is a year-long programme aimed at developing our high
potential leaders.
Spirax Sarco UK Field Services Manager, Frank Milloy, was in the
first cohort when LEAP was launched in 2018. LEAP encouraged
Frank to take a more strategic view within his role. He identified
the service delivery function as his first priority, as improving
that area could have a significant business impact. By involving
key stakeholders (engineers, schedule coordinators and supply
management) and putting together a more formal structure for
collaboration and communication, he increased the number of
jobs his team completed by nearly 20%, compared with the same
period in the prior year.
Frank commented, “LEAP has helped me see that sustainable
success doesn’t happen by just working harder. It often requires
a different approach. Stakeholder inclusion and clarity are key.
When people understand the purpose, can contribute to the
solution and have a structure in place to support that, not only
do business results improve but engagement does as well.”
Since his participation in LEAP, Frank has been promoted to
National Services Manager.
36
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Broaden our global presence
Our strong global infrastructure
enables us to rapidly branch into
neighbouring markets or leverage our
existing infrastructure to pioneer the
introduction of our businesses and
technologies into new markets.
Progress in 2019
Our direct sales business model requires a local sales presence to
unlock the self-generated sales that are only possible as a result of
having expert sales and service engineers on-the-ground, visiting
customers and identifying their problems. A key element of our
strategy is the geographic expansion of our direct sales presence,
to increase coverage and customer access to this expertise.
Four new operating companies began trading in 2019: Watson-
Marlow Philippines, Watson-Marlow Colombia, Watson-Marlow
Iberia and Gestra China. In addition, Spirax Sarco established a
direct presence in Bosnia & Herzegovina, Honduras and Qatar
for the first time. Chromalox expanded its direct sales presence,
entering Korea and Hungary, and Gestra strengthened its presence
in Asia Pacific and the Americas. In addition, five new direct sales
offices came into the Group through acquisition: Thermocoax
France, Germany, UK, USA and China, which strengthen the
geographical presence of our Electric Thermal Solutions business in
Europe and Asia.
Strategy in action
Having historically served the Philippines through distributors, a
direct sales presence was established in the country in 2018. In July
2019 a new Watson-Marlow sales company began trading under
the direction of Country Sales Manager Joel Flores. The Philippines
was identified as a market with good growth potential, in particular
in the Food, Beverage, Biopharmaceutical and Environmental
(Water & Wastewater) industries.
With a direct sales presence Watson-Marlow can serve customers
more effectively, drawing on the company’s 60+ years of pumping
expertise to advise customers on the most suitable pump for
their application. A direct sales presence also allows engineers
from Watson-Marlow to demonstrate the value of peristaltic
pumps to customers who may not be familiar with the application
of this pumping technology. Furthermore, the knowledge and
specialisation of its sales engineers has enabled Watson-Marlow
to broaden the range of products that it sells within the Philippines.
During the first six months of trading, the company made good
progress, increasing base business by nearly 50% compared with
the same period in the prior year, during which time most business
was conducted by distributors.
As a Group we are benefiting from this global expansion.
For example, Watson-Marlow’s recently-established sales company
in the Middle East completed its first full year of trading in 2019.
Having well-trained specialist engineers visiting customers is
providing good opportunities for cross-selling products from
across Watson-Marlow’s brands, delivering greater outcomes to
customers as well as generating growth for the business, which
would not be possible if relying solely on distributors. For example,
at a water treatment plant in Dubai, engineers from Watson-
Marlow, who were called to the site to advise on pumps, identified,
recommended and delivered a pumping solution that not only
included 22 Bredel hose pumps, from Watson-Marlow, but also
Aflex PTFE-lined hoses too.
Focus for 2020
• Continued geographical expansion and strengthening
of Gestra, Chromlaox and Thermocoax’s direct sales
presence internationally.
• Strengthening Watson-Marlow’s direct sales presence in
Asia and Latin America.
• Strengthening Spirax Sarco’s direct sales presence in
developing markets.
37
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Review continued
Leverage our R&D investments
We leverage R&D investments
to meet changing customer
requirements, improve our offering,
respond to market trends, expand
our addressable market and maintain
our market-leading position in each
of our business niches.
Progress in 2019
During 2019, we continued to invest in the development of
innovative new products to ensure that we maintain our industry-
leading position and stay ahead of our customers’ changing
needs. Within the Steam Specialties business, Gestra launched
SPECTORconnect, a next-generation range of boiler controls (see
below). The Spirax Sarco steam business launched, amongst other
products, SpiraHeat, a compact and energy efficient steam-to-
water heat transfer solution for building heating applications; and a
new Clean Steam Generator (see pages 35 and 66). During 2019
we held our first Global Steam Business Development conference
that brought together nearly 60 delegates from 16 countries, from
both sales and Business Development functions, to identify and
explore future growth opportunities and strengthen collaboration
across the business.
Watson-Marlow launched, amongst other products, Qdos ReNu
PU, a pump-head developed specifically to address the needs
of water treatment customers; and Puresu® assemblies, which
combine Watson-Marlow tubing and BioPure connectors and
fittings into assemblies that are sterilised and ready for use by
customers. Watson-Marlow also supported the development of an
exciting new product that will expand the technical capabilities of
peristaltic pumps, ready for launch in 2020.
The Electric Thermal Solutions business launched a number of new
products, including a medium voltage electric steam generator,
which utilises Chromalox’s DirectConnect™ medium voltage
heating element technology to connect directly to 4,160V and
7,200V medium voltage power; and the ProtoAir IIoT Gateway,
which connects Chromalox’s digitally-enabled products for reliable
remote-monitoring. Thermocoax, which uses its core technologies
to develop a significant proportion of its products bespoke to
customer needs, continued to deliver innovative products such as
a signal transmission solution for high pressure applications and
signal transmission lines that will continue working under the most
extreme conditions in the nuclear industry.
Focus for 2020
• Continue to develop innovative, sector-aligned new
products through effective R&D processes.
• Broaden the application scope of existing products through
range extensions, to meet a wider range of customer needs.
Strategy in action
Gestra has long been recognised as the market leader in boiler
control technologies, a position that was reaffirmed during 2019
with the launch of SPECTORconnect, a next generation automated
boiler control system that offers users unrivalled safety and reliability.
A complete system, including limiters, probes and controllers,
SPECTORconnect allows remote monitoring of the boiler house
from anywhere in the world. By providing users with detailed,
real-time information about their boilers’ performance, they have
the information to enable them to quickly undertake preventative
or corrective maintenance before any performance deviations
can cause a significant problem on their site, resulting in safer,
more efficient steam production, reduced energy bills and
lower emissions.
Certified to a high safety rating and extensively tested to ensure
reliability and durability, SPECTORconnect reflects the Group’s
commitment to developing industry-leading products that meet end
users’ exacting requirements and needs.
38
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Optimise supply chain effectiveness
Within the Watson-Marlow business, having broken ground on
Aflex Hose’s new site in Yorkshire, UK, good progress was made
on the over £20 million project that will see Aflex’s four existing
manufacturing sites consolidated into one new state-of-the art
facility. The project is scheduled for completion mid-2020.
Watson-Marlow saw progress across its other manufacturing
sites as a result of the continued implementation of its Global
Excellence in Manufacturing Strategy, which brings together best
practice in manufacturing from within and outside the company
to drive improvements. For example, during 2019 Watson-
Marlow commissioned an automated boxing line to construct,
label and close Watson-Marlow Tubing boxes prior to shipping
to customers. The investment will deliver labour savings of 1,800
hours per year and reduce EHS risk, with operators re-deployed
within the business to increase capacity for more value-adding
activities elsewhere.
Focus for 2020
• Increase our focus on supplier performance, making
use of improved data to accelerate improvements in our
supply chain, improve quality and support our customer
service metrics.
• Further improve the alignment between sales and
supply companies, making use of improved internal
and customer data, to reduce lead times and support
OTTR improvements.
• Complete the consolidation of Aflex Hose’s UK
manufacturing sites into one new, purpose-built facility to
increase capacity and productivity.
We have a global manufacturing
footprint and focus on increasing
supply chain agility and compressing
lead times to enable greater
responsiveness, reduce costs and
improve customer service.
Progress in 2019
Within the Steam Specialties business, during 2019 we undertook
a range of initiatives to further improve product availability,
measuring our performance against the challenging “On Time to
Customer Request” (OTTR) metric. Good progress was made
across a number of our supply sites, as can be seen in the
example below. We have also utilised comprehensive quality data
to better monitor all aspects of our supply chain performance and
drive improvements, from supplier quality performance to internal
scrap rates, to field failures, with investigative root-cause analysis
conducted and improvements delivered. (Read more on page 65.)
Gestra’s manufacturing site benefited from capital investments in
new machinery and equipment during 2019.
Throughout 2019, Chromalox focused on its on time delivery
performance, strengthened the management structure across
its manufacturing sites, conducted detailed supplier analysis,
and invested in machine guarding and other controls – including
training – to reduce risk health and safety risk and improve
operational performance.
Strategy in action
Hiter Controls (Hiter), Brazil, a specialist manufacturer of process
control valves, joined the Steam Specialties business in 2016.
Utilising Spirax Sarco’s direct sales engineers as a route to market,
Hiter has experienced rapid sales growth since acquisition. As a
result, Hiter was struggling to meet the high On Time to Request
(OTTR) performance levels required by customers.
During 2019, Hiter undertook a programme of initiatives to
improve OTTR performance. Key strategic activities included daily
meetings, with the use of “Team Improvement Boards” to analyse
and resolve delays; increased headcount and an additional shift
to expand manufacturing capacity; improvements to the Enterprise
Resource Planning system; a detailed supplier review to identify
underperforming suppliers; daily contact with key suppliers to
reduce material delays; and work to standardise the company’s
pool of components and products. By increasing the stock of
standard components, for use in bespoke customer solutions,
Hiter has been able to shorten lead times while maintaining
product quality.
The transformation has been outstanding. Hiter has achieved
a strong increase in OTTR performance, significantly improving
customer service levels and supply chain effectiveness.
39
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Review continued
Operate sustainably and help improve
our customers’ sustainability
As we focus on improving our
own sustainability and deliver
innovative solutions that improve
the sustainability of our customers’
operations, we create value and
drive growth.
Progress in 2019
We continued to focus on the delivery of our Sustainability Strategy,
a core component of our business strategy, and delivered good
progress against many of our targets. For example, as a result
of investment in safe-working controls in our recently acquired
businesses, Behavioural Based Safety (BBS) training and safety
campaigns we reduced our over three-day lost time injury rate from
4.9 per 1,000 employees in 2018, to 3.6 per 1,000 employees
in 2019. We rolled out a Group Employee Volunteering Policy,
which entitles all Company employees to up to three days of paid
volunteering leave a year, and the number of employee volunteering
hours increased by 9%, compared with the prior year. We made
good progress in reducing our waste generation and also saw
a small reduction in water use intensity. Our greenhouse gas
emissions intensity saw a small increase, of 1%, during 2019.
While the increase was partially as a result of improved reporting
and also business growth, we recognise that more needs to be
done to ensure a return to the downward trend that we have
seen in recent years. Throughout the year, through our bespoke,
engineered solutions we continued to deliver significant energy,
water and carbon emissions savings for our customers.
On a local level, our Group companies are engaging with our
sustainability commitments and acting to initiate positive change.
For example, when Watson-Marlow Germany relocated to a
new office location in 2019, environmental sustainability was a
key consideration when selecting the site. The new office is an
exemplar of energy efficiency, with energy use expected to be up
to 30% lower per annum than the company’s former building, and
incorporates solar panels and an air source heat pump to ensure
that most of the building’s heating and hot water is powered by
renewable energy sources.
Focus for 2020
• Drive progress against our sustainability targets and
objectives, in each of our 10 material sustainability topics.
• Act to improve our carbon emissions intensity.
• Fully integrate recent acquisition, Thermocoax, into the
Group’s Sustainability Strategy.
Strategy in action
For the last three years Spirax Sarco China has provided 50 high
school students in one of the poorest provinces of China with
scholarships. The academically gifted students were in danger of
leaving school as their families could not afford to pay their living
costs. Spirax Sarco stepped in to provide scholarships to ensure
the students remained in school. During 2019, the students sat a
highly competitive university entrance exam, with 37 of the students
(17 girls and 20 boys) receiving university offers and all but one of
the remaining students deciding to re-sit the exam next year.
In the last year employees of Spirax Sarco China also participated
in a beach clean-up, took part in the Shanghai Marathon and
other sporting events to raise money for charitable causes such as
funding medical treatment for children with cancer, and donated
200 books to a local library.
In recognition of their efforts, Spirax Sarco China won the
large company category in the Group’s 2019 Community
Engagement Awards.
Further reading
More information about the 2019 Community Engagement Awards.
See page 71
40
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations
We are pleased to report strong
organic sales growth of 6% in
2019, ahead of global industrial
production growth rates.”
Nicholas Anderson
Group Chief Executive
Introduction
Despite a very low growth macro-economic environment in
2019 we achieved strong organic growth and delivered record
revenue and adjusted operating profit. We created value for
our stakeholders, continued to invest in our businesses and
implement our strategy to ensure a strong foundation for continued,
sustainable growth.
Market environment
Our Steam Specialties, Electric Thermal Solutions and Watson-
Marlow businesses all provide engineered products, services and
solutions that play a critical role in industrial processes worldwide.
Steam is used across a broad range of industries, in all
geographical markets, for a wide range of applications including
heating, curing, cooking, drying, cleaning, sterilising, space heating,
humidifying, vacuum packing and producing hot water on demand.
Steam is relatively easy to control, environmentally safe, clean and
sterile, and is capable of transferring large energy loads (in the
form of heat) into industrial processes. A complementary medium
to steam, with a similarly broad industrial and geographic reach,
electrical heating solutions are particularly utilised in applications
that require rapid “on-off” control, higher temperatures, easy
installation, or zero-emissions at point of use.
Peristaltic and other niche pumps and associated fluid path
components are widely used across an extensive range of
industries to address mission critical or difficult pumping problems.
Peristaltic pumps are particularly suitable for hygienic applications
(as the fluid is contained within a tube, sterile tubing creates a
sterile pump), precise metering or low-shear applications, as well
as handling corrosive or abrasive materials that would otherwise
damage the pump.
The wide applicability of our products across a broad range of
industries, combined with our extensive geographical presence
mean that conditions in our markets closely correlate with industrial
production growth rates.
Throughout 2019 global industrial production growth declined each
quarter, continuing the downward trend that commenced in 2018.
Averaging 1.0% for the year, global industrial production growth
was significantly lower than the 3.1% seen in 2018 and much
weaker than initially forecast. Emerging markets saw 3.0% growth
while mature markets experienced a 0.5% contraction compared
with the prior year. With organic revenue growth of 6% we
significantly outperformed our markets, as a result of the successful
implementation of our strategy for growth.
The continuing uncertainty surrounding Brexit had an impact
on market confidence and contributed to the negative industrial
production growth rates seen in the UK and Europe in 2019.
Nevertheless, while dampening market confidence in the UK and
some of our European markets, overall Brexit uncertainty had a
relatively limited impact on our business as a whole during 2019 as
around 93% of our revenue and profit was generated outside of the
UK during the year.
Forecasters are currently expecting global industrial production
growth to slow further in 2020, to average 0.8% for the year, but
with the COVID-19 outbreak still evolving we assume this could
deteriorate further. Looking forward we remain cautious and
are planning for the continuation of a low-growth environment
throughout 2020.
41
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Summary of progress in 2019
Sales
Overall the Group achieved organic sales growth of over 6%, with
6% organic growth in the Steam Specialties business and over
12% organic growth in Watson-Marlow. Within the Electric Thermal
Solutions business, sales were down 1% in Chromalox at constant
currency, following a strong 9% sales growth in 2018. Thermocoax,
which joined the Group on 13th May, contributed sales of
£27.9 million for the period under ownership. HygroMatik was
divested on 30th November 2018 and as a result made no
contribution to sales in 2019, compared with £12.7 million in the
prior year.
At £1,242.4 million, Group sales were up 8%
(2018: £1,153.3 million). Although varying by business and
geography, foreign exchange had no overall impact on Group sales.
Geographically, the Steam Specialties business, which accounted
for 61% of Group revenue in 2019, saw growth in all regions.
Sales of £755.4 million, were up 3% on a reported basis, 6% on an
organic basis.
The Electric Thermal Solutions business, which accounted for 15%
of Group revenue in 2019, achieved sales of £186.1 million, 20%
ahead of the prior year, with the increase a result of the acquisition
of Thermocoax. On an organic basis, sales were 1% lower.
Watson-Marlow accounted for 24% of Group revenue in 2019
and delivered £300.9 million of sales, a 13% increase over the
prior year, up 12% organically. Growth was achieved across all
geographic regions.
Adjusted operating profit
Group adjusted operating profit was 7% ahead of the prior year on
an organic basis and, at £282.7 million, was also up 7% at reported
exchange rates including acquisitions and disposals. The strong
growth reflects the increase in revenue, a net 1% positive impact
from the acquisition of Thermocoax and disposal of HygroMatik,
and margin expansion in the Steam Specialties business, partially
offset by a 1% negative translational and transactional exchange
impact, slight margin dilution in Watson-Marlow as we invest
to maintain growth and margin dilution from Chromalox due to
operational issues in the first half of the year, particularly in Europe.
Within the Steam Specialties business, adjusted operating profit
of £177.9 million was 10% higher than the prior year on an
organic basis, with all three geographical segments delivering
organic adjusted operating profit growth. On a reported basis,
adjusted operating profit was 5% ahead, reflecting the divestment
of HygroMatik on 30th November 2018 and the resulting non-
repeat of £3.8 million of adjusted operating profit that the business
contributed in 2018, as well as a £4.8 million adverse impact from
currency movements.
Adjusted operating profit in the Electric Thermal Solutions business,
at £24.7 million, was up 8% on the prior year on a reported basis.
Chromalox had adjusted operating profit of £19.3 million, down
19% organically as we address unsatisfactory performance in
the company’s French operations, respond to manufacturing
inefficiencies and continue to step up our investments for future
growth and improved profitability. All of the Chromalox profit
decline occurred in the first half of 2019. Thermocoax contributed
£5.4 million to adjusted operating profit. Currency movements
increased adjusted operating profit by 4%.
Watson-Marlow’s organic adjusted operating profit grew by 11%,
despite continued investment in the business. Reported growth of
13% was aided by a currency tailwind.
Adjusted operating profit margin
At 22.8% the Group adjusted operating profit margin was 20 bps
lower than the prior year, due to the disposal of the highly profitable
but non-strategic HygroMatik business and a negative exchange
impact. On an organic basis, the Group margin increased 10 bps.
Within the Steam Specialties business, the adjusted operating profit
margin increased by 40 bps on a reported basis to 23.6%, driven
by margin progress across all three geographical segments, offset
by the disposal of the highly profitable HygroMatik business and a
negative exchange impact. Organically, the adjusted operating profit
margin increased by 100 bps. On a reported basis, the adjusted
operating profit margin of the Electric Thermal Solutions business
fell 140 bps to 13.3% as a result of lower profitability in Chromalox
in the first half of the year, partially offset by a small positive
exchange impact and Thermocoax’s higher adjusted operating
profit margin of 19.5%. On an organic basis the margin fell by 270
bps, wholly due to the first half deterioration, but the margin was
30 bps higher in the second half of the year compared to the same
period in 2018. Watson-Marlow’s operating margin was 20 bps
lower, 60 bps lower on an organic basis, as we continue to invest in
the business to sustain growth.
Statutory operating profit and margin
Statutory operating profit decreased from £299.1 million to
£245.0 million, as a result of the non-repeat of the profit on disposal
of HygroMatik (£47.4 million), the disposal of property (£6.5 million)
and a credit resulting from the post-retirement benefit plan in
the USA being frozen to future accrual (£6.0 million), which all
contributed to statutory profit in 2018. As a result the margin fell
from 25.9% to 19.7%.
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
2018
£1,153.3m
£264.9m
23.0%
£299.1m
25.9%
Exchange
–
(£2.0m)
Organic
£73.9m
£18.2m
42
Acquisitions
and disposals
2019
£15.2m £1,242.4m
£282.7m
£1.6m
Organic
+6%
+7%
22.8% +10 bps
£245.0m
19.7%
Reported
+8%
+7%
-20 bps
-18%
-620 bps
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Performance at a glance
Steam Specialties
Electric
Thermal Solutions
Watson-Marlow
Fluid Technology Group
Spirax Sarco & Gestra
Chromalox & Thermocoax
Watson-Marlow
Revenue £m
Revenue £m
Revenue £m
61%
27%
20%
14%
£755.4m
Reported
+3%
Organic
+6%
15%
£186.1m
Reported
+20%
Organic
-1%
24%
£300.9m
Reported
+13%
Organic
+12%
Adjusted operating profit £m
Adjusted operating profit £m
Adjusted operating profit £m
£177.9m
£24.7m
£95.8m
Adjusted operating margin %
Adjusted operating margin %
Adjusted operating margin %
23.6%
13.3%
31.8%
No. of operating units at year end
No. of operating units at year end
No. of operating units at year end
61
25
44
Key industries
Key industries
Key industries
Performance summary
Organic sales up 6%; organic operating profit up
10%. All geographic segments achieved organic
growth. Reported results impacted by 2018
HygroMatik divestment. Operating profit margin
23.6%; up 100 bps organically. Gestra operating
profit margin up 110 bps, despite flat sales.
Strategy implementation delivering improved
performance. Remain confident in outperforming
challenging markets.
Performance summary
Organic sales down 1%; up 20% on a reported
basis. Small project & MRO sales up; offsets
lower capital projects. Acquired Thermocoax;
expands technology, geographic footprint.
Operating profit up 8%; Thermocoax and FX
offset Chromalox H1. Chromalox H2 margin
recovered to 15.1%; up 40 bps on FY 2018.
2020: restructuring Chromalox France; divested
ProTrace (Canada). Confident that improvement
actions can offset challenging markets.
Performance summary
Organic sales up 12%; strong growth in all
regions. Biopharm sector drives stronger sales
growth. Operating profit up 13%; organic
profit up 11%. Organic margin down 60 bps;
increased investments for growth. New sales
companies in Spain, Colombia and Philippines.
Well positioned to deliver above-market organic
sales growth.
See pages 44-48
See pages 49-51
See pages 52-53
43
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Review of Operations continued
Steam Specialties
Revenue £m
Reported
Organic
Group revenue %
£755.4m +3% +6%
2018: £733.5m
2019
2018
2017
2016
2015
755.4
733.5
675.4
563.5
514.6
61%
27%
20%
14%
Adjusted operating profit £m Reported
Organic
£177.9m +5% +10%
2018: £170.1m
Europe, Middle
East and Africa
(EMEA)
Asia Pacific
Americas
2019
2018
2017
2016
2015
177.9
170.1
154.6
129.1
114.5
Adjusted operating margin %
23.6%
2018: 23.2%
Reported
+40 bps
Organic
+100 bps
Steam Specialties at a glance (at year end)
61
operating units*
66
countries with
a resident
direct sales
presence
* Operating units are business units that invoice locally.
4,821
employees
First for Steam Solutions
The Steam Specialties business
made good progress in 2019,
delivering revenue
of £755.4 million.
Adjusted operating
profit was also
strongly ahead
of the prior year.”
Neil Daws
Managing Director,
Steam Specialties
Key market performance
Industrial production growth rates, 2019*
• Low or negative industrial
production growth in many
core markets during 2019
• Pharmaceutical sector a
good driver of growth; Food,
Beverage and Healthcare
generally robust
• OEMs, Oil & Gas and
Chemical industries weaker
>4%
>2 to 4%
>0% to 2%
≤0%
* Compared with the prior year. (Source: Oxford Economics, February 2020.)
Positive
Neutral
Negative
44
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Market overview
Europe, Middle East and Africa (EMEA) as a whole saw a small
contraction in industrial production during 2019. Brexit, political
unrest and economic challenges affected market conditions and
dampened industrial production growth rates in several countries.
Our large European markets were particularly challenging, with
industrial production down 3.4% in Germany, down 0.6% in the UK
and down 1.2% in Italy, compared with the prior year. Of our larger
European markets, only France saw growth, but at a low rate of just
0.5%. Elsewhere across EMEA, the picture was more mixed with
some of our smaller markets such as Belgium, Denmark, Egypt,
Russia, Spain and Sweden seeing growth between 0.9% and
4.4%, but other markets, such as the Netherlands, Norway, South
Africa and Turkey, experiencing contraction.
Excluding China, Asia Pacific saw industrial production contract
by 0.3%, as export-dependent economies were affected by the
trade dispute between China and the USA, resulting in investment
decisions to carry inventory, expand capacity or build new plants,
being delayed or cancelled. Including China, industrial production
in Asia Pacific grew by 2.5%. The industrial production growth rate
in China slowed for the first three quarters and averaged 5.7%
for the year. Korea, our second largest market in the region, saw
contraction of 1.1% for the year as a whole, with a more marked
contraction in the first half of the year that eased somewhat
in the second half. Japan, Singapore, Thailand and Taiwan
also experienced negative industrial production growth rates.
Elsewhere in the region, industrial production growth was more
mixed, with good growth in Vietnam, Indonesia and the Philippines,
moderate growth in Australasia and low growth of 1.0% in India.
Within the Americas, industrial production growth slowed in
consecutive quarters in North America, compared with the same
period in the prior year, turning negative in the second half and
averaging 0.6% for the year. Canada saw a 1.1% contraction
for the year. The USA started the year relatively strongly but its
industrial production growth rate slowed each quarter and reached
a negative 0.9% in the final quarter and averaged 0.8% for the
year. Market conditions in Latin America were challenging, with an
average contraction of 1.7% for the region for the year. With the
exception of some of our smaller markets in the region, such as
Colombia and Costa Rica, which saw low growth, all of our key
markets in the region experienced declining industrial production
in 2019. Argentina saw the strongest contraction, of nearly 5%, as
the country experienced the political uncertainty of a regime change
and continued to suffer from a significant currency devaluation
and recessionary conditions. Mexico continued to experience
uncertainty, primarily as a result of trade tensions between the USA
and China and the impact of the US Administration’s influence on
corporations off-shoring production, resulting in a 1.6% contraction.
Brazil experienced a 1.1% decline in industrial production
during 2019.
Progress in 2019
Against a backdrop of low or negative industrial production growth
in many of our core markets during 2019, good progress was
made in the Steam Specialties business. With organic revenue
growth of 6%, we significantly outperformed our markets, delivering
£755.4 million of revenue in 2019. On a reported basis, revenue
was up 3%, impacted by the sale of HygroMatik in November 2018
and a negative impact from exchange movements.
Adjusted operating profit of £177.9 million was also strongly
ahead; up 10% on an organic basis and up 5% on a reported
basis. Reported growth was lower than organic growth due to the
divestment of highly profitable HygroMatik and a negative exchange
impact. At 23.6%, the Steam Specialties business’ adjusted
operating profit margin was up 100 bps organically and up 40 bps
on a reported basis.
Gestra, which joined the Steam Specialties business in May 2017,
generates over 40% of its sales in Germany and thus has a high
exposure to conditions in that market. As outlined above, Germany
experienced a marked contraction in industrial production growth in
2019. The German chemical industry, a key sector for Gestra, was
particularly weak throughout the year, as were OEM boiler makers,
who were affected by softening global demand and lower industrial
production growth rates. In addition, distributor sales were affected
by political and economic uncertainty in Europe. Despite these
headwinds and a very tough comparison against 10% growth in
2018, Gestra outperformed its markets maintaining sales at 2018
levels and growing its order book, while increasing the adjusted
operating profit margin by 110 bps.
On 3rd December 2018 we announced the disposal of HygroMatik.
In 2018 HygroMatik reported sales of £12.7 million and £3.8 million
of adjusted operating profit.
Statutory operating profit decreased from £222.5 million to
£172.6 million primarily as a result of a number of non-recurring
events in 2018; the profit on the disposal of HygroMatik
(£47.4 million), the disposal of property (£6.5 million) and a credit
resulting from the post-retirement benefit plan in the USA being
frozen to future accrual (£6.0 million).
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
2018
£733.5m
£170.1m
23.2%
£222.5m
30.3%
Exchange
(£7.4m)
(£4.8m)
Organic
£42.0m
£16.4m
Acquisitions
and disposals
(£12.7m)
(£3.8m)
2019
£755.4m
£177.9m
Organic
+6%
+10%
23.6% +100 bps
£172.6m
22.8%
Reported
+3%
+5%
+40 bps
-22%
-750 bps
45
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Steam Specialties continued
Europe, Middle East and Africa (EMEA)
Revenue £m
£335.7m
2018: £344.4m
Adjusted operated profit £m
£67.0m
2018: £69.3m
Adjusted operating margin %
20.0%
2018: 20.1%
2019
2018
2017
2016
2015
335.7
344.4
305.3
234.3
219.4
2019
2018
2017
2016
2015
67.0
69.3
66.1
50.0
42.7
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
Asia Pacific
Revenue £m
£249.8m
2018: £232.7m
Exchange
(£3.6m)
(£0.8m)
Organic
£7.6m
£2.3m
Acquisitions
and disposals
(£12.7m)
(£3.8m)
2018
£344.4m
£69.3m
20.1%
£111.5m
32.4%
Organic
2019
+2%
£335.7m
£67.0m
+4%
20.0% +30 bps
£63.4m
18.9%
Reported
-3%
-3%
-10 bps
-43%
-1,350 bps
Adjusted operated profit £m
£72.5m
2018: £63.9m
Adjusted operating margin %
29.0%
2018: 27.5%
2019
2018
2017
2016
2015
249.8
232.7
218.0
193.3
171.8
2019
2018
2017
2016
2015
72.5
63.9
56.9
49.9
44.7
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
Americas
Revenue £m
£169.9m
2018: £156.4m
Exchange
£0.1m
£0.3m
Organic
£17.0m
£8.3m
Acquisitions
and disposals
–
–
2018
£232.7m
£63.9m
27.5%
£69.9m
30.0%
Organic
2019
+7%
£249.8m
£72.5m
+13%
29.0% +140 bps
£72.5m
29.0%
Reported
+7%
+14%
+150 bps
+4%
-100 bps
Adjusted operated profit £m
£38.4m
2018: £36.9m
Adjusted operating margin %
22.6%
2018: 23.6%
2019
2018
2017
2016
2015
169.9
156.4
152.1
135.9
123.4
2019
2018
2017
2016
2015
38.4
36.9
31.6
29.2
27.1
2018
Exchange
Organic
Acquisitions
and disposals
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
£156.4m
£36.9m
23.6%
£41.1m
26.3%
(£3.9m)
(£4.3m)
£17.4m
£5.8m
–
–
2019
Organic
Reported
+11%
£169.9m
£38.4m
+18%
22.6% +120 bps
£36.7m
21.6%
+9%
+4%
-100 bps
-11%
-470 bps
46
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Europe, Middle East and Africa (EMEA)
Progress in 2019
Despite the zero-growth environment across the region as a whole
and industrial production contraction in most of our core markets,
sales in EMEA increased by 2% on an organic basis. At reported
exchange rates and including the £12.7 million loss of revenue due
to the divestment of HygroMatik, sales of £335.7 million were down
3% on the prior year.
Organic sales for Spirax Sarco companies were ahead in most
countries in the region, including our mature markets of the
UK, Germany, Italy and France, where market conditions were
particularly poor, reflecting the successful implementation of our
strategy. Our focus on helping customers to identify process,
productivity, energy and sustainability improvements, and our
ability to offer bespoke, engineered solutions that deliver customer
value – self-generated small project sales – offset a reduction in
large capital projects in the region that was caused by market
uncertainty. Maintenance, repair and overhaul (MRO) base business
was also robust.
The Pharmaceutical sector was a good driver of growth for a
number of our sales companies in Central and Eastern Europe,
sales into the Healthcare industry were generally robust and our
strategic focus on the Food and Beverage industries delivered
growth across the region, particularly in France and South Africa.
Growth in these priority sectors helped to offset a small decline in
OEM business, Oil & Gas and a weakness in the German Chemical
industry, while a heightened focus on our strategic accounts, with
an accompanying increase in the number of energy audits and
steam system surveys, delivered good results.
As outlined earlier, Gestra, whose sales in EMEA accounted
for 85% of its total revenue, struggled to make progress in very
challenging markets that were predominantly showing negative
growth and finished the year with a 2% organic decline in EMEA.
At £67.0 million, adjusted operating profit was 3% behind, due to
the divestment of HygroMatik in November 2018 and a currency
headwind. Organically, adjusted operating profit was up 4%,
reflecting the organic sales growth and margin enhancement.
The adjusted operating margin decreased by 10 bps to 20.0%,
due to the divestment of highly profitable HygroMatik. Organically,
the margin improved by 30 bps, primarily as a result of growth in
self-generated project sales, which generally have higher margins
than larger capital projects, and improvements to profitability in
Gestra’s European operations.
Statutory operating profit decreased from £111.5 million to
£63.4 million, primarily due to the £47.4 million profit from the sale
of HygroMatik in 2018.
Asia Pacific
Progress in 2019
Sales of £249.8 million were up 7% on both an organic and
reported basis.
China saw strong, double-digit growth and Korea, our second
largest market in the region, saw good growth despite challenging
market conditions. Elsewhere in the region sales were more mixed
with strong growth in Singapore and India, robust growth in Taiwan
and New Zealand, but lower sales in Australia and some of our
smaller markets such as the Philippines, Indonesia and Vietnam,
against tough compares.
Sales growth in the region came from a combination of large
project orders, self-generated business and MRO sales. Gestra,
which has a small presence in the region, saw double-digit growth
and benefited from the new sales company in China, which began
trading in April 2019.
We are very pleased with the performance of our Indian operation,
which was established as a sales and manufacturing location
in 2016. As a result of strong domestic revenue growth and an
increase in inter-company manufacturing volume, the company
achieved a “break-even” position in 2019, one year ahead of plan,
and we look forward to seeing continued sales and profitability
growth in 2020.
Adjusted operating profit of £72.5 million increased 13% organically,
with a small positive impact from exchange resulting in a reported
increase of 14%. The adjusted operating margin of 29.0% was
ahead 140 bps organically due to operational gearing from volume
growth, active price management and increased localisation of
products from our manufacturing plants in China and India, which
more than covered increased costs elsewhere in the business.
Statutory operating profit increased from £69.9 million to
£72.5 million despite the profit on the disposal of property
(£6.5 million) in 2018.
Americas
Progress in 2019
At £169.9 million, sales were ahead 9% on a reported basis, and
up 11% on an organic basis, with a 2% negative impact from
currency movements. Excluding our Argentine business, where
the further devaluation of the currency distorts both organic growth
(due to large price increases) and currency movements, organic
growth was 5% and reported growth 10%.
Organic sales were up 6% in North America. Both Spirax Sarco
and Gestra achieved strong organic sales growth in the USA as
we expanded our direct sales presence. Our customer facing
employees in the USA and throughout the region are benefiting
from training, delivered through the Spirax Sarco Academy,
which equips them with the consultative selling tools to help
them uncover our customers’ process challenges and deliver
the bespoke thermal energy solutions needed to resolve them.
While strengthening our direct sales presence, we have continued
to work with our distribution network to drive growth.
In Latin America, organic sales were ahead 20%, with good
organic growth across all but one of our operations in the region
and a positive benefit from Argentina’s US dollar-denominated
pricing. Excluding Argentina, organic sales growth was 8% in the
region. Hiter, our Brazilian controls business, which we acquired
in 2016, delivered another record year of double-digit growth and
expanded its overseas sales footprint. Our Spirax Sarco company
in Brazil also performed strongly, despite the country’s challenging
economic conditions. Argentina performed well to withstand
the very difficult economic landscape, benefiting from in-country
manufacturing and dollar-based pricing. Only Mexico struggled to
secure growth and saw a fall in sales.
Gestra, which has a relatively small local presence in the region,
continued to strengthen its direct sales presence in the Americas,
47
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Steam Specialties continued
while maintaining its long-standing distribution relationships.
The Steam Specialties business’ dual brand strategy and
sectorised market approach is enabling both Gestra and Spirax
Sarco to achieve growth and offer customer choice in the region.
As a result, during 2019 Gestra saw strong double-digit growth in
the Americas.
Adjusted operating profit in the Americas was ahead of the prior
year; up 4% to £38.4 million. On an organic basis, adjusted
operating profit was up 18%. Unlike 2018, reported profit in
Argentina fell back as organic growth failed to offset currency
devaluation. The reported adjusted operating profit margin
was down 100 bps to 22.6% due to the impact of currency.
On an organic basis, the margin rose 120 bps in the region.
Excluding Argentina, the increase was 60 bps.
Statutory operating profit reduced from £41.1 million to
£36.7 million as a result of the non-repeat of a credit from the
post-retirement benefit plan in the USA being frozen to future
accrual (£6.0 million).
Steam Specialties strategy update
Throughout 2019 we continued to implement the “Customer First”
Steam Specialties business strategy, with all three geographic
segments benefiting from the resulting operational improvements.
The ability of our sales and service engineers to self-generate sales
through uncovering problems and providing bespoke solutions
to meet customers’ needs, became increasingly important in the
negative or low-growth global industrial production environment
during 2019. Five years of intensive strategic execution,
investments in our direct sales business model and extensive
training delivered through the Spirax Sarco Academy were reflected
in the above-market growth achieved in 2019.
While strengthening and consolidating our position in our mature
and emerging markets, we continued to expand our geographic
footprint. In 2019 we established a Spirax Sarco direct presence
in Bosnia & Herzegovina, Honduras and Qatar and our newly
established Gestra company in China commenced trading.
We also strengthened Gestra’s direct sales presence in the Asia
Pacific and Americas regions.
Our strategic focus on our priority sectors delivered good results,
although OEMs and Oil & Gas were affected by the poor market
conditions. A focus on customer steam quality, with customer
educational campaigns, targeted marketing materials and the
development of a new clean steam generator designed specifically
for the Healthcare industry, delivered results in both the Healthcare
and Food & Beverage industries.
In 2019 we initiated project OPAL, the implementation of a new
integrated IT system to improve operational effectiveness and
deliver improved customer focus and insight, effective strategic
account management and rapid quoting and processing to further
improve our customer delivery performance. The new system
will incorporate ERP (Enterprise Resource Planning), CRM
(Customer Relationship Management), CPQ (Configure, Price,
Quote) and BI (Business Intelligence) modules. It is envisaged
that the roll-out will extend over five years. We also continued
to invest in our manufacturing sites through our “Future factory”
programme, for example upgrading CNC machines in the
UK, making improvements to the machining centres in Brazil,
Argentina and Mexico, and stepping up capital investments in
Gestra’s manufacturing facility in Germany, leading to increased
manufacturing efficiencies.
In the final quarter of the year, Gestra released the new
SPECTORconnect boiler control range, offering customers
unrivalled safety features, tools to enable them to monitor boiler
efficiency, improve maintenance and better prevent breakdown, as
well as improved digital monitoring to enable customers to have a
better understanding of on-site energy usage.
We have continued to strengthen our safety culture, with intensive
BBS (Behavioural Based Safety) training rolled out to managers
during 2019, which is continuing into 2020, and the continued
implementation of our Sustainability Strategy in support of all
our stakeholders.
Steam Specialties outlook
The latest forecasts suggest that the global industrial production
growth rate will remain low throughout the year, averaging 0.8% in
2020. Developed markets are expected to contract by an average
0.3% for the year, while the emerging markets are expected to
grow 2.4%.
The UK, France, Germany and Italy are all currently forecasted
to contract further in 2020, with conditions elsewhere in EMEA
remaining broadly positive, although at low levels. The average
growth rate is forecasted to be 0.9% for the region as a whole.
Within the Americas, conditions in the USA are expected to slow
further with year-on-year industrial production rates contracting
by 0.5%. Within Latin America, conditions are expected to remain
challenging, but returning to low growth of around 0.7% for the
region as a whole, if Brazil, in particular, picks up as forecasted.
Within Asia Pacific, Chinese growth is expected to slow further,
although conditions elsewhere in the region may be slightly better
than seen in 2020.
The Steam Specialties business has a higher exposure to the
unfolding COVID-19 situation, which we anticipate could further
reduce global industrial production growth in the first half of the
year. We are therefore planning for a low-growth environment
and the continuation of challenging market conditions in 2020.
Nevertheless, thanks to our resilient business model, ability to
self-generate sales, significant maintenance and repair revenues,
broad geographic reach and the successful implementation
of our strategy, we remain confident in our ability to continue
outperforming our markets.
48
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Electric Thermal Solutions
Revenue £m
Reported
Organic
Group revenue %
£186.1m +20% -1%
2018: £154.6m
2019
2018
2017*
2016
2015
186.1
154.6
75.1
xx.x
xx.x
* Chromalox acquired in July 2017.
Adjusted operating profit £m Reported
Organic
£24.7m +8% -19%
2018: £22.8m
2019
2018
2017*
2016
2015
* Chromalox acquired in July 2017.
24.7
22.8
13.8
xx.x
xx.x
Adjusted operating margin %
13.3%
2018: 14.7%
Reported
-140 bps
Organic
-270 bps
Electric Thermal Solutions at a glance (at year end)
25
operating units*
19
countries with
a resident
direct sales
presence
* Operating units are business units that invoice locally.
1,530
employees
15%
Electric Thermal Solutions
business revenue was 20%
ahead of the prior year,
following the
acquisition of
Thermocoax in
May 2019.”
Dominique Mallet
President,
Electric Thermal Solutions
Key market performance
Industrial production growth rates, 2019*
• Slowing industrial production
growth rates in North
America, Chromalox’s core
market, and contraction in
EMEA, Thermocoax’s core
market, in 2019
• Power Generation and
Marine markets robust
• Other sectors, such as OEM,
Oil & Gas and Chemical lower
>4%
>2 to 4%
>0% to 2%
≤0%
* Compared with the prior year. (Source: Oxford Economics, February 2020.)
Positive
Neutral
Negative
49
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Electric Thermal Solutions continued
Market overview
Chromalox, which accounted for 85% of revenue in the Electric
Thermal Solutions business in 2019, generates 80% of its revenue
in North America and thus has a high exposure to industrial
production growth rates in the USA and Canada, which slowed
markedly during the year, averaging just 0.6%. A number of
Chromalox’s market sectors, such as Power Generation and
Marine, saw positive growth in 2019 but this was offset by a
slowdown in other sectors, such as OEM, Oil & Gas and Chemical,
which account for around 47% of sales. The company saw a
strong contraction in the Oil & Gas industry in EMEA as economic
conditions in the region and political unrest in the Middle East
delayed projects and hampered growth. Shipbuilding, offshore
projects and Liquefied Natural Gas markets strengthened
compared with the prior year and Chromalox saw progress in
these industries, particularly in Asia Pacific.
Thermocoax, acquired in May, accounted for 15% of the Electric
Thermal Solutions business’ revenue in 2019. The company has
a high exposure to industrial production growth rates in Europe
with three quarters of its revenue generated through its companies
in France, Germany and the UK. Industrial production contracted
in Europe in 2019, creating a difficult operating environment.
By industry, Thermocoax saw progress in OEM semiconductor
markets, Aeronautics and Space, but found conditions more
challenging in the Nuclear sector where global uncertainty,
particularly in China and India, led to project delays.
Progress in 2019
The Electric Thermal Solutions business delivered £186.1 million
of sales in 2019, up 20% on a reported basis, with Thermocoax
adding £27.9 million for the seven and a half months under
ownership. A 3% exchange tailwind more than offset a 1% organic
decline in Chromalox’s revenue.
Chromalox delivered £158.2 million of sales in 2019, a 1%
organic decline following strong 9% organic growth in 2018.
We saw sustained maintenance, repair and overhaul demand
and continued the positive trend towards an increasing number
of smaller projects and standard product sales, to offset a decline
in large, custom-engineered capital project sales. This trend was
particularly noticeable in the Heat Trace product line, which saw
a reduction in heavy industry projects towards more engineering
services and material sales. A focus on small projects and recurring
revenue also produced an uplift in Component Technology sales,
particularly in the renewable energy sector. We benefited from the
direct sales presence that we established in Latin America (Brazil
and Chile) in 2018 and saw good growth in these countries in
2019. Sales in Asia Pacific also saw growth in 2019.
In the full year of 2019, sales in Thermocoax fell by 5% at constant
currency, partially due to disruption by the acquisition process
in the first part of the year and partially as a result of customer
rescheduling of shipments in the latter part of the year. This had the
result of expanding the order book by 18% in the year.
Adjusted operating profit was £24.7 million for the Electric
Thermal Solutions business up 8% on a reported basis due to
the acquisition of Thermocoax and a 4% currency tailwind. On an
organic basis, profit was down 19% due to the operational issues,
particularly in Europe, encountered in the first half of the year
by Chromalox.
The adjusted operating profit margin for the Electric Thermal
Solutions business as a whole was down 140 bps with a 270
bps organic decline in Chromalox, partially offset by the higher
operating margin of Thermocoax and a positive contribution from
currency. In August 2019, we reported the disappointing profitability
of Chromalox in the first half of the year, with an operating profit
margin of 9.7%. Chromalox’s second half operating margin
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
2018
£154.6m
£22.8m
14.7%
£12.1m
7.8%
Exchange
£5.1m
£1.0m
Organic
(£1.5m)
(£4.5m)
Acquisitions
and disposals
£27.9m
£5.4m
Organic
2019
-1%
£186.1m
£24.7m
-19%
13.3% -270 bps
£7.9m
4.2%
Reported
+20%
+8%
-140 bps
-35%
-360 bps
50
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report was much stronger at 15.1%, which was above the 14.7% full
year margin achieved in 2018, as we began to see indications
of operational performance improvement resulting from actions
initiated in the first half of the year. Thermocoax’s adjusted operating
margin was 19.5% for the period under ownership.
Statutory operating profit decreased from £12.1 million to
£7.9 million due to the amortisation of acquired intangibles
recognised on the acquisition of Thermocoax.
Strategy update
We welcomed electric thermal solutions specialist, Thermocoax,
into the Group in May 2019. Thermocoax expands our technical
offering to customers, particularly in highly regulated and high-tech
industries such as Nuclear, Aeronautic, Space, Power Generation
and Semiconductor. It also doubles the Electric Thermal Solutions
business footprint in Europe and Asia, which can be leveraged
to improve Chromalox’s access to those markets. At the same
time, Chromalox’s strong brand and presence in North America,
will support faster market penetration for Thermocoax into that
important market.
Chromalox and Thermocoax both have strong, well-respected
brands and they will maintain these within the newly renamed
Electric Thermal Solutions business. In September 2019,
Thermocoax’s Chief Executive Officer, Dominique Mallet, was
appointed President of the Electric Thermal Solutions business.
We are confident that the business will benefit from Dominique’s
experienced leadership.
Chromalox launched a variety of new products during 2019,
including a new Medium Voltage electric steam generator, utilising
the company’s patented DirectConnect technology; the ProtoAir
IIoT Gateway, that can be installed with any Chromalox digitally
enabled product to provide seamless real time connectivity to the
Cloud allowing for remote access and monitoring; and a wide
range of “pick and ship” products, including heaters, flanges and
control panels, which feature universal designs allowing for fast
quoting, fast delivery and competitive pricing, when compared with
more customer-bespoke products.
During 2019, we broadened Chromalox’s direct sales footprint,
establishing an initial direct sales presence in Korea and Hungary, to
better support customers in those countries.
In addition to investing for long-term growth, Chromalox undertook
a range of initiatives to improve profitability throughout the year,
including the adoption of Spirax Sarco price management tools, a
strategic pricing review and reducing central costs.
In February 2020 we announced to our workforce in Chromalox
France the intention to reorganise the operation to reduce losses
and help bring the European operation of Chromalox to break-even
by the end of 2021. This will entail a restructuring of the supply
chain to reduce manufacturing activity in France, which will result
in a reduction of the workforce. Also, in early March we divested
Chromalox’s small Canadian subsidiary, ProTrace, which made
a loss of £0.2 million in 2019. The combined cost of these two
projects, which is estimated to be £4.2 million, will be taken as an
adjusting item in 2020. The annualised benefit, which should begin
to be seen from July 2020 is in the region of £1.2 million.
Outlook
Industrial production growth rates are forecasted to remain low
or contract further in the core markets of the Electric Thermal
Solutions business in 2020, with many of the factors affecting
economic and political uncertainty during 2019 continuing into the
current year. Nevertheless, the business is well-placed to make
progress in 2020. We will continue to benefit from broadening our
geographical direct sales footprint and the new products that were
launched during the last quarter of 2019 and early in 2020 align
strongly with customer trends such as decarbonisation, emissions
control, energy efficiency, process productivity and digitisation, and
should contribute to sales growth in 2020. We remain confident
that all these actions will offset the inevitable market headwind
resulting from the unfolding COVID-19 situation.
51
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Review of Operations continued
Watson-Marlow
Revenue £m
Reported
Organic
Group revenue %
£300.9m +13% +12%
2018: £265.2m
2019
2018
2017
2016
2015
300.9
265.2
248.2
24%
193.9
152.6
Adjusted operating profit £m Reported
Organic
£95.8m +13% +11%
2018: £84.8m
2019
2018
2017
2016
2015
95.8
84.8
80.3
64.3
48.0
Adjusted operating margin %
31.8%
2018: 32.0%
Reported
-20 bps
Organic
-60 bps
Watson-Marlow at a glance (at year end)
44
operating units*
37
countries with
a resident
direct sales
presence
* Operating units are business units that invoice locally.
1,623
employees
Exceptional organic growth achieved
in 2019, with strong growth in all
geographical regions,
delivering sales
of £300.9 million.”
Jay Whalen
Executive Director and President of
Watson-Marlow*
* Jay Whalen retired on
31st December 2019 and was
replaced by Andrew Mines
Key market performance
Industrial production growth rates, 2019*
• Industrial production growth
rates challenging in many
geographic markets
• Pharma & Biotech, Medical,
Mining, Water & Environment
industries buoyant
• General industry more
challenging, reflecting low
global industrial production
growth rates
>4%
>2 to 4%
>0% to 2%
≤0%
* Compared with the prior year. (Source: Oxford Economics, February 2020.)
Positive
Neutral
Negative
52
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Market overview
Industrial production growth is also a good indicator of economic
conditions in Watson-Marlow’s markets because of the company’s
wide geographical spread and diversity of end user industries.
With a smaller but broadly similar geographic footprint to the Steam
Specialties business, the market overview commentary found within
the Steam Specialties business commentary is largely applicable
to the Watson-Marlow business. However, Watson-Marlow’s
much greater weighting (c.50% of sales) to the Pharmaceutical &
Biotechnology industry means that it is more affected by conditions
in that market, than the Group as a whole. Throughout the year,
the Pharmaceutical & Biotechnology market remained buoyant,
as did the Medical Diagnostics, Mining and Water & Environmental
industries, which are all key sectors for Watson-Marlow.
General industrial markets were more challenging, reflecting the low
industrial production growth rates globally.
Progress in 2019
Watson-Marlow delivered sales of £300.9 million in 2019, a 13%
reported increase, with exceptional organic growth of 12% and a 1%
currency tailwind. Strong organic sales growth was delivered across
all geographical regions.
Within Europe and the Middle East, Watson-Marlow again achieved
strong growth across most of our territories, including double-digit
growth in the UK. Our relatively new sales companies in Ireland and
the UAE both delivered excellent growth. Across the region, growth
was largely driven by sales into the Biopharmaceutical sector with
our BioPure, Flexicon, Watson-Marlow Tubing and Watson-Marlow
Pumps products and solutions all achieving double-digit growth.
General Industry and Food & Beverage sales were down slightly,
hampered by the poor industrial production growth rates in the region
and against a strong compare. In Asia Pacific, sales were also well
ahead of the prior year, with China, Korea and Japan all performing
strongly, and with excellent growth in some of our smaller markets.
The Biopharmaceutical and Medical sectors were key drivers of
growth in the region. Within the Americas, the Biopharmaceutical,
Medical, Environmental and Mining industries all saw good growth,
with sales growth in all countries in the region, with the exception of
Mexico which was flat year-on-year.
Aflex, which was acquired at the end of November 2016, delivered
solid growth, benefiting from the continuing conversion of distributor
to direct sales across many of Watson-Marlow’s direct sales
territories. Work continues apace on the construction of Aflex’s new
purpose-built factory in the UK, which will consolidate the company’s
four UK factories onto one site, increasing capacity and production
efficiency. The new facility, at a cost of over £20 million, is on schedule
for completion in mid-2020.
Watson-Marlow’s adjusted operating profit was £95.8 million, up
13% at reported exchange rates and up 11% organically, with a 2%
exchange tailwind. At 31.8% the reported adjusted operating profit
margin was down 20 bps. On an organic basis, the margin fell by
60 bps due to increased investment to sustain above market levels
of growth.
Statutory operating profit increased from £77.5 million to £82.7 million
although the margin fell by 170 bps to 27.5%.
Strategy update
Watson-Marlow’s geographic expansion continued in 2019, with
new sales companies established and trading in the Philippines,
Colombia and Iberia (Spain and Portugal). The preparatory work was
also completed for a new sales company to begin trading in Hungary
in 2020.
During the year we broadened our direct sales product portfolio
as our sales operations in Austria, Switzerland, Italy, Japan, India,
Brazil and South Africa began selling Aflex products directly to their
customer base, with sales growing as a result.
New product development remains a key strategic priority, with a
number of product launches during the year, including the Qdos
ReNu PU pumphead, developed specifically to address the pumping
needs of the Wastewater Treatment industry; a new range of
Puresu® assemblies, combining Watson-Marlow tubing with BioPure
connectors and fittings, assembled, sterilised and ready for use; an
expansion of BioPure’s gasket range, using new materials to meet
consistent quality demands for Bioprocessing; and Flexicon FPC60,
a highly accurate peristaltic fill and finishing system that allows
users to create their own bespoke filling solution to suit small-batch
applications. The Qdos ReNu PU pumphead, in particular, has
outperformed expectations, delivering sales more than double its plan
in the first six months following launch in June 2019.
Throughout 2019, following the acquisition of a small, pre-revenue
company in January 2018, we continued to develop an innovative
product that will expand the technical capabilities of peristaltic pumps
and extend the life of pump consumables, reducing maintenance
and downtime for customers. We expect our first product as a result
of this acquisition to be launched in the summer of 2020. As a result,
a deferred “earn-out” of €5.8 million (£5.2 million) was paid in the first
quarter of 2020.
Outlook
Globally, industrial production growth rates are expected to remain
low throughout 2020. We remain confident in our ability to strongly
outperform industrial production growth as Watson-Marlow’s core
industries, notably Pharmaceutical, Biotechnology, Biopharmaceutical
and Medical devices, look to remain strong. Going into 2020 we have
a strong pipeline of new products for launch during the year. We will
continue to convert Aflex product sales from distributor to direct,
utilising our global direct sales network to leverage growth. In recent
years we have seen excellent growth in our new sales companies as
we expand into new territories and we anticipate this continuing in
our three new companies established in 2019, as well as in our other
recently established companies. We anticipate that Watson-Marlow
will have a lower exposure to the effects of the unfolding COVID-19
situation due to its strong position in the Biopharmaceutical industry,
which we assume will be less impacted. As result of all of these
factors, we are well positioned to continue to deliver above-market
organic sales growth in 2020.
Revenue
Adjusted operating profit
Adjusted operating profit margin
Statutory operating profit
Statutory operating profit margin
2018
£265.2m
£84.8m
32.0%
£77.5m
29.2%
Exchange
£2.3m
£1.8m
Organic
£33.4m
£9.2m
Acquisitions
and disposals
–
–
2019
£300.9m
£95.8m
31.8%
£82.7m
27.5%
Organic
+12%
+11%
-60 bps
Reported
+13%
+13%
-20 bps
+7%
-170 bps
53
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Strategic Report
Financial Review
A strong financial result in
2019 against a background
of declining industrial
production growth, with
sales of £1,242.4 million and
adjusted operating profit of
£282.7 million.”
Kevin Boyd
Chief Financial Officer
54
Introduction
The Group reports under International Financial Reporting
Standards (IFRS) and also uses adjusted and organic figures
where the Board believe that they help to effectively monitor
the performance of the Group and aid users of the Financial
Statements to draw comparisons with our peers. Certain alternative
performance measures also form a meaningful element of
Executive Directors’ variable remuneration and some are used in
calculating debt covenants. Adjusted results quoted in the text
below are referred to as “adjusted” (see Note 2). A reconciliation
of adjusted operating profit to statutory operating profit is given
on page 55 and more detail can be found in Note 2 to the
Financial Statements.
As we are a multi-national Group of companies that trade in a large
number of foreign currencies and regularly acquire and sometimes
dispose of companies, we also refer to organic performance
measures. Organic measures strip out the effects of the movement
of foreign currency exchange rates and of acquisitions and
disposals. The percentage organic growth or decline is measured
as the constant currency movement in those businesses that were
part of the Group at the end of the current year and the beginning
of the prior year, i.e. excluding the effects of any acquisitions or
disposals made in either year. The Board believe that this allows
users of the Financial Statements to gain a further understanding of
how the Group has performed.
Revenue
The Group achieved a strong financial result in 2019 against a
background of declining industrial production growth. Total sales
grew 8% to £1,242.4 million (2018: £1,153.3 million) with organic
sales growth of 6%. Watson-Marlow had an exceptional year,
delivering 12% organic growth, with all regions performing well.
Sales grew by 6% organically in the Steam Specialties business,
with growth of 2% in EMEA, 7% in Asia Pacific and 11% in the
Americas. Sales in the Electric Thermal Solutions business grew
by 20% boosted by the acquisition of Thermocoax, on an organic
basis sales were down 1%. The net effect of the acquisition of
Thermocoax in May 2019 and the divestment of HygroMatik at the
end of November 2018, added 1% to sales.
In aggregate, currency had no effect on sales, with losses in the
Steam Specialties business being compensated for by gains in
the Watson-Marlow and Electric Thermal Solutions businesses.
If recent exchange rates were to prevail for the rest of 2020 we
would expect to see a negative 2% impact to sales on translation
when compared to 2019.
Adjusted operating profit and margin
Adjusted operating profit of £282.7 million (2018: £264.9 million)
was 7% ahead at reported exchange rates and 7% ahead on an
organic basis. On an organic basis the Steam Specialties business
saw adjusted operating profit increase by 10% with 4% growth
in EMEA, 13% growth in Asia Pacific and 18% growth in the
Americas. Watson-Marlow’s adjusted operating profit grew 11% on
an organic basis while the Electric Thermal Solutions business fell
back 19% due to Chromalox’s poor performance in the first half of
the year.
Currency movements depressed adjusted operating profit
by less than 1% with translational losses of £4.6 million being
partially offset by a transactional gain of £2.6 million. The main
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report transactional exposure flow affecting the Group is the export of
products from our factories in the UK, invoiced in sterling, less
the import of goods from overseas Group factories and third
parties priced predominately in euros and US dollars. The net
exposure is approximately £100 million. If recent exchange rates
prevail for the rest of 2020 we would expect to see a negative
impact to profit of 3% due to transactional and translation foreign
exchange movements.
The net effect of the acquisition made in 2019 and disposal in 2018
was to add less than 1% to adjusted operating profit on a constant
currency basis.
The adjusted operating profit margin in the Steam Specialties
business grew 40 bps to 23.6% despite the dilutionary impact of
currency and eleven months less of the high margin HygroMatik
business, which was sold in 2018. Excluding these effects, margin
growth was 100 bps. Watson-Marlow’s reported margin fell 20
bps to 31.8%, a fall of 60 bps at constant currency. The Electric
Thermal Solutions business’ margin fell by 140 bps although it was
boosted by currency and the acquisition of Thermocoax in the
middle of May 2019. On an organic basis it fell 270 bps as a result
of the operational issues in Chromalox in the first half of the year.
The margin in Chromalox in the second half of the year expanded
600 bps over the 9.1% reported in the first half, to 15.1%, which
compares with 14.8% in the second half of 2018 and 14.7% in
the full year. Overall the Group’s reported adjusted operating profit
margin fell by 20 bps to 22.8% due to the dilutionary impacts of
currency and HygroMatik leaving the Group. On an organic basis,
the Group margin improved by 10 bps.
Statutory operating profit and margin
Statutory operating profit decreased from £299.1 million to
£245.0 million, as a result of the non-repeat of the profit on disposal
of HygroMatik (£47.4 million), the disposal of property (£6.5 million)
and a credit resulting from the post-retirement benefit plan in
the USA being frozen to future accrual (£6.0 million), which all
contributed to statutory profit in 2018. As a result, the margin fell
from 25.9% to 19.7%.
Finance costs
Net finance costs fell from £10.3 million to £8.4 million. Net bank
interest decreased from £8.3 million in 2018 to £4.9 million
reflecting lower interest rates and reduced levels of debt, in
particular that denominated in US dollars.
Net costs under IAS 19 in respect of the Group’s defined
benefit pension schemes increased marginally to £2.2 million
(2018: £2.0 million).
In 2019, the Group adopted IFRS 16 (Leases). The IFRS 16 interest
charge for the year was £1.3 million (2018: £nil million).
We anticipate total net interest charges to be at a similar level
in 2020.
Associates
The Group has one Associate holding, a 26.3% interest in
Econotherm, a heat pipe technology business. Econotherm’s
performance improved in 2019, with our share net of tax, rising to
£0.2 million (2018: £nil million).
Adjusted profit before tax
The adjusted profit before tax of £274.5 million
(2018: £254.6 million) was 8% ahead of the prior year. As outlined
earlier, currency movements were negative in the year. At constant
currency, adjusted profit before tax increased by 10%.
Statutory profit before tax
The statutory profit before tax was £236.8 million
(2018: £288.8 million) and includes the items listed below that have
been excluded from the adjusted profit:
Europe, Middle East and Africa
Asia Pacific
Americas
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Adjusted operating profit
Profit on disposal of businesses
Profit on disposal of property
Post-retirement benefit plan in the USA being frozen to
future accrual
Equalising guaranteed minimum pensions for the UK
post-retirement benefit plans
Amortisation of acquisition-related intangible assets
Acquisition-related items
Reversal of acquisition-related fair value adjustments to
inventory
Impairment of goodwill
Statutory operating profit
Operating profit
margin 2019
%
20.0%
29.0%
22.6%
23.6%
13.3%
31.8%
22.8%
Operating profit
2019
£m
67.0
72.5
38.4
177.9
24.7
95.8
(15.7)
282.7
–
–
Operating profit
2018
£m
69.3
63.9
36.9
170.1
22.8
84.8
(12.8)
264.9
47.4
6.5
Operating profit
margin 2018
%
20.1%
27.5%
23.6%
23.2%
14.7%
32.0%
23.0%
–
–
(26.8)
(2.6)
(4.1)
(4.2)
245.0
6.0
(0.7)
(25.2)
0.2
–
–
299.1
55
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Financial Review continued
• a charge of £26.8 million (2018: £25.2 million) for the amortisation
• related acquisitions that fit alongside our existing
of acquisition-related intangible assets;
• a charge of £4.2 million for the impairment of goodwill
Steam Specialties, Watson-Marlow or Electric Thermal
Solutions businesses.
(2018: £nil million)
• a charge of £2.6 million for acquisition costs relating to
Thermocoax (2018: £0.2 million credit); and
• reversal of acquisition-related fair value adjustments to inventory
on the acquisition of Thermocoax, £4.1 million (2018: £nil million).
The principal reasons for the movement between years
are explained in the “Statutory operating profit and margin”
section above.
Taxation
The tax charge on the adjusted profit before tax increased by 90
bps to 28.5% (2018: 27.6%), due primarily to a reduction in the
benefit the Group received from its internal financing structures in
2019. The Group’s overall tax rate reflects the blended average of
the tax rates in nearly 50 tax jurisdictions around the world in which
the Group trades and generates profit. The Group comprises in
the region of 130 operating units, the majority of which are small,
reflecting our local direct sales business model. On a statutory basis
the Group’s effective tax rate was 29.5%.
For the year to 31st December 2020 we currently anticipate that,
based on the forecast mix of adjusted profits, the Group effective
tax rate will be comparable to 2019, at approximately 29%.
Earnings per share
Adjusted basic earnings per share increased by 6% to 265.7 pence
(2018: 250.0 pence). Statutory earnings per share was 226.2
pence (2018: 303.1 pence). The fully diluted earnings per share
was not materially different in either year.
Dividends
The Group has a progressive dividend policy where dividend
payments follow underlying earnings per share growth while
maintaining prudent levels of dividend cover. The aim is to provide
sustainable, affordable dividend growth, building on our 52 year
record of dividend progress, with a compound annual increase of
11% over that period and a 12% per annum increase over the last
10 years. The Board is proposing a final dividend of 78.0 pence per
share for 2019 (2018: 71.0 pence) payable on 22nd May 2020 to
shareholders on the register at 24th April 2020. Together with the
interim dividend of 32.0 pence per share (2018: 29.0 pence), the
total Ordinary dividend for the year is 110.0 pence per share, an
increase of 10% on the Ordinary dividend of 100.0 pence per share
in 2018.
The total amount paid in dividends during the year was
£76.3 million, 13% above the £67.3 million paid in 2018.
Acquisitions
Acquisitions are an important complement to our strategy for
organic growth.
Dedicated resource remains focused on identifying opportunities
to add attractive businesses that closely match our strategic,
industrial and commercial requirements. Our three broad acquisition
criteria are:
• geographic expansion, typically through the acquisition of a
distributor in a developing market;
• products that can be integrated into our existing businesses; and
On 13th May 2019 we acquired Thermocoax for €156 million
(£135 million) on a cash-free, debt-free basis. The acquisition
was financed from existing cash and debt facilities. Thermocoax,
headquartered near Paris, France, is a leading designer and
manufacturer of highly engineered electrical thermal solutions for
critical applications in high added-value industries and together with
Chromalox forms our Electric Thermal Solutions business. For more
information on Thermocoax see the “Acquisition” section of the
Strategic Review.
Brexit
About 93% of the Group’s sales and operating profit are made
outside the UK, reducing the risk to the Group from the United
Kingdom’s decision to leave the European Union. That said, we
are net exporters from the UK, importing approximately £45 million
raw materials and components and exporting in the region of
£170 million of finished goods to our sales companies around the
world. In 2018, to mitigate the risk of delays at ports, we made
the decision to build a month’s buffer stock of raw materials and
components in the UK and finished goods outside the UK equating
to an additional two weeks’ usage ahead of the then planned exit
date of 31st March 2019. Given that the Transition Period now
extends to the 31st December 2020, we currently plan to maintain
this buffer stock of £5 million into 2021.
We have modelled potential tariff impacts and believe that
these would be more than compensated for by a devaluation in
sterling if a “no-deal” Brexit were to occur following the end of the
Transition Period.
We are well prepared and well placed to take on the challenges
and identify the opportunities resulting from a UK exit from the EU.
We have navigated periods of economic and political uncertainty
in many different places around the world and have a long and
successful history of doing so.
Research and development
The development of innovative new products, getting those
products to market faster and sold more effectively, is an important
element of our strategy for growth. Overall the Group’s total
spend on research and development in 2019 was £13.4 million
(2018: £12.4 million) of which £3.2 million was capitalised
(2018: £1.6 million).
IFRS 16
The adoption of IFRS 16 from 1st January 2019 has resulted in the
inclusion of £40.8 million of right-of-use assets in the Statement
of Financial Position at 31st December 2019 together with a
lease liability of £38.9 million. In the year to 31st December 2019,
operating profit was increased by £1.3 million, which was matched
by an increase in lease liability interest of £1.3 million, giving a zero
net impact to the Income Statement. Further information can be
found in Note 1.
Capital employed
Total capital employed has increased by 15% at reported exchange
rates. If the effects of currency, the acquisition of Thermocoax and
IFRS 16 are excluded growth was 7%. This compares with organic
sales growth of 7%.
56
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Capital employed
Property, plant and equipment
Right-of-use assets (IFRS 16)
Inventories
Trade receivables
Prepayments and other current assets
Trade, other payables, current provisions and current tax
Capital employed
Intangibles including goodwill
Investment in Associate
Post-retirement benefits
Net deferred tax
Non-current provisions and long-term payables
Lease liabilities
Net debt
Net assets
Adjusted operating profit
Adjusted operating profit (excluding IFRS 16)
Average capital employed
Average capital employed (excluding IFRS 16)
Return on capital employed
Return on capital employed (excluding IFRS 16)
2019
£m
251.2
40.8
185.9
240.7
44.6
(205.0)
558.2
721.6
0.2
(71.3)
(43.1)
(5.2)
(38.9)
(295.2)
826.3
282.7
281.4
521.4
501.0
54.2%
56.2%
2018
£m
230.8
–
160.6
245.1
43.7
(195.7)
484.5
645.2
–
(85.1)
(35.5)
(6.4)
(235.8)
766.9
264.9
264.9
482.2
482.2
54.9%
54.9%
Tangible fixed assets (PPE and IFRS 16 right-of-use-assets)
increased by £61.2 million to £292.0 million. Changes in exchange
rates reduced fixed assets by £8.3 million, £8.1 million came from
the acquisition of Thermocoax and £40.8 million from the adoption
of IFRS 16, giving an underlying increase of £20.6 million, or 9%.
Total working capital increased by £12.7 million. The ratio of
working capital to sales reduced by 70 bps to 21.3%
(2018: 22.0%). On a constant currency basis, excluding
acquisitions and disposals, underlying working capital as a
percentage of sales improved by 30 bps to 21.5% despite the
building of £5 million of Brexit buffer stock and increasing Gestra’s
inventory to improve customer service levels. Going forward, we
would expect a similar percentage of working capital to sales.
Return on capital employed (ROCE)
ROCE measures effective management of fixed assets and
working capital relative to the profitability of the business.
ROCE decreased to 54.2% (2018: 54.9%), due to the adoption of
IFRS 16. At constant currency, excluding acquisitions and disposals
and IFRS 16, ROCE increased by 310 bps. ROCE is defined in
Note 2.
Return on invested capital (ROIC)
ROIC measures the return on invested capital, both equity and
debt, relative to the adjusted operating profit after tax. ROIC fell
to 18.7% (2018: 19.3%), due to the acquisition of Thermocoax
and the adoption of IFRS 16. At constant currency, excluding
acquisitions and disposals and IFRS 16, ROIC increased by 120
bps. ROIC is defined in Note 2 to the Financial Statements.
Post-retirement benefits
The net post-retirement benefit liability under IAS 19 fell to
£71.3 million (2018: £85.1 million). Assets rose by £46.8m
(11%), reflecting greater than expected returns. Liabilities rose by
£33.0 million (6%), largely due to changes in market conditions,
which resulted in reductions in the AA corporate bond rates used to
discount future cash flows.
The main UK schemes, which constitute 88% of assets, were
closed to new members in 2001 but have remained open to future
service accrual. These schemes continue to be managed under a
dynamic de-risking strategy whereby asset and liability values are
monitored on a daily basis by the asset manager and appropriate
asset allocation decisions taken as the funding level improves
against pre-agreed trigger points. Following actuarial valuations of
the three UK schemes, we agreed deficit reduction programmes
with the Trustees and additional contributions of £4.0 million were
made in 2019. Further contributions at the same rate per annum
have been agreed until 2021. Actuarial valuations of the UK
schemes will be undertaken in 2020.
Cash flow and treasury
Adjusted cash from operations is a measure of the cash flow
generated from our companies over which the local management
have control. A reconciliation between this and statutory operating
cash flow can be found in Note 2 to the Financial Statements.
Adjusted cash from operations fell by £4.8 million to £238.1 million
(2018: £242.9 million) representing 84% cash conversion. If we
exclude the capital spend on the new Aflex facility this would rise
to 90%.
Movements in working capital are discussed above.
Capital additions increased by £19.0 million. The most significant
addition in the year was the £15.7 million spend on the construction
of a new purpose-built factory in the UK for Aflex Hose, which
will consolidate the existing four locations into a single facility,
giving capacity for future growth while increasing efficiencies and
providing a dedicated production line for Pharmaceutical products.
57
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Financial Review continued
It is estimated that a further £6 million will be spent in 2020 in
completing the project.
Looking forward, we would expect capital expenditure in 2020
to be at a similar level of approximately £65 million as we finish
the Aflex facility but increase spending on project OPAL, the
implementation of a global IT system for the Steam Specialties
business. We generate significant cash and our first priority is to
reinvest in the business, taking opportunities to generate good
returns from increased efficiency, reduced costs and flexibility.
Tax paid in the year increased by £16.8 million to £78.4 million as
tax rates rose and the Group grew. Free cash flow, defined in the
table below, fell to £154.3 million (2018: £174.6 million) as a result
of the increase in capital expenditure and tax.
Dividend payments were £76.3 million, including payments to
minorities (2018: £67.3 million) and represent the final dividend for
2018 and the interim dividend for 2019.
There was a cash outflow, including fees, of £137.6 million on the
acquisition of Thermocoax, as well as an additional £0.9 million
outflow relating to the acquisition of various distribution rights.
The net of share purchases and new shares issued for the
Group’s various employee share schemes gave a cash outflow
of £12.5 million (2018: £5.0 million) reflecting the move to acquire
shares on the open market rather than issue new equity.
Due to the acquisition of Thermocoax, net debt increased from
£235.8 million to £295.2 million at 31st December 2019, an
expansion of £59.4 million. This equates to a net debt to EBITDA
ratio of 0.9 times (2018: 0.8 times) excluding IFRS 16. EBITDA is
defined in Note 2 and the components of net debt are disclosed in
Note 24.
The Group’s Income Statement and Statement of Financial Position
are exposed to movements in a wide range of different currencies.
This stems from our direct sales business model, with a large
number of local operating units. These currency exposures and
risks are managed through a rigorously applied Treasury Policy,
typically using centrally managed and approved simple forward
contracts to mitigate exposures to known cash flows and avoiding
the use of complex derivative transactions. The largest exposures
are to the euro, US dollar, Chinese renminbi and Korean won.
Whilst currency effects can be significant, the structure of the Group
provides some mitigation through our regional manufacturing
presence, diverse spread of geographic locations and through the
natural hedge of having a high proportion of our overhead costs in
the local currencies of our direct sales operating units.
Capital structure
The Board keeps the capital requirements of the Group under
regular review, maintaining a strong financial position to protect the
business and provide flexibility of funding for growth. The Group
earns a high return on capital, which is reflected in strong cash
generation over time. Our capital allocation policy remains
unchanged. Our first priority is to maximise investment in the
business to generate further good returns in the future, aligned
with our strategy for growth and targeting improvement in our
key performance indicators. Next, we prioritise finding suitable
acquisitions that can expand our addressable market through
increasing our geographic reach, deepening our market penetration
or broadening our product range. Acquisition targets need to
exhibit a good strategic fit and meet strict commercial, economic
and return on investment criteria. When cash resources significantly
exceed expected future requirements, we would look to return
capital to shareholders, as evidenced by special dividends declared
in respect of 2010, 2012 and 2014. However, in the near term, we
will look to reduce our financial leverage prior to considering new
returns of capital to shareholders.
Cash flow
Adjusted operating profit
Depreciation and amortisation (excluding IFRS 16)
Depreciation of leased assets
Cash payments to pension schemes more than the charge to adjusted operating profit
Equity settled share plans
Working capital changes
Repayments of principal under lease liabilities
Capital additions (including software and development)
Capital disposals
Adjusted cash from operations
Net interest
Income taxes paid
Free cash flow
Net dividends paid
Purchase of employee benefit trust shares/Proceeds from issue of shares
(Acquisitions)/Disposals of subsidiaries (including costs)
Cash flow for the year
Exchange movements
Opening net debt
Net debt at 31st December (excluding IFRS 16)
IFRS 16 lease liability
Net debt and lease liability at 31st December
58
2019
£m
282.7
34.3
11.3
(5.2)
6.2
(21.4)
(11.2)
(62.4)
3.8
238.1
(5.4)
(78.4)
154.3
(76.3)
(12.5)
(138.5)
(73.0)
13.6
(235.8)
(295.2)
(38.9)
(334.1)
2018
£m
264.9
32.9
–
(4.6)
5.7
(22.5)
–
(43.4)
9.9
242.9
(6.7)
(61.6)
174.6
(67.3)
(5.0)
48.8
151.1
(13.3)
(373.6)
(235.8)
–
(235.8)
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Sustainability Report
Through our sustainability
strategy we strive for
continuous improvement across
our 10 material sustainability
topics, considering the impact
of our business operations
on the environment and key
stakeholder groups, to support
the long-term success and
sustainability of the Company.”
Ian Farnworth
Group Environmental,
Health and Safety Director
Long-term focus
We embed long-term thinking and action across our business
operations and in our interactions with our stakeholders, in order to
create sustainable value for all our stakeholders as we engineer a
more efficient, safer and sustainable world.
Membership, engagement and reporting
In 2019 our Group Sustainability Committee comprised: Ian
Farnworth (Steam Supply Chain and Group EHS Director);
Sheldon Banks (Divisional Director, Spirax Sarco Americas); Sean
Clay (Divisional Director, Spirax Sarco EMEA); James Wright
(Watson-Marlow Supply Chain Director); and Mark Wyatt (Group
EHS Executive).
The Sustainability Committee engages a wide range of senior
managers, project leaders and employees as part of its
responsibility to oversee strategy implementation and review
progress against strategic objectives. The Committee meets
regularly throughout the year and receives presentations from
project leaders at each session.
Progress against the Group’s sustainability objectives is reported to
the Group Chief Executive, Group Executive Committee and Board
of Directors.
Managing sustainability
We have a well-defined management structure to help us achieve
our sustainability objectives.
Group Chief
Executive
Responsible for the Group
sustainability strategy
Supported by
Board of
Directors
Sustainability Committee
Senior Managers (Steam Supply Chain and Group EHS Director;
Divisional Director Spirax Sarco Americas; Divisional Director Spirax
Sarco EMEA; WMFTG Supply Chain Director; Group EHS Executive)
oversee strategy implementation and review progress against
strategic objectives
Sustainability
strategy sponsors
Senior managers
allocated to each
sustainability objective
Divisional Directors,
Regional and General
Managers
Ensure the Group’s
sustainability policies are upheld
and implemented by our
operating units
Sustainability strategy project leaders
and teams
Establish strategic priorities, with sponsors, and oversee
strategic implementation
Employees and organised employee groups
Oversee, record and report on strategic implementation
and performance within their local workplaces
59
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Sustainability Report continued
Progress in 2019
Key areas of focus for 2019 were: increasing our employee’s
knowledge and understanding of sustainability, through the roll-
out of the “Group Essentials” training programme; the continued
adoption and integration of recent acquisitions into the Group’s
sustainability programmes; and progress against the Group’s
sustainability targets. We are pleased to have achieved progress
in our areas of focus during 2019.
During 2019 we translated the course materials of our Group
Essentials training programme into 15 languages and rolled
these out across the Group. To date, over 5,300 employees have
completed the programme’s anti-bribery and corruption (ABC)
training and 2,800 have completed all courses. Both Gestra and
Chromalox have continued their adoption and implementation of
the Sustainability Strategy and we made progress against most of
our sustainability targets, which are outlined on page 61.
Focus for 2020
• Increase the number of employees who have completed the
Group Essentials programme.
• Consider including the adoption of Group Essentials as an
area of review within the Group’s internal audit programme.
• Continue the integration of recent acquisition, Thermocoax,
into the Group’s sustainability programmes.
• Make progress against the Group’s sustainability targets.
Spirax-Sarco Engineering plc
is a constituent of the
FTSE4Good UK Index
Non-financial information statement
This Annual Report contains the information required to comply with the Companies, Partnerships and Groups (and Non-Financial
Reporting) Regulations 2016, as contained in sections 414CA and 414CB of the Companies Act 2006. The table below provides key
references to information that, taken together, comprises the Non-Financial Information Statement for 2019.*
Reporting requirement
Group Policies that guide our approach
Information and risk management, with page references
Environmental matters
• Group Environmental, Health, Safety,
Employees
Social matters
Respect for
human rights
Anti-corruption and
anti-bribery matters
Energy and Sustainability Policy
• Group Management Code
• Supplier Sustainability Code
• Group Diversity and Inclusion Policy
• Group Management Code
• Group Human Rights Policy
• Group Environmental, Health, Safety,
Energy and Sustainability Policy
• Group Human Rights Policy
• Group Charitable Donations Policy
• Group Employee Volunteering Policy
• Supplier Sustainability Code
• Group Human Rights Policy
• Group Sanctions, Embargoes and Restrictions Policy
• Supplier Sustainability Code
• Group Anti-Bribery and Corruption Policy
• Group Gifts, Entertainment and Hospitality Policy
• Group Competition Law Compliance Policy
• Group Sanctions, Embargoes and Restrictions Policy
• Group Whistle-Blowing Policy
• Supplier Sustainability Code
Sustainability Report, pages 67-70
Principal risks, pages 21-22 and 99
Our business model, pages 8-17
Section 172 Statement, pages 80-81
Company purpose, page 1
Sustainability Report, pages 62-64
Our business model, pages 8-11
Principal risks, page 24
Employee Engagement Committee Report, pages 82-84
Section 172 Statement, page 80-81
Company purpose, page 1
Sustainability Report, pages 64-65 and 71
Our business model, page 8-11
Strategic Review, page 40
Section 172 Statement, page 80-81
Company purpose, page 1
Sustainability Report, pages 64-65
Principal risks, page 24
Sustainability Report, page 64
Principal risks, page 24
Risk Management Committee Report, page 99
Description of the business model
Our business model, pages 8-17
Description of the principal risks in relation to the above matters, including business
relationships, products and services likely to affect those areas of risk, and how the
company manages the risks
Risk management and principal risks, pages 20-25
Risk Management Committee Report, pages 98-101
Non-financial key performance indicators
Sustainability Report, pages 62-71
Key Performance Indicators, page 27
* The policies listed above can be found on our website: www.spiraxsarcoengineering.com/our-approach/corporate-governance/governance-documents. Compliance with our
policies is monitored through the implementation of our Sustainability Strategy and, locally, by our General Managers.
60
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our sustainability vision:
To engineer a more sustainable future.
Our sustainability mission:
We will operate sustainably through responsibly managing our business for on-going financial success; operating in accordance with
laws and regulations; managing our social and environmental impacts; acting ethically; and managing our customer and supplier relationships,
to improve the sustainability of their operations.
Our sustainability objectives:
We commit to engineering a sustainable future by focusing on five core areas, setting objectives and targets in each.
Sustainability overview 2019
Sustainability
area
Material
sustainability topic
Objective
Health & Safety
To achieve Health and Safety (H&S) excellence through
engagement, empowerment and fostering good
behaviours while targeting zero accidents.
Target
Zero accidents
Further
reading
Page 62
Our
workplaces
Employment
practices
To promote diversity and equality through employment
practices that are free from discrimination and in
accordance with international human rights principles.
33% of women on our Board,
as opportunities arise
Page 63
Ethical business
practices
To act in accordance with our Values, upholding a zero
tolerance approach to bribery and corruption.
Zero incidents of bribery
and corruption
People development
To invest in developing the knowledge and skills of
our people.
Our
supply chain
End-to-end
supply chain
To focus on continuous improvement in our supply chain
with particular emphasis on sustainability.
Increase the impact of our
technical and leadership
training offering
84% of phase 3 supplies to have
signed our supplier sustainability
code by the end of 2019
Product
responsibility
To incorporate sustainability factors into our product
design process, including energy efficiency, emissions,
serviceability, recyclability and the availability of compliant
and ethically sourced materials.
Continuing compliance with all
applicable EHS standards, while
meeting customer expectations of
performance and cost
Page 64
Page 64
Page 65
Page 66
Water and waste
Our
environment
To limit the environmental impacts of our operations
through reducing water use and minimising and
managing effluent and waste.
To reduce waste intensity by 10%
and water intensity by 5% over
three years to 2021
Page 67
Energy and carbon
To minimise the environmental impacts of our operations
by managing energy consumption with the aim of
reducing carbon emissions.
Our
customers
Customers
To provide products and services that improve the
sustainability of our customers’ operations through
helping them reduce their environmental impacts,
improve plant efficiency and productivity and maintain
product quality.
To reduce our energy intensity by
10% over three years to 2021,
with an accompanying reduction
in carbon emissions
Pages
68-69
n/a
Page 70
Our
communities
Community
engagement
To engage positively with the communities in
which we operate and to offer financial support to
approved charities.
All Group companies to
participate in at least one
community engagement activity
annually by 2020
Page 71
61
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Strategic Report
Sustainability Report continued
Our workplaces
Health and Safety
Overview
We strive for Health and Safety (H&S) excellence and target
zero accidents. As well as having robust management systems
and safety controls to prevent accidents, we promote a strong
H&S culture, with safety being one of our six Company Values.
The Group Chief Executive and Board of Directors oversee
our H&S programmes and performance, with H&S a standing
agenda item at every Board meeting. All Group companies are
expected to operate to the highest safety standards.
2019 performance and actions
Lagging indicators: lost time injury rate
During 2019, our over three-day lost time injury rate per 1,000
employees improved to 3.6 per 1,000 employees (2018: 4.9), a
reduction from 36 injuries in 2018 to 28 in 2019. We also saw an
improvement in our one to three-day lost time injury rate, which
fell to 1.4 per 1,000 employees in 2019 (2018: 2.2), a reduction
from 16 injuries in 2018 to 11 in 2019.
The 2018 increase in the over three-day lost time injury rate to
4.9 (2017: 4.6) was due to the full-year effect of the acquisition
of Chromalox in 2017, which had less mature H&S practices
than the rest of the Group. Since acquisition we have rolled
out the Group’s H&S programmes to Chromalox, invested in
the business to reduce H&S risk and focused on increasing
the H&S culture of the business. As a result, Chromalox’s H&S
performance improved in 2019.
Leading indicators: safety concerns and
near miss reporting
Reflecting an increasingly well-embedded safety culture, the
number of safety concerns raised by employees increased to
2,291 per 1,000 employees (2018: 1,954). The number of near
misses reported also increased to 298 per 1,000 employees
(2018: 195). All safety concerns and near misses were assessed
and corrective action taken.
Leading indicators: safety training
During 2019, 134,341 H&S training units were delivered
across the Group (2018: 87,671) and we established a new
Group standard Behavioural Based Safety (BBS) programme.
We delivered BBS training to our senior executive team and a
number of General Managers. 14 EHS leaders completed a
three day training event in the UK and at our global Group EHS
conference 17 delegates received BBS training, to enable them
to train our employees and drive a further improvement in our
safety culture within the business. We established a quarterly
safety competition in the steam business. We started the year
with a safety message to all employees, to increase awareness
of risk, empower employees to “stop the job” if they perceive
any risk to themselves or their colleagues and reiterating the
importance of reporting safety concerns and near misses.
Safety management
During 2019, we increased the number of full-time qualified EHS
professionals employed across the Group to 48 (2018: 39), improved
the internal EHS audit scores at our steam supply sites and developed
an EHS internal audit framework for our steam sales companies.
We developed a Group Working at Height Policy and training, rolled
out a Group Personal Protective Equipment standard and prepared
a H&S integration plan for Thermocoax. We completed 1,978 EHS
audits (2018: 2,446) and 2,428 inspections (2018: 1,599). 17 of our
32 manufacturing sites have OHSAS 18001 certification (2018: 15).
Notable achievements
Watson-Marlow MasoSine, Germany, celebrated 20 years without
a lost-time accident and, for the second consecutive year, Spirax
Sarco Ltd, UK, achieved a Royal Society for the Prevention of
Accidents Gold award in recognition of the company’s strong H&S
management systems and culture.
Over three-day lost time injury rate per 1,000 employees
2019
2018*
2017
2016
2015
3.6
4.9
4.6
6.0
6.2
* 2018 rate increased due to the full-year effect of the Chromalox acquisition
One to three-day lost time injury rate per 1,000 employees
2019
2018*
2017
1.4
2.2
1.7
* 2018 rate increased due to the full-year effect of the Chromalox acquisition
17
Near misses and employee H&S concerns raised
per 1,000 employees
16
2019
298
2018
195
2017
89
868
2,291
1,954
Near misses per 1,000 employees
Employees H&S concerns per 1,000 employees
Reporting metrics
We have refreshed our external reporting metrics to reflect our more challenging internal metrics.
This has expanded the scope of the data from work-related lost time accidents – as defined
by the UK’s Health and Safety Executive’s Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations 2013 (RIDDOR) – to all lost time injuries experienced by our employees
while working, regardless of cause. Most notably, injuries caused by car accidents, which were
excluded under the RIDDOR definition, are now included in the data. We have also chosen to
report one to three-day lost time injuries, reflecting the increasing maturity of our Health and
Safety programmes, as well as two important leading indicators.
Focus for 2020
• Implement our BBS programme in Watson-Marlow UK.
• Roll out the EHS internal audit framework to sales
companies in the Steam Specialties business.
• Align Thermocoax to Group EHS standards/programmes
• Establish new Group First Aid and Manual Handling Policies
and increase the number of trained first aiders.
62
Spirax-Sarco Engineering plcAnnual Report 2019 Our workplaces continued
Our people
Overview
Our Values, in particular Respect and Integrity, underpin our HR
policies and employment practices. We are committed to creating
a culture in which our employees feel safe to challenge and are
encouraged to do so. We have robust HR policies and systems
that support us in protecting the rights of our employees and
ensure their fair and equitable treatment.
Employee engagement
We communicate with employees to ensure that they have an
understanding of the operations and performance of their company
locally and the Group. Every two years we conduct an employee
survey to provide a confidential forum for all employees globally to
tell us how they feel about working for Spirax-Sarco Engineering.
Following each employee survey we undertake extensive work to
put local actions plans in place to demonstrate a commitment to
acting on the feedback from our employees. We also have well-
established grievance and whistle-blowing procedures to enable
employees to confidentially raise concerns.
The creation, in 2019, of the Employee Engagement Committee
has achieved greater Board engagement with the workforce,
enabling the Board to gauge and monitor our culture and to ensure
it is both embedded and retained in our Company. The Employee
Engagement Committee Report can be found on pages 82 to 84.
Workforce diversity
We believe that diversity of culture, gender, age, experience and
expertise enhance our ability to operate effectively and ethically,
whilst increasing the sustainability of our business. Our recruitment
policies ensure decisions are fair and made without bias, and our
remuneration policies are designed to recognise skills, experience
and achievement.
We seek to increase diversity at all levels of the organisation, with
a particular focus on gender diversity. Our Diversity and Inclusion
Policy outlines, amongst other things, our commitment to provide
equality, fairness and respect for all employees, regardless of
background; to oppose all forms of unlawful discrimination; and
to operate in accordance with the Equality Act 2010, avoiding
discriminating on the basis of any protected characteristics.
2019 Performance and actions
We remain committed to increasing gender diversity across the
business and contributed to the FTSE Women Leaders (Hampton-
Alexander) Review. During 2019, we appointed Caroline Johnstone
as a Non-Executive Director, increasing female representation on
our Board from 22% to 30%. At the time of publication, following
the retirement of Jay Whalen on 31st December 2019, female
Board membership is 33%. At the end of 2019, 20% of the
Executive Committee and their Direct Reports were female, an
increase from 18% last year.
We formalised our commitment to ensuring more diverse shortlists
for external recruitment and have asked the Human Resources
managers of our operating companies not to accept shortlists from
recruiters that do not include at least one strong female candidate.
2019 was the first full year of our Executive Mentoring Programme,
designed to accelerate the development of high-potential women
and strengthen the pipeline of female talent. Across the Group,
20 of our women leaders were paired with an executive mentor
for one year. Notable success achieved by these women during
the year include: Teeny Parwongphol, who was promoted from
General Manager of Spirax Sarco Thailand to Regional General
Manager of Thailand and South East Asia Developing Markets; Jo
Weekes, who was promoted from General Manager of Watson-
Marlow Ireland to Regional Sales Manager – Northern Europe;
Dilsad Baysan, who was promoted from National Sales Manager
in Spirax Sarco Turkey to General Manager of Spirax Sarco Turkey;
Natalia Voropaeva, who was promoted from Spirax Sarco Central
and Eastern Europe Regional Business Development Manager to
Steam Specialties EMEA Business Development Manager, and
Sarah Peers, Head of Group Corporate Communications, who
received a prestigious WeQual Award, which recognises leadership
potential in women one level below the Executive Committee.
In December 2019, we commenced a pilot to establish a Group-
wide Women’s Network. Approximately 30 women from different
levels of the organisation, and across a variety of roles, were invited
to participate in the pilot. Development of the Women’s Network will
continue in 2020.
During 2019, our workforce gender diversity improved across the
workforce as a whole with 26% of our employees being female and
74% male (2018: 22% female, 78% male). Disappointingly, senior
manager diversity declined slightly with 20% female and 80% male
(2018: 21% female, 79% male). We recognise that there is still more
to do to address gender imbalance and will continue to implement
further programmes and initiatives in 2020.
Gender diversity 2019*
Board of Directors
Senior management
3
122
Workforce
2,086
7
493
Male
Female
5,975
* At year end 2019.
Focus for 2020
• Inclusive leadership training to be delivered to senior
managers across the Group.
• Starting salary analysis to be undertaken to further limit the
gender pay gap throughout the business.
• Increased focus on internal communications to continuously
improve employee engagement and collaboration across
the Group.
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Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report
Sustainability Report continued
Our workplaces continued
Ethical business practices
Our workplaces continued
People development
Overview
With the implementation of our refreshed Company Values across
the Group in 2018, and on-going training and communication
regarding sustainable and ethical business practices, we continue
to ensure that we are creating and maintaining a culture of ethical
behaviour throughout our global operations.
2019 Performance and actions
Continued expansion of ABC training
In keeping with the growing employee base and geographic reach
of the Group’s businesses, in 2019 we significantly expanded the
scope of our internal anti-bribery and corruption (ABC) training.
This increased scope, which commenced in late 2018, was
completed in 2019 with the final roll-out of the new course to every
employee with an email address, including our new colleagues
within the Thermocoax business. More than 5,300 employees (at
all levels within the business) have now completed the course, three
times the number of employees who had completed it at the end
of 2018.
The new course, which is part of a broader “Group Essentials”
training programme, is available in 16 languages, ensuring that our
high expectations for ethical business practices are understood
across all our Group companies worldwide.
Overview
People development is an essential enabler of business
sustainability. As we invest in our people, we are better able
to serve our customers and engineer sustainable value for all
our stakeholders.
2019 Performance and actions
During 2019 we invested in training and development initiatives
across the Group, expanded our technical development
programmes and rolled out Group-wide induction training.
Graduate development
We recruited 23 graduates onto our Global Graduate Development
Programme, in 11 countries, hiring graduates in Korea, Singapore,
India and Brazil for the first time. The total number of graduates
currently on the two-year programme is 42, across 14 countries,
with slightly over 50% being female. We held our first global
graduate training conference in June, attended by all current
graduates and some past-programme participants, and launched
an online learning portal designed specifically for our graduates.
The success of the Graduate Programme in accelerating career
progression can be seen in the promotion of a former Graduate
Programme participant, Lukas Grech (2013-15), to the position of
General Manager of New Zealand, effective from 1st January 2020.
Whistle-blowing
Every employee has access to a local, independent, third-party
whistle-blowing hotline, hosted by Safecall, where they can speak
to an external party in their own language to raise concerns about
potentially unethical behaviour within the business. Following the
completion of the Thermocoax acquisition in May 2019, materials
advertising the Safecall hotline were made available at each
Thermocoax site. The internal audit function confirms that the
Safecall information is appropriately displayed at every Group site.
Leadership development
We expanded our LEAP leadership development programme,
running three cohorts: one in EMEA, one in the Americas and
one in Asia Pacific. The programme is delivering good results for
the business, which was recognised when we won the “Best
Commercial Programme” in the Training Journal Awards 2019.
We actively promote diverse participation in LEAP, with the 88
attendees, to date, drawn from across all our Group businesses,
from 28 countries, and with 27% of participants being women.
In 2019, 13 calls were made to the Group’s Safecall hotline. Each of
these were investigated by senior management and follow-up
actions taken, where necessary. Summaries of all calls and related
actions are reviewed by the Audit Committee and the Board.
Company Values
We continue to embed our Company Values (customer focus,
excellence, respect, integrity, safety and collaboration) through a
number of initiatives to ensure they are constantly visible in our
everyday work. For example, during 2019 Chromalox’s HR team
ran a Values in Action campaign, which publicly recognised 35
employees for “living the Values” in their daily work.
Focus for 2020
• Update content of ABC training to ensure it remains relevant
and current.
• Continue to monitor compliance with internal whistle-
blowing hotline publication requirements, via internal audit.
Watson-Marlow also continued to invest in their strategy-focused
ASPIRE programme, with 31 leaders attending from across
the business in 2019. A number of our senior leaders attended
Executive education programmes at the London Business School,
Harvard Business School, the Centre for Creative Leadership and
Ashridge Business School.
Sales Management capability
During the second half of the year we launched an initiative to
develop our Sales Management capability. We developed a Sales
Management framework, as well as a competency assessment.
Work has commenced to build a development programme
for Sales Managers, which will be launched in 2020. Using the
framework as a foundation, work has commenced on building
a development programme for Sales Managers, which will be
launched in 2020.
Focus for 2020
• Strengthen our Graduate Development programme.
• Continue to roll out our Leadership Development
• programmes.
• Launch a Sales Management development programme.
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Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our supply chain
End-to-end supply chain
Overview
We operate 32 manufacturing sites globally. By manufacturing
close to the point of sale we shorten lead times, manufacture to
local specifications, reduce transportation requirements for finished
goods, provide local employment, improve customer service
and strengthen our competitive advantage. We continuously
seek to improve the sustainability of our end-to-end supply
chain and focus on sourcing materials ethically, manufacturing
responsibly and distributing efficiently, with the aim of providing
high levels of customer service while managing our social and
environmental impacts.
Supplier Sustainability Code
Our Supplier Sustainability Code (Code) is central to our
commitment to ethical and sustainable sourcing. The Code
outlines the expectations that we have for suppliers and enables
us to embed sustainability into our purchasing processes.
The requirements of the Code fall within four broad categories:
• Ethics: suppliers are required to comply with all applicable trade
laws and regulations and commit to international ethical business
conventions, including compliance with competition laws, the
rejection of bribery and corruption, a commitment to trace the
origin of materials, the maintenance of records to demonstrate
compliance with regulations, and the use of anonymous
grievance and whistle-blowing mechanisms.
• Human Rights: suppliers are expected to comply with
international Human Rights conventions and, amongst
other requirements, prohibit the use of child labour, eliminate
discrimination in their employment practices, comply with laws
regulating wages, working hours and working conditions, allow
their employees freedom of association, and comply with the UK
Modern Slavery Act and the US Dodd-Frank Act.
• Health & Safety (H&S): suppliers must operate a safe working
environment, with a suitable H&S policy and management
system, and the products produced by suppliers must comply
with all applicable environmental, health and safety regulations.
• Environmental Sustainability: suppliers should implement
initiatives that contribute to the preservation of the environment
and mitigate their impact on natural resources, complying with all
legal environmental requirements and demonstrate continuous
improvement in environmental performance.
2019 Performance and actions
Supplier Sustainability Code roll-out
During 2016 and 2017 we commenced the Phase 1 and 2
roll-outs of the Code to direct suppliers of our Spirax Sarco and
Watson-Marlow manufacturing and sales companies. By the end
of 2019, 99% of Phase 1 and 2 suppliers had signed the Code
(2018: 97%). In 2018, we commenced a Phase 3 roll-out of the
Code to suppliers of recently acquired businesses Hiter Controls,
Aflex Hose, Gestra and Chromalox. By the end of 2018, just over
50% of suppliers had signed the Code. Our 2019 target was for
84% of Phase 3 suppliers to have signed the Code, we achieved
our target. We continue to work with suppliers on a continuous
improvement basis to further raise standards within our supply
chain. Our new combined Phase 1, 2 and 3 target is for 97% of
suppliers to have signed the Code by the end of 2020.
Having acquired Thermocoax in 2019, we commenced a Phase 4
roll-out of the Code. Our Phase 4 target is for over 90% of suppliers
to have signed the Code by the end of 2020.
During 2019 we exited seven suppliers who would not sign the
Code, or whose standards fell short of those we require.
Supply chain sustainability initiative example
During 2019, Chromalox undertook a number of initiatives to
improve the sustainability of its supply chain. One key activity was a
detailed supplier analysis, using a range of categories. Following the
analysis, several strategically important suppliers were identified
as being in need of improvement and strategies were designed
and deployed to work with those suppliers on a continuous
improvement basis. Another project was undertaken to improve
transportation efficiency for goods to and from the company’s
manufacturing plant in Mexico. As a result of the project, efficiency
was increased, overall transportation costs were reduced and a
number of new jobs were created for local employees in Mexico.
Product Lifecycle Management
Within the Steam Specialties business, we are benefiting from
our enhanced Product Lifecycle Management (PLM) tool and the
data that it provides. It is enabling us to more effectively monitor
supplier quality, allowing us to identify and rectify supplier quality
issues quickly, reducing the need for re-working parts as well as
reducing scrap.
For example, during 2019 Spirax Sarco Mexico utilised PLM to
identify its three lowest performing suppliers, by product quality.
It found that one supplier accounted for 76% of rejected parts.
Of those rejected parts, 81% related to just one sand-cast
product, with 99% of the rejections due to small holes in the metal.
The supplier and our Quality Assurance team identified a problem
with the design of the casting that was causing small gas bubbles
to be trapped. By modifying the template used to cast the part, the
molten metal was able to flow more freely, preventing gas bubbles
from being trapped, which resolved the issue.
Modern Slavery Statement
Spirax-Sarco Engineering plc prides itself on setting high standards for
sustainable and ethical business practices in its operations worldwide.
Included in those high standards is a commitment to respecting and
protecting the human rights of all individuals and combating all forms of
modern slavery or human trafficking in all parts of our business organisation,
including our supply chain. We are continuously developing and improving
our business practices and policies in line with that commitment.
We support a strong, collective stand to identify, prevent and raise
awareness of modern slavery and human trafficking practices in all parts of
the world.
Further reading
Read our Modern Slavery Statement in full or view our Supplier Sustainability Code
on our website.
www.spiraxsarcoengineering.com/sustainability/supply-chain
Focus for 2020
• Achieve progress against our targets and exit any suppliers
found to fall short of required standards.
• Review our method for monitoring supplier sustainability.
65
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Sustainability Report continued
Our supply chain continued
Product responsibility
Overview
To achieve our Company purpose of engineering a more efficient,
safer and sustainable world, we design, manufacture and supply
an industry-leading range of quality products to customers that are
reliable, safe to use, ethically-produced and environmentally sound
throughout their lifecycle.
Across five principal Research and Development (R&D) centres,
in the UK (Spirax Sarco and Watson-Marlow), Germany (Gestra),
the USA (Chromalox) and France (Thermocoax), we develop new
products to meet our customers’ changing needs, and enhance
existing products. Extensive on-site analysis, test and validation
capabilities, as well as the use of third-party certification, ensure
that our customers can buy from us with confidence.
2019 Performance and actions
Management changes
Our product responsibility topic came under new day-to-day
management, following the development of new Business
Development and R&D organisational structures within the Steam
Specialties business. As a result of the changes, limited progress
was made against our 2019 objectives as the new project manager
focused on refining the topic’s overall objectives.
Two broad areas of focus going forward are, firstly, to build on
the Eco-Design Policy that we already have to better incorporate
sustainability factors into our product design and lifecycle process
and, secondly, to improve the internal mechanisms used for
measuring, monitoring and reporting on product sustainability.
Knowledge management
We continued to develop the use of quality data, including
manufacturing reworking analysis, to evaluate the new product
development process, with the aim of reducing energy use
and scrappage rates during manufacturing. This data is being
continuously fed back into the development process to ensure
that lessons are learned and changes implemented to maximise
manufacturing efficiency for new products that we develop.
Product development
Across the Group we continued to develop new products that will
help our customers to improve the sustainability of their industrial
processes. More information about some of the new products
launched by our businesses in 2019 can be found on page 38.
Focus for 2020
• Complete a Group-wide review of R&D design practices
and principles and facilitate the sharing of best practice.
• Improve disclosure of sustainability information to customers.
66
Eco-design in action:
Clean Steam Generator
Energy efficiency is at the heart of the design of Spirax Sarco’s
new Clean Steam Generator (CSG), for the Healthcare
industry, launched in 2019. Design features include variable
speed pumps to reduce electricity consumption, a compact
heat exchanger to minimise heat loss, predictive maintenance
algorithms to ensure peak efficiency is maintained throughout
the life of the product and additional heat recovery
options available to ensure maximum efficiency within a
customer’s application.
All materials used within the CSG are responsibly sourced,
and maintainability is central to the design, with all product
components repairable or replaceable, to extend the life of
the CSG.
During the CSG’s development phase, the engineering team
undertook an environmental impact assessment and used the
results of the assessment to inform the development of the
product. During the validation phase we undertook extensive
testing and optimisation of the design in our world class R&D
facility in Cheltenham, UK, to ensure optimum performance,
long-term reliability, compliance with clean steam standards
and product safety (see images below).
The CSG is being manufactured in three global locations:
Mexico, Italy and China, to reduce transportation requirements,
maximise local sourcing of materials, and ensure compliance
with regulatory requirements in the three regions, while
supporting economies of scale.
Further reading
To find out more about the Clean Steam Generator, see the strategy in action
case study.
See page 35
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our environment
Water and waste
Overview
Fresh water is a scarce resource in many areas of the world.
As a result, we aim to use water efficiently across all our global
operations, monitoring use, controlling leakage, reducing effluent
and acting to reduce total consumption. Through the products,
solutions and services we supply to customers, we also help them
to do the same.
Wherever we operate we ensure full compliance with waste
regulations. For example, waste is segregated and stored safely,
with certified waste vendors appointed to handle and responsibly
dispose of waste. Any hazardous waste, such as paint residues,
chemical waste from cleaning and degreasing processes, electronic
waste and printer toner cartridges, are removed from our sites
by licenced contractors who responsibly recover or dispose of
waste. We proactively seek to reduce waste generation across our
global operations and across our sites we utilise monitoring and
management systems to ensure compliance with environmental
regulations, such as the control of pollution and air emissions.
2019 Performance and actions
Water use
In 2019, our global operations (excluding Thermocoax) used
212,027m³ of water (2018: 211,540m³), a 0.2% increase. On an
intensity basis, water use fell by 2% to 174.6m³ per £m of inflation
adjusted sales (2018: 178.8m³), demonstrating progress towards
our 5% reduction target, 2019- 2021.
Total water use m³
2019
2018
2017
212,027
211,540
167,000
Water intensity m³ of water per £m of inflation adjusted
sales at constant currency
2019
2018
2017
174.6
178.8
186.4
Water management
During 2019, we focused on improving the quality of our global
water consumption data, utilising the global sustainability
accounting software that we purchased and rolled out in 2018.
We now have a complete data set from across the Group
(excluding Thermocoax) in 2019.
Across many of our sites we made good progress in reducing
water use, which is partially masked in the reported results by
the more complete data set in 2019. Examples of activities
undertaken in 2019 to more effectively manage water use include
the installation of automated remote water metering with internet
reporting across our sites in Cheltenham, UK and participation
in a district waste water recovery project that uses grey water for
garden irrigation by Spirax Sarco India.
Waste
In 2019, our global operations (excluding Thermocoax) generated
5,389 tonnes of waste (2018: 5,843), an 8% reduction over the
prior year. On an intensity basis, waste generation fell by 10% from
4.9 tonnes per £m of inflation adjusted turnover in 2018 to 4.4
tonnes in 2019. The 2018 data has been restated to correct errors
that resulted in the overstating of waste generation at two sites.
The strong progress in 2019 saw us achieve our three year waste
intensity reduction target. Our target will remain in place for 2020
to ensure that the sites that have met the 10% reduction target
maintain it and the rest continue to make progress towards it.
Total waste generation tonnes
2019
2018
5,389
5,843
Waste intensity tonnes of waste per £m of inflation
adjusted sales at constant currency
2019
2018
4.4
4.9
In addition to reducing the total amount of waste generated, we
reduced the amount of waste sent to landfill in 2019 by increasing
the volume of waste recycled and improving the recovery of
materials for reuse. During 2019, globally, 79% of our waste was
recovered, recycled or used to generate energy.
Waste management
During 2019, we improved monitoring and reporting of waste data,
especially in our operations outside of Europe. In a small number of
locations we changed our waste contractors to suppliers that are
able to provide data with greater accuracy.
Examples of waste reduction initiatives undertaken in 2019
include, improvements to Spirax Sarco Argentina’s waste metals
recovery programme; improved waste segregation and recycling
at Chromalox Tennessee; new waste water storage containers in
Chromalox France and Utah; and the introduction of a new waste
contractor in Watson-Marlow Alitea (Sweden) that allows Alitea to
donate money raised by recycling to charity. Spirax Sarco Argentina
also joined an industrial sustainability forum in 2019, with 10 other
industrial companies, which aims to facilitate learning and the
sharing of best practice on key environmental sustainability topics
such as water, waste and energy management.
Focus for 2020
• Implement locally-identified initiatives to reduce water use,
such as improved monitoring and metering, water-efficient
fixings and promoting behavioural change.
• Include Thermocoax’s water and waste data in the
Group results.
• Increase the re-use of packaging materials and identify
alternatives for non-recyclable materials.
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Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Sustainability Report continued
Our environment continued
Energy and carbon
Overview
Climate change is a global challenge and an emerging risk to
businesses, people and the environment across the world.
We have a role to play in limiting warming by improving our energy
management, reducing our carbon emissions and helping our
customers to do the same.
2019 Performance and actions
Greenhouse gas emissions performance
Our CO2e 2019 emissions data have been audited by TÜV UK Ltd,
which has provided limited assurance as follows:
“TÜV UK Ltd is acting as the independent verifier of the carbon
footprint of Spirax Sarco. Based on our checks and reviews,
taking into consideration a materiality level of 5% and a limited
level of assurance we have found no evidence suggesting that the
calculated greenhouse gas emissions are materially misstated and,
hence, they are not an unreasonable assertion of the greenhouse
gas-related data and information. Further, no facts became evident,
which led us to the assumption that the calculation was not carried
out in accordance with the applied international norm for the
quantification, monitoring and reporting of GHG emissions (GHG-
Protocol). The emissions for the reporting period 1st January 2019
to 31st December 2019 (inclusive) are: 23,878 tCO2e for Scope 1
and 19,497 tCO2e for Scope 2.
TÜV UK Ltd, London, February 2020”
The increase in CO2e emissions reflects the growth of our business
and an increased manufacturing output, set against emission
reductions elsewhere across the Group. In 2019, 24% of our CO2e
emissions were generated in the UK. On an intensity basis, our
emissions increased by 1% in 2019. Since 2013, our benchmark
year, we have reduced our emissions intensity by 20%.
Energy performance
Group energy use increased by 6% in 2019, for the reasons
outlined above, with a 4% increase on an intensity basis. We were
disappointed not to have made progress against our energy and
CO2e emissions targets in 2019 and will look to return our energy
and emissions intensity to a positive downward trend in 2020.
Energy management
In 2019 we were pleased to achieve a Carbon Disclosure Project
score of B, placing us in the “Management” band of global
companies, demonstrating that we are taking coordinated action
on climate change.
All Group companies are responsible for identifying energy
saving opportunities through EHS audits and “treasure hunts”,
and implementing them locally. A wide range of initiatives were
undertaken during 2019. For example, Watson-Marlow Bredel
(Netherlands) replaced the roof in its assembly hall and installed
a more effective insulation system; Chromalox China, converted
to LED lighting; Chromalox Tennessee, Spirax Sarco France and
Spirax Sarco USA, upgraded their compressed air systems to
increase energy efficiency; Spirax Sarco UK optimised efficiency of
its Combined Heat and Power plant, with 95% of electricity now
self-generated on site; Spirax Sarco China, Spirax Sarco USA and
Spirax Sarco Argentina replaced or improved their steam boilers;
and Spirax Sarco USA became our seventh company to be
certified to energy management standard ISO 50001.
Total Group CO2e emissions (scope 1 and 2) tonnes
2019
2018*
2017
2016
2015
23,878
19,497 43,375
41,991
32,058
30,704
30,050
Scope 1
Scope 2
* The increase was due to the acquisition of Gestra and Chromalox, whose emissions were
included for the first time in 2018.
CO2e intensity tonnes per £m of inflation adjusted sales,
at constant currency
2019
2018
2017
2016
2015
35.7
35.5
35.8
37.1
38.0
Group energy consumption MWh
2019
2018*
2017
Overseas
UK
115,602
50,616 166,218
156,301
111,065
* The increase was due to the acquisition of Gestra and Chromalox, whose energy use was
included for the first time in 2018.
Energy intensity MWh per £m of inflation adjusted sales,
at constant currency
2019
2018
2017
136.9
132.1
123.9
Methodology
We employ an “operational control” definition to outline our carbon footprint boundary.
Included within that boundary are manufacturing facilities, administrative and sales offices
where we have authority to implement our operating policies. For each of these entities we have
measured and reported on our relevant Scope 1 and Scope 2 emissions. (Scope 1 refers to
direct emissions from sources owned or controlled by the Company; Scope 2 refers to indirect
emissions resulting from the purchase of energy generated off site, including electricity.) Excluded
from our footprint boundary are emission sources from operating companies established or
acquired during 2019. We have used the GHG Protocol Corporate Accounting and Reporting
Standard and emission factors from the UK Government’s GHG Conversion Factors for Company
Reporting 2018 and 2019, data from The International Energy Agency 2018 and 2019, ISO
140064-1, and regionally specific Environmental Reporting Guidelines to calculate our total CO2e
emissions figures. In the interest of transparency and accuracy our total CO2e emissions for 2018
have been re-stated from 40,009 tonnes to 41,991 tonnes CO2e, following checks and revisions
of reported fuel use, final invoicing and adjustments of estimates. This adjustment has also
resulted in the restatement of our total energy use for 2018 from 155,947 MWh to 156,301 MWh.
Our carbon and energy intensity metrics have, as a result, been recalculated for 2018.
Focus for 2020
• Develop a comprehensive, long-term strategic
carbon roadmap.
• Develop and implement a Group Transportation Policy to
reduce CO2e emissions.
• Continue to implement energy saving initiatives.
68
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Task Force on Climate-related Financial Disclosures (TCFD)
Governance
Describe the Board’s oversight of
climate-related risks and opportunities
• Our Risk Management Committee, a principal committee of the Board, oversees the management of our
climate-related risks and opportunities. Day-to-day management of the Group’s climate change mitigation
activities is overseen by the Group Sustainability Committee, utilising the management structure outlined on
page 59.
Describe management’s role in
assessing and managing climate
related risks and opportunities
• The Board has collective responsibility for managing climate-related risks and opportunities. In particular, Neil
Daws, Executive Director, supported by Andy Robson, Group General Counsel and Company Secretary, has
specific delegated responsibility for overseeing climate related risks, mitigation activities and performance.
Strategy
Describe the climate-related risks and
opportunities the organisation has
identified over the short, medium and
long-term
• Short-term (0-5 years): customer carbon emission targets and increasing availability of green electricity
could encourage a move towards electric heating solutions that have zero emissions at point of use. While an
opportunity for the Electric Thermal Solutions business, some sales could be at risk in the Steam Specialties
business for applications where steam or electric heating solutions are equally viable.
• Medium-term (5-10 years): growth in electric vehicles could cause a decline in the oil and gas industry,
particularly refinery demand.
• Long-term (10+ years): large oil, coal and gas fired boilers could be replaced by banks of small electric
generators reducing demand for boiler controls and boiler-house products.
• Increasing frequency of climate related extreme weather events.
• In the short to medium-term, growing awareness of climate change and customer sustainability targets will
continue to provide an impetus for business growth as we provide products, services and solutions that
increase efficiency and reduce customers’ energy use and carbon emissions. To mitigate the risks outlined
above, we initiated a strategic project to assess potential business impacts and opportunities. The outcome
of the review will feed our R&D pipeline to ensure that we stay abreast of customers’ changing requirements.
Our broad geographical presence and global manufacturing footprint reduce the risk of disruption caused by
an extreme weather event and we have appropriate insurance cover in place to mitigate the effects of such
events. We direct our financial resources appropriately, for example investing in R&D and allocating capital to
projects that increase our own energy efficiency and reduce our environmental impacts.
• Our company purpose is to create sustainable value for all our stakeholders as we engineer a more efficient,
safer and sustainable world, and our business strategy supports this, with all three of our businesses
offering significant environmental benefits to customers. With customers in almost all industries worldwide
and across 130 countries our products are indispensable for the production of foods, beverages and
medicines, the generation of power and the treatment of water and wastewater, and many other essential
products. Furthermore, steam remains the world’s most efficient heat transfer medium with multiple on-site
applications. We thus have a highly resilient business and business strategy that will remain relevant across
different climate-related scenarios. However, we are not complacent and recognise that we will need to
continue to develop and adapt, ensuring that our product offering continues to evolve to meet customer
needs now and in the future.
• Each year the Group engages in a top-down and bottom-up risk review and feeds its results to the
Risk Management Committee. This includes sustainability/climate-related risks. The Risk Management
Committee assesses the climate-related risks identified to understand their severity, identify controls or
mitigation required and monitors such risks on its risk register.
• We report various consumption and intensity metrics relating to energy, CO2e, waste and water in our
Sustainability Report, as well as a customer carbon avoided metric. Please see pages 67 to 68 and 70.
• Streamlined Energy and Carbon Reporting (SECR) disclosures can be found on page 68.
• Our current three year target (2019-2021) is to reduce our energy and CO2e emissions intensity by 10%.
Please see page 68 for details of performance against these targets.
Describe the impact of climate-
related risks and opportunities on the
organisation’s businesses, strategy
and financial planning
Describe the resilience of the
organisation’s strategy, taking into
consideration different climate-
related scenarios, including a 2°C or
lower scenario
Risk management
Describe how processes for
identifying, assessing, and managing
climate-related risks are integrated
into the organisation’s overall
risk management
Metrics and targets
Disclose the metrics used by the
organisation to assess climate-related
risks and opportunities in line with its
strategy and risk management process
Disclose Scope 1, Scope 2, and, if
appropriate, Scope 3 greenhouse gas
(GHG) emissions, and the related risks
Describe the targets used by the
organisation to manage climate-
related risks and opportunities and
performance against targets
69
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Sustainability Report continued
Customers
Overview
With growing concern globally over climate change and businesses
increasingly recognising a need to lower their carbon emissions,
use energy more efficiently, reduce waste and minimise their water
consumption, we are uniquely placed to offer our customers a
wide range of products, engineered solutions and services to
help them reduce their environmental impacts and increase their
operational sustainability.
2019 Performance and actions
Customer CO2 emissions reduction
Using methodology that has been independently assessed with the
assistance of Ricardo Energy & Environment, and taking revised
emissions factors into account, we estimate that our customers
will save 7.2 million tonnes of carbon emissions annually as a result
of purchasing a select range of energy saving products from our
Steam Specialties business in 2019. The calculation is based on a
select range of products for which we can quantify energy savings
with reasonable accuracy. Many other products will generate
energy and carbon savings when used as part of an engineered
solution that increases operating efficiency, but as the benefits are
not easily quantifiable they are excluded from the methodology.
The scope of the calculation was extended in 2019 to include
the sale of products from Gestra, acquired in 2017, as well as the
Spirax Sarco steam business.
Tonnes of CO2e emissions our end users saved as a
result of purchasing our energy management products*
2019
2018
2017
2016
2015
1.5m
7.2m
5.7m
5.7m
4.8m 1.0m
5.8m
4.4m
1.0m
4.4m
CO2 savings from Spirax Sarco products
CO2 savings from Gestra products
CO2 savings from existing product range
CO2 savings from expanded product range
* 2015-2018 Spirax Sarco steam products only.
To put the savings into context, 7.2 million tonnes of carbon
emissions is equivalent to the annual carbon sequestration of
approximately 327 million mature trees or equates to removing
approximately 3.7 million new cars from the roads annually.
Sustainability offering roadmap
In 2018 we developed a sustainability offering roadmap within
the Steam Specialties business, which we have used and further
developed in 2019. The roadmap captures how our products,
solutions and service offerings support our customers with their
sustainability journeys, as well as identifying future opportunities for
meeting customer needs. One area of focus for the roadmap is
working with our strategic accounts management team to support
customer energy saving programmes (audits, training and projects).
We saw positive progress during 2019, with both delivery of
customer sustainability benefits and related growth opportunities.
Thermocoax supports ground-breaking
nuclear fusion project
In one of the most ambitious energy projects in the world, 35
nations are collaborating in the south of France to build the
world’s largest nuclear fusion reactor, which aims to become
the first fusion device to produce net energy, proving the
concept and preparing the way for commercial fusion power
plants in the future.
Within the reactor magnetic interferences, a vacuum, radiation
and extreme temperatures create exceptionally challenging
conditions for relaying essential information from sensors.
Even Thermocoax’s robust mineral-insulated cable technology
could not function effectively under such harsh conditions.
Research demonstrated that by twisting the cable it was
possible to overcome the interference, but this process
damaged the cable sheathing. In response, Thermocoax
developed a new technology that combined twisted conductor
cables with a specifically formulated sheath that is able to
consistently and reliably relay sensor signals within the reactor,
despite the extreme conditions.
Widely regarded as the “holy grail” of power generation,
nuclear fusion involves fusing hydrogen atoms in a controlled
way, with the resulting reaction producing almost 4 million
times more energy than burning fossil fuels and four times as
much energy as nuclear fission, at equal mass. Nuclear fusion
is environmentally safe and sustainable: the fuel sources are
readily available in nature; the principal by-product of the
process is helium – an inert, non-toxic gas; no radioactive
waste is generated; no carbon emissions or greenhouse gases
are released; and there is no risk of a chain reaction, leading to
a nuclear “meltdown”.
Thermocoax’s technology is playing an essential role in
this ground-breaking, and potentially environmentally
revolutionary, project.
Further reading
Examples of how our products and services are engineering a more efficient,
safer and sustainable world can be found on pages 12 to 17 and on our website.
www.spiraxsarcoengineering.com/about-us/our-impact
Focus for 2020
• Enhance international collaboration to consistently
support multinational companies with their
sustainability programmes.
• Continue to strengthen the skills and expertise of our
sales and service teams to identify customer sustainability
improvement opportunities.
• Develop our customer sustainability reporting metrics.
70
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our communities
Community engagement
Overview
Wherever we operate, we seek to be a force for good. We commit
to “Engineering better futures” for the people living in our
communities through financial donations to registered charities;
educational provision; in-kind donations of products, services or
the use of company facilities; and company-supported employee
volunteering. Our primary focus is education, particularly in the
sciences and engineering, where we aim to raise awareness
of technical careers and break down gender stereotypes that
are limiting female participation in engineering. We also seek to
respond to local needs, offer support to the underprivileged young,
disadvantaged, disabled and elderly, and contribute to natural
disaster relief.
2019 Performance and actions
Group Charitable Fund donations
During 2019, the Spirax Sarco Group Charitable Fund increased its
donations by 7%, to £280,300. The Fund made donations varying
in size from £300 to £50,000 to a wide variety of charities, including
£6,000 to Young Gloucestershire, which supports disadvantaged
young people in the county who are facing challenges in their lives;
an £8,000 donation to Young Enterprise, a charity that empowers
young people to develop their personal and business skills and
make connections between school and the world of work; and
£50,000 to Engineers Without Borders UK, a charity that seeks
to inspire young engineers and embed global responsibility into
engineering. In addition to supporting Engineers Without Borders
UK financially, we are contributing to their valuable work through
encouraging employee volunteering.
Group Charitable Fund donations £’000
2019
2018
2017
2016
2015
280.3
263.0
231.1
180.1
150.8
Local community engagement activities
Nearly £160,000 was donated to charitable causes by our
operating companies during the year. In-kind donations with an
estimated value of £31,000 were donated and our employees
contributed over 5,300 hours of working time to community
engagement activities. Using an average hourly salary to estimate
the cost to the company of employee volunteering, and including
management costs, we estimate that the total value of our
operating companies’ community engagement activities in 2019
was approximately £320,000. In addition, our employees donated
£55,000 of their own money and gave over 2,000 hours of their
own time in workplace-organised fundraising and community
engagement activities.
Employee Volunteering
During 2019, a Group Employee Volunteering Policy was
developed and rolled out across our global operations, which
entitles all employees to three days of paid volunteering leave
each year. During the year we saw a 9% increase in the number of
employee volunteering hours, compared with 2018.
Community Engagement Awards, 2019
The Group Community Engagement Awards raises awareness
of community engagement and recognises the work that is being
done by our colleagues. In 2019, 27 strong entries were received.
Following a careful selection process, the Sustainability Committee
and Group Chief Executive chose the winners: Spirax Sarco China
(large company award), Spirax Sarco Colombia (small company
award) and Chromalox Mexico (Group Chief Executive’s award),
which each received £5,000 towards their community engagement
activities in 2020. In addition, Steam Business Development (UK),
Chromalox Singapore and Watson-Marlow USA each received an
honorary award of £2,500.
Winners
All employees from Spirax Sarco Colombia worked together
to construct a new house for a single mother with three young
children who were living in poverty; providing the family with a
warm, safe place in which to live.
Chromalox Mexico undertook a wide range of community
engagement activities, with widespread participation by employees.
Activities included donating school supplies to 360 students;
donating toys and gifts to disadvantaged children; organising
a Christmas meal, party and gifts for children living in poverty;
donating life-saving blood and hair for children with cancer;
donating money raised through recycling to support families
struggling to pay for cancer treatment and planting trees and plants
at a local school.
Further reading
Spirax Sarco China’s community engagement activities.
See pages 40
Honorary award winners
Employees in the Steam Business Development team in the
UK raised money for Gloucestershire Young Carers, produced
marketing materials for the charity pro-bono and spent a day
volunteering at Acorns Children’s Hospice. All Chromalox
Singapore employees spent a day at a local hospital, playing
games with patients with severe long-term medical conditions and
providing them with tasty snacks. Employees of Watson-Marlow
USA raised over $14,000 for local charities and donated business
outfits to unemployed people looking for work, toys and Christmas
gifts to children in need, toiletries to a local homeless shelter and
care packages for serving members of the armed forces, as well
as established a school Science, Engineering, Technology and
Mathematics programme, to be rolled out in 2020.
Focus for 2020
• Establish a Group-wide employee volunteering portal to
facilitate ease of monitoring and reporting.
• Translate the Group Employee Volunteering Policy into the
Group’s core languages.
• Raise awareness of employee volunteering across
the Group.
71
Spirax-Sarco Engineering plcAnnual Report 2019Strategic Report Our governance*
*At year end 2019.
1. Jamie Pike
Chair
3. Trudy Schoolenberg
Independent Non-Executive Director
and Senior Independent Director
5. Neil Daws
Managing Director, Steam Specialties
2. Nicholas Anderson
Group Chief Executive
4. Kevin Boyd
Chief Financial Officer
6. Caroline Johnstone
Independent Non-Executive Director
In this section
1. Board leadership and Company purpose
– Board of Directors
– Chair’s introduction
– Our approach to governance
– Engaging with our stakeholders
– Employee Engagement Committee Report
2. Division of responsibilities
3. Composition, succession and evaluation
– Nomination Committee Report
– Board Evaluation
4. Audit, risk and internal control
– Audit Committee Report
– Risk Management Committee Report
5. Remuneration
– Remuneration Committee Report
– Remuneration at a glance
– Annual Report on Remuneration 2019
– Remuneration Policy 2020
Regulatory disclosures
Statement of Directors’ responsibilities
74
74
76
78
79
82
85
89
89
92
93
93
98
102
102
106
107
122
133
137
Board overview*
Core expertise
2
10
3
3
4
6
6
7
9
8
International
Operational
Product development
Senior management
Strategy
People
Engineering
M&A
Sales and marketing
Finance
72
* At year end 2019.
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 7. Peter France
Independent Non-Executive Director
9. Jane Kingston
Independent Non-Executive Director
Andy Robson
Group General Counsel
and Company Secretary
8. Jay Whalen
President, Watson-Marlow
10. Kevin Thompson
Independent Non-Executive Director
Nationality
Gender
Length of service
8
1
7
5
1
2
3
2
1
2
British1
American1
Dutch
Irish2
Male
Female
5+ years
3–5 years
1–3 years
Less than 1 year
1 N.J. Anderson holds dual British and American citizenship.
2 J. Pike holds dual British and Irish citizenship.
73
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report
1. Board leadership and Company purpose
Board of Directors*
*At year end 2019.
Jamie Pike MBA, MA, MIMechE
Chair
N* EE
Appointed to the Board
May 2014
Areas of experience
Senior management, engineering, international
Background
Jamie Pike joined Burmah Castrol in 1991
and was Chief Executive of Burmah Castrol
Chemicals before leading the Foseco buy-out
in 2001 and its subsequent flotation in 2005.
Prior to joining Burmah, he was a partner at Bain
& Company. Jamie was educated at Oxford,
holds an MBA from INSEAD and is a Member of
the Institute of Mechanical Engineers.
External appointments
Chair of Cobham plc - stepped down Cobham’s
Board in January 2020.
Nicholas Anderson BSc Engineering, MBA
Group Chief Executive
Kevin Boyd BEng, CEng, FIET, FCA
Chief Financial Officer
RK*
Appointed to the Board
March 2012. Appointed Chief Operating Officer
in August 2013 and Group Chief Executive in
January 2014
Areas of experience
International, operational, industrial, sales and
marketing, engineering, strategy, M&A
Background
Before joining the Group in 2011 as Director
EMEA, Nicholas Anderson was Vice-President
of John Crane Asia Pacific (part of Smiths Group
plc), based in Singapore, and President of
John Crane Latin America, based in the USA.
Previously, Nicholas held senior positions with
Alcoa Aluminio in Argentina and Brazil, starting
his career with the Foseco Minsep Group plc
in Brazil.
RK
Appointed to the Board
May 2016
Areas of experience
Finance and accounting, engineering, pensions,
international, M&A
Background
Before joining the Group in 2016, Kevin Boyd was
Group Finance Director for Oxford Instruments
plc. Prior to that he was Group Finance Director
of Radstone Technology plc and previously held
senior finance positions within Siroyan Ltd and
the TI Group (now Smiths Group plc). Kevin is a
Chartered Engineer, a Chartered Accountant and
a Fellow of the Institute of Chartered Accountants
and the Institution of Engineering and Technology.
External appointments
Non-Executive Director and Audit Committee
Chair of EMIS Group plc.
Trudy Schoolenberg PhD
Independent Non-Executive Director
& Senior Independent Director
A
EE
N R
Appointed to the Board
August 2012
Areas of experience
Engineering, product development, oil
and petrochemical
Background
Prior to her most recent position at AkzoNobel,
Trudy Schoolenberg served as Vice-President
of Global Research & Development at Wärtsilä
Oy. Trudy previously held senior management
positions with Royal Dutch Shell plc and
was Head of Strategy for Shell Chemicals.
Until October 2016, Trudy served as Director
of Integrated Supply Chain and Research,
Development and Innovation, Decorative Paints
Division of AkzoNobel.
External appointments
Non-Executive Director of COVA and Low &
Bonar PLC. Non-Executive Director and Senior
Independent Director of Accsys Technologies plc.
74
Peter France
Independent Non-Executive Director
Caroline Johnstone BA, CA
Independent Non-Executive Director
A EE N R
Appointed to the Board
March 2018
Areas of experience
International, operational, industrial, sales and
marketing, engineering
Background
Peter France was Chief Executive Officer of
Rotork plc from 2008 to 2017. He also gained
wide experience in a number of key roles at
Rotork plc from 1989 to 2008 including acting
as Chief Operating Officer and Director of Rotork
South East Asia based in Singapore.
Peter is a Chartered Director of the Institute
of Directors
External appointments
Chief Executive Officer of ASCO Group Limited.
A EE* N R
Appointed to the Board
March 2019
Areas of experience
Finance, people, international, M&A
Background
Caroline Johnstone has nearly 40 years’
experience of working with large global
organisations on turnaround, culture change,
delivering value from mergers and acquisitions
and cost optimisation programmes. She sat
on the Board of the Assurance practice of
PricewaterhouseCoopers (PwC) as people
partner. Caroline is a chartered accountant and a
member of the Institute of Chartered Accountants
of Scotland. She also provides consulting
services to a range of international clients.
External appointments
Non-Executive Director and Audit Committee
Chair of both Synthomer plc and Shepherd
Group Ltd, a private company which owns
Portakabin Limited.
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Neil Daws CEng, FIMechE
Managing Director, Steam Specialties
Jay Whalen** BA, MBA
President, Watson-Marlow
RK
RK
Appointed to the Board
June 2003
Appointed to the Board
March 2012
Areas of experience
Manufacturing, engineering, product
development, sales and marketing, broad
operational experience
Background
Neil Daws joined the Group in 1978 and held
positions in production and design engineering
prior to being named as UK Supply Director.
Following this, Neil has held responsibility for
Asia Pacific, Latin America, the Group’s Supply
operations, including the Group’s health, safety
and environmental matters and, more recently,
EMEA.
Areas of experience
Sales and marketing, engineering, product
development, operational, international
business development
Background
Jay Whalen joined the Group in 1991 as
President of Watson-Marlow Inc. in the USA.
He was named Sales and Marketing Director
of the global Watson-Marlow business in 2002
and in 2010 was appointed to his current
Group position of President, Watson-Marlow
Fluid Technology Group. Prior to joining
Watson-Marlow, Jay was Vice-President
Operations for Harvard Bioscience, Inc.
Andy Robson LLB Law Barrister
Group General Counsel and
Company Secretary
Appointed as Group General
Counsel and Company Secretary
June 2012
Areas of experience
International law, corporate governance,
international business development including
mergers and acquisitions, business
restructuring, information technology,
contract negotiation
Background
Before joining the Group in 2012,
Andy Robson was General Counsel and
Company Secretary of RM Plc, a role he held
for 14 years. Prior to this, Andy was European
General Counsel with Cendant Corporation
headquartered in Baltimore, USA.
** As previously announced, Jay Whalen retired
from the Board on 31st December 2019.
Jane Kingston BA
Independent Non-Executive Director
Kevin Thompson BSc, FCA
Independent Non-Executive Director
A EE N R*
Appointed to the Board
September 2016
A* EE N R
Appointed to the Board
May 2019
Areas of experience
Human Resources, remuneration, international,
engineering
Background
From 2006 until her retirement in December
2015, Jane Kingston served as Group Human
Resources Director for Compass Group PLC.
Prior to this, she served as Group Human
Resources Director for BPB plc. Jane has
worked in a variety of sectors, including roles
with Blue Circle Industries plc, Enodis plc
and Coats Viyella plc and has significant
international experience.
External appointments
Non-Executive Director of Inchcape plc.
Stepped down from the Board of National
Express plc on 31st December 2019.
Areas of experience
Finance, tax and treasury, engineering, M&A
Background
Kevin Thompson was Group Finance Director
of Halma plc from 1998 to 2018, having joined
Halma as Group Financial Controller in 1987.
Kevin qualified as a Chartered Accountant with
PricewaterhouseCoopers (PwC) and is a Fellow
of the Institute of Chartered Accountants in
England and Wales
External appointments
Member of the Financial Reporting Lab Steering
Group and a Trustee of the Great Ormond Street
Hospital Children’s Charity.
Further reading
Read about our Board diversity,
composition, succession
and evaluation.
See pages 89-92
A Audit Committee
N Nomination Committee
EE Employee Engagement Committee
R Remuneration Committee
RK Risk Management Committee
* Denotes Committee Chair
Flag denotes country of citizenship
75
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 1. Board leadership and Company purpose continued
Chair’s introduction
Our 2019 Governance
Report complies in full with
the Corporate Governance
Code and we attach great
importance to the Code
principles of diversity,
long-term thinking and
stakeholder engagement.”
Jamie Pike
Chair
Board changes in 2019
On 1st March 2019, we announced the appointment of
Caroline Johnstone as an independent Non-Executive Director.
Caroline’s financial, people and advisory skills, together with her
international business experience across a range of different
industries, will benefit the further development of the Group.
Caroline was appointed as Chair of our newly established
Employee Engagement Committee in the first half of 2019.
The purpose of the Committee is to make recommendations to
the Board on all aspects of employee engagement, giving full
consideration to the matters set out in Principle E and Provisions 5
and 6 of the UK Corporate Governance Code 2018 (Code).
Following the Annual General Meeting (AGM) in May 2019,
Kevin Thompson succeeded Clive Watson as Chair of the Audit
Committee. Clive stood down having served as a Non-Executive
Director and Chair of the Audit Committee for nine years, in addition
to being the Senior Independent Director since 2018. The Board
acknowledges with gratitude Clive’s significant contribution to
the Group’s growth and prosperity over the last nine years, and
his guidance.
Kevin was Group Finance Director of Halma plc from 1998
to 2018. He qualified as a Chartered Accountant with
PricewaterhouseCoopers and is making a valuable contribution to
the Board. Dr Trudy Schoolenberg took over from Clive as Senior
Independent Director.
Jay Whalen, President, Watson-Marlow, and Executive Director,
retired from the Board on 31st December 2019 after over 28 years
of service. The Board acknowledges the major contribution to the
Group’s growth and prosperity made by Watson-Marlow under
Jay’s leadership.
Board biographies can be found on pages 74 to 75.
A FTSE 100 company
Our business has continued to grow organically and increase in
size with the acquisitions of Gestra, Chromalox and Thermocoax.
We have successfully integrated and driven performance
improvement in our acquisitions. We are pleased to have
consolidated our presence in the FTSE 100.
Good governance
Recent Board changes have provided the opportunity to reaffirm
our individual and collective responsibilities as a Board and to test
our understanding of what good governance means to us and why
it is important.
In 2019, we refreshed our Company purpose, following detailed
input from the Group Executive Committee and overseen by the
Board. Although the purpose itself has not changed, the way in
which we articulate it has (see page 1).
76
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 In respect of section 172(1) of the Companies Act 2006 (as
amended by the Companies (Miscellaneous Reporting) Regulations
2018), the Directors have prepared a statement describing how
they have had regard to the matters set out in section 172(1), when
performing their duty to promote the success of the Company (see
pages 80 to 81).
Key Board activities 2019
During 2019, we paid attention to succession planning for the
Board with the appointments set out earlier in this section. We also
focused on the acquisition of, and investments in, Thermocoax, our
culture, strategic risks and opportunities, including Brexit, climate
change and diversity.
About 93% of our revenue is generated outside of the UK, while
close to a third of our cost of goods sold is manufactured in the
UK. Therefore, a devaluation of sterling would produce translational
and transactional net benefits for the Group.
Diversity
As a Group we are committed to gender diversity and to achieving
a minimum target of 33% female representation on the Board, the
Group Executive and their direct reports. We ensure that this target
is taken into account in our succession planning and recruitment.
Our Group Diversity and Inclusion Policy is available on the
Group’s website. At the time of publication, we have 33% female
representation on our Board.
We invested in a new consolidated manufacturing site for Aflex
Hose in Yorkshire, UK.
We appointed J.P. Morgan Cazenove and Morgan Stanley as joint
corporate brokers. J.P. Morgan Cazenove and Rothschild are our
joint financial advisers.
We also attach importance to ensuring that our people can
progress to the highest levels in their business careers regardless
of their socio-economic background, race or sexual orientation.
We accept Sir John Parker’s recommendation that our Board
should have at least one Director from an ethnic minority
background by 2021.
Assessing and monitoring culture
Our culture is one of the main reasons for our measured progress
and success. As we grow it is vital that we retain such a successful
culture. We ensure our culture and Company Values are aligned
with our strategy.
The creation and work of the Employee Engagement Committee
has achieved greater Board engagement with the workforce,
enabling the Board to gauge and monitor our culture and to ensure
it is both embedded and retained in our Company.
Electric Thermal Solutions
The Board meeting in June 2019 was held in Utah, USA where
Chromalox has its largest manufacturing site. We were joined
by Dominique Mallet, President of Thermocoax immediately
following the acquisition of this business. We reviewed our plan for
improvements within Chromalox and our strategy for combining
Chromalox and Thermocoax under Dominique’s leadership.
Brexit
We have taken the following actions with respect to our
preparations for Brexit:
• holding an additional month’s raw material in stock in the UK;
• holding an additional two weeks’ finished goods stock at those
businesses that purchase from the UK; and
• planned for “no-deal” in respect of orders and demand in the
Group’s operating companies.
The UK is currently in a transition period while trade agreements
are sought. We are, therefore, continuing to prepare for a “no deal”
Brexit and the application of tariffs for goods moving in and out of
Europe. However, we are poised to take advantage of opportunities
that are presented and to mitigate any adverse trading impact on
the Group.
2018 Code compliance
In running our business in 2019, we were fully compliant
with the UK Corporate Governance Code 2018 (Code) and
we detail our compliance, on a Code provision-by-provision
basis, in the corporate governance section on our website:
www.spiraxsarcoengineering.com.
Fair, balanced and understandable
In accordance with the Code, the Directors confirm that they
consider the Annual Report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Group’s financial position, performance,
business model and strategy.
Focus for 2020
We see many future opportunities to build on our success and we
look forward to realising and sharing these with our shareholders
through our strategic plan.
I look forward to meeting our shareholders at our forthcoming AGM.
Jamie Pike
Chair
Further reading
All governance-related policies and procedures are available to view
and download:
www.spiraxsarcoengineering.com
77
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 1. Board leadership and Company purpose continued
Our approach to governance
The Code
We have summarised some of the key words from the 2018
Code’s Principles A-E in the graphic below and provided cross-
references for further reading. This is our own interpretation and
serves to direct our readers to narrative that explains how we have
applied some of the Principles. In addition, we report on relevant
provisions later within the scope of the Governance Report.
With many relevant examples already covered in the Strategic
Report our aim is to reduce repetition and demonstrate the
integrated spirit of the 2018 Code.
In relation to Code Provision 1, which deals with the Company
generating value over the long term in the context of future risks
and opportunities, sustainability is addressed in our Sustainability
Report, on pages 59 to 71, and Risk Management Report, on
pages 98 to 101. The contribution of governance to Strategy is
explained graphically below.
Our approach to governance
Governance helps us to ensure our shareholders receive a
good return on their investment; behave with integrity; treat our
customers, employees, suppliers and local communities properly;
and respect the environment.
In the Governance Report we describe the responsibilities of the
Board and its Committees, the key activities during 2019 and the
focus for 2020.
The ways in which we have addressed compliance with some of
the key elements of the Code and our leadership on these matters
are highlighted below.
Long-term sustainable success
The Board is focused on long-term corporate and strategic plans.
It engaged in a review and assessment of market and technology
trends at its strategic meeting in June 2019. As part of this review,
the Board considered the business risks and opportunities arising
from our strategy for growth.
Leading by example
The Board relies on the Executive management team to run the
business. The Board holds this team accountable against targets
and standards. The Board ensures that we have strong and
effective leadership in place to execute the strategic plan.
Effective and entrepreneurial
The Non-Executive Directors provide effective challenge and review,
bringing wide experience, specific expertise and a fresh objective
perspective to major decisions.
The emphasis is on growth and on an entrepreneurial approach
with a strong governance culture. To ensure that the Board remains
effective, in 2018 we engaged Independent Audit Ltd to carry
out an external Board effectiveness evaluation and followed up
their recommendations by way of our internal evaluation in 2019.
The process and actions of this evaluation are detailed on page 92.
Company
purpose
See page 1
Business model
See pages 8-17
Culture
and Values
See pages 64 and 77
Leading an effective
and entrepreneurial
Board for long-term,
sustainable success
Strategy
See pages 33-40
Resource/
capital allocation
See pages 56-58
Sustainable
thinking
See pages 40, 59-71,
and 80-81
Stakeholder
engagement
See pages 79-81
Effective
controls and
framework
See pages 20-25
and 93-101
Workforce
practices
See pages 36, 62-64
and 82-84
78
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 1. Board leadership and Company purpose continued
1. Board leadership and Company purpose continued
Our approach to governance
Engaging with our stakeholders
Our commitment to
shareholder engagement
In addition to the five key stakeholder groups detailed on pages
80 to 81, the Board recognises our shareholders as an important
stakeholder group. We maintain an active dialogue with our
principal investors, institutional shareholder advisers and the
investment community.
During 2019, we undertook a comprehensive calendar of
events, as shown below. By providing regular forums for meeting
and communicating with shareholders, their advisers and the
investment community, we ensure that we understand the views
and opinions of our investors and are kept informed of any
concerns that may arise. We are also able to give updates on our
results and developments within our businesses.
We communicate using a variety of forums including regulatory
news announcements, interviews, investor and analyst calls,
one-to-one meetings, roadshows, site tours and capital markets
events. During 2019, Nicholas Anderson, Group Chief Executive,
and Kevin Boyd, Chief Financial Officer, attended shareholder
roadshows across a number of key countries in Europe, Asia and
North America.
At the AGM in 2019, shareholders were able to hear from, and put
questions to, the Board on a range of matters.
Shareholder engagement calendar 2019
Jan
Feb
Mar
Apr
• Shareholder consultation
on Remuneration Policy
• Institutional meetings,
Cheltenham
• Investor and analyst calls
• Institutional visit to
China facility
• Institutional meetings,
London and Cheltenham
• Investor and analyst calls,
including in relation to
the announcement of
exclusive negotiations to
acquire Thermocoax
• Preliminary Results
announcement, analyst
meeting and shareholder
roadshow, London
• Institutional meetings,
Cheltenham and London
• Investor and analyst calls
• Institutional meetings,
Cheltenham and London
• Investor and analyst calls
May
Jun
Jul
Aug
• AGM and trading update
• Institutional meetings,
Cheltenham, London and
Europe (Copenhagen,
Helsinki and Stockholm)
• Investor and analyst calls
following AGM, trading
update and Thermocoax
acquisition announcement
• Institutional meetings,
Cheltenham, Europe
(Madrid) and USA (Los
Angeles, San Francisco
and Salt Lake City)
• Investor and analyst calls
• Shareholder roadshow,
Europe (Amsterdam,
Brussels, Frankfurt, Paris
and Zurich)
• Half Year Results
announcement, analyst
meeting and shareholder
roadshow, London
• Shareholder roadshow,
Scotland (Edinburgh)
• Institutional meetings,
Cheltenham
• Investor and analyst calls
Sep
Oct
Nov
Dec
• Shareholder roadshow,
• Shareholder roadshow,
• Baird Global Industrial
• Institutional meetings,
Asia (Hong Kong,
Singapore and Tokyo)
• Institutional meetings,
Cheltenham and London
• Investor and analyst calls
Canada and USA
(Montreal, Toronto, Boston,
Chicago and New York)
• BAML Conference (Paris)
• Institutional meetings,
Cheltenham
Conference, USA (Chicago)
Cheltenham
• Investor and analyst calls
• HSBC Global Investment
Forum, USA (New York)
• Investec Best Ideas
Conference, London
• Institutional meetings,
• Investor and analyst calls
Cheltenham
• Investor and analyst calls
79
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 1. Board leadership and Company purpose continued
Engaging with our stakeholders continued
Section 172 Statement
Engaging with our stakeholders and acting in a way that promotes
the long-term success of the Company, while taking into account
the impacts of our business decisions on our stakeholders,
is central to our strategic thinking and our statutory duty in
accordance with Section 172(1) of the Companies Act 2006
(s.172). The content on pages 80 to 81 constitutes our s.172
Statement, as required under the Companies (Miscellaneous
Reporting) Regulations 2018.
The Board of Directors of Spirax-Sarco Engineering plc consider,
both individually and together, that they have acted in the way
that they consider, in good faith, would be most likely to promote
the success of the Company for the benefit of its members as a
whole, having regard to the stakeholders and matters set out in
s.172 (A-F of the Companies Act) in the decisions taken during
the year. In particular, as outlined in a Board assurance statement
that accompanied our business plan for the period 2020 to 2025,
and approved by the Board, our plan is designed to have a long-
term beneficial impact on the Company and its stakeholders,
and contribute to the Company’s continued success in delivering
reduced carbon emissions and increased efficiency, safety and
sustainability for our customers. Our plan is focused on our
customers, as exemplified by our customer focused business
strategy, but also takes into account other stakeholders, such as
our employees and the effective management of our supply chain,
with the aim of delivering value to shareholders.
As a Board of Directors, our intention is to behave responsibly and
ethically at all times, in line with our Company values, and to ensure
that our management teams operate the business in a responsible
manner and to the highest standards of business conduct and
good governance. As we act in a way that reflects our values,
we will contribute to the long-term success of the Company and
continue to nurture our reputation as a responsible, successful
Company that delivers stakeholder value, as outlined in our
Company purpose.
We improved our focus on our s.172 duty during 2019, and
established a formal process to ensure that all new investments
that are submitted to the Board address how the investment will
benefit or impact our shareholders, customers, employees, the
environment and the communities where we work.
Our impacts on, and engagement with, five key stakeholders
groups are systematically considered within the implementation
of our Group sustainability strategy, which is overseen by the
Group Chief Executive and supported by the Board of Directors.
The stakeholder groups are: our employees, our customers,
our suppliers, our communities and our environment. How and
why we engage with these stakeholders is summarised below.
Additional information on how we engage with employees can be
found in our Employee Engagement Committee Report on pages
82 to 84. In addition, as a Board of Directors, we recognise our
shareholders as an important stakeholder group and treat them
fairly and equally, so they too may benefit from the successful
delivery of our plan and the value we create. For more detail on how
we engaged with our shareholders in 2019, see page 79.
80
Embedding
long-term
thinking
and action
Our employees
Why it’s important
Our employees are our greatest asset and our success relies
on the application of their knowledge and skills. We aim to be
a responsible employer in our approach to pay and benefits,
and the health, safety and well-being of our employees is
always a primary consideration.
How we are engaging
• We communicate with employees through a variety of
channels including meetings, conferences, videos, email and
written communications.
• Through our global employee survey we listen to the views
of our employees. Survey results are analysed collectively, by
business, by company and, where numbers are sufficient,
by department, with focus groups established and plans
to address those areas our employees tell us we could
do better.
• Our Employee Engagement Committee ensures that
the views and interests of employees are considered at
Board level.
Read more on pages 62-64 and 82-84
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019
1. Board leadership and Company purpose continued
Engaging with our stakeholders continued
Our customers
Why it’s important
We generate value for our stakeholders as we help the
end users of our products to improve the efficiency, safety
and sustainability of their operations. Meeting the needs
of customers now and developing our offering so that we
can continue to meet their needs into the future, requires a
closeness to, and engagement with, customers.
How we are engaging
• Our direct sales business model is the key avenue for
customer engagement, allowing us to deeply understand
their needs and requirements.
• Regular “Voice of the customer” surveys provide valuable
feedback from customers who tell us what we are doing
well and how we can improve.
• Customer requirements are always taken into consideration
during new product development, with customer needs
driving the design and development of products.
Read more on pages 8-17 and 70
Our environment
Why it’s important
We live in a resource-constrained world where human impacts
on the environment are increasingly being recognised as
harmful not only to the natural world but also to the long-term
sustainability of financial systems and societies. Not only is
managing our environmental impacts the right thing to do, it
also helps us to manage and mitigate risk.
How we are engaging
• We actively engage with customers to identify and
implement engineered solutions to reduce their energy use,
carbon emissions, water and waste.
• We educate our employees and take steps to reduce our
own environmental impacts.
• We report transparently on our environmental performance
and engage with international reporting frameworks such as
the Carbon Disclosure Project.
Our communities
Why it’s important
As a financially successful business, we are well-placed to
“give something back” to our communities. We strive to be
a force for good wherever we operate. While education,
particularly in the sciences and engineering, is our priority
focus, to maximise our positive impact we always seek to
identify and respond to local needs.
How we are engaging
• We respond to requests for much needed charitable
funding, making financial donations to a wide range of local,
national and international charitable causes.
• Our employees are encouraged to volunteer their time
and skills, during working hours, to support a range of
worthwhile causes in their local community.
• We work with schools, colleges and universities to raise
aspirations, increase awareness of engineering and develop
the talent of young engineers.
Read more on pages 40 and 71
Our suppliers
Why it’s important
Our purchasing decisions not only impact our suppliers, but
their stakeholders too. We expect our suppliers to operate
ethically, taking due consideration for the safety and well-being
of their workers while minimising their environmental impacts.
By setting high standards for our suppliers, we reduce
operating and reputational risk and promote the long-term
success of the Company.
How we are engaging
• We purchase from suppliers who adhere to our Supplier
Sustainability Code.
• We undertake supplier audits to oversee compliance with
our standards.
• We work with suppliers on a continuous improvement basis
to raise standards.
• We train employees on business ethics and encourage the
use of the whistle-blowing hotline to raise concerns about
anything in our end-to-end supply chain.
• We pay our suppliers for properly completed work on
60 day terms in the UK and follow customary good pay
practices in other countries.
Read more on pages 12-13 and 67-70
Read more on pages 39 and 64-65
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1. Board leadership and Company purpose continued
Employee Engagement Committee Report
The Employee Engagement
Committee’s purpose is to
ensure the Board hears the
voice of our employees.”
Caroline Johnstone
Chair of Employee Engagement Committee
Members
Our Employee Engagement Committee comprises:
Caroline Johnstone (Chair)
Peter France
Jane Kingston
Jamie Pike
Trudy Schoolenberg
Kevin Thompson
No. of meetings attended/
total no. of meetings held
3/3
3/3
3/3
3/3
3/3
3/3
Attendance
%
100%
100%
100%
100%
100%
100%
How the Committee spent its time
60%
15%
25%
Employee meetings
and follow-up
Terms of Reference/
Committee remit
Current engagement practices
and survey results
Developing the remit of the Committee
The Employee Engagement Committee was established
in response to, and in compliance with the Code, with one
Non-Executive Director designated as the Chair of the Committee.
The principal remit is to support the Board and to ensure that
we consider employees in all aspects of our thinking and to have
insight into the areas of concern and interest for employees.
The Committee will, among other activities, develop an
understanding and knowledge of employee engagement practices
across the Group, review and ensure that appropriate mechanisms
are in place for employees’ views to be heard, and will advise the
Board on all aspects of employee engagement.
Committee role and responsibilities
The Committee’s future agenda is being developed and refined,
but current responsibilities of the Committee include making
recommendations to the Board on all aspects of employee
engagement and giving full consideration to the matters set
out in the relevant portions of the Code. The Committee’s
Terms of Reference are available on the Group’s website,
www.spiraxsarcoengineering.com.
82
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 The duties of the Committee include:
• develop an understanding and knowledge of existing employee
engagement practices across the Group;
• develop a programme of Board engagement activities to enable
the Board to have regular dialogue with employees across the
Group. This will be practical and pragmatic, building on existing
opportunities and with proportionate time and expense;
• in association with the Audit Committee and the Board, review
the mechanisms and procedures in place for employees to
raise concerns in confidence and anonymously, such as the
Company’s whistle-blowing facility (Safecall);
• the Committee will advise, provide oversight and review
the following:
– global employee engagement survey;
– executive mentoring of high-potential talent; and
– operating company activity related to employee engagement;
and
• have regard to the latest legislation, corporate governance best
practices, and Financial Conduct Authority Listing Rules with
respect to employee/workforce engagement.
Meetings
The Committee met three times in the year to address the
following matters:
• review and approve the Terms of Reference, establishing the
remit of the Committee;
• develop plans for Committee events and actions;
• focus group meeting at Chromalox, Utah, follow-up discussions,
and Executive responses;
• review the results of the employee engagement survey;
• review executive-arranged focus group activity; and
• discuss current Group employee engagement activities.
Chair’s review of 2019
I was delighted to join the Board in March 2019 and to be asked
to take on the role as Chair of the newly formed Employee
Engagement Committee. In my previous career with PwC and on
the Boards of other organisations, I have always focused on the
people. In my view, all businesses are people businesses.
Key Employee Engagement Committee
activities 2019
Employee engagement and empowerment is at the heart of the
Group’s philosophy and is a major factor in its success to date.
It is a diverse organisation, which allows local leaders to pursue
business development in a way that best suits their market, but
with clear goals and principles of operating, common across all of
the Group. Our direct sales force is a key differentiator for us.
In recent years, the Group Executive Committee has been
developing its approach to employee engagement and, in 2019,
the business again rolled out a survey across the whole of the
Group, following the first Group-wide employee engagement
survey in 2017. A total of 7,636 employees received an invitation
to participate in 2019 and 82% responded. The executive
management’s action plans are being developed as a result of the
survey responses and will be reviewed by the Committee.
In addition to the employee survey, the business has been listening
to employees and developing a programme of two-way internal
communications. For example, Neil Daws, Managing Director of
the Steam Specialties business, is now sending out a quarterly
business update video. He has had some excellent feedback and
employees really welcome the immediate, personal information,
straight from the business leader.
We have a diverse and dispersed employee group, with over
8,000 employees spread across 66 countries, three businesses,
and multiple brands. We strive to ensure all voices are heard in
the boardroom and we guard against misinterpretation of views.
My aspiration is to reach out to employees on a regular basis and
to aim for a cross section of views on how we are doing as a Board
and what people think.
Over the course of 2019, we developed the initial remit of the
Committee, which we recognise will continue to evolve as we learn
from various activities and feedback. The Non-Executive Directors
have already had various interactions with employees and I was
able to use my induction activities to engage with quite a wide
range of employees and managers across the businesses.
Jun
Oct
• Developed remit and agenda,
and established the Terms
of Reference
• Hosted focus group at
Chromalox, Utah
• Committee members met
with a range of employees at
the Women in Engineering
Day at Watson-Marlow
in Falmouth
Aug
• Considered feedback from
• Reviewed employee
Chromalox, Utah focus group
engagement
survey headlines
• Further review of employee
engagement survey results
• Reviewed summary
of Group employee
engagement activities
• Considered Executive-led
focus group feedback
• 2020 priorities agreed,
including plans for the
Board to hear from
individual business units
about their employee
engagement activities and
response to the employee
engagement survey at each
Board Meeting
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 1. Board leadership and Company purpose continued
Employee Engagement Committee Report continued
I have spent time in the Steam Specialties manufacturing and
sales businesses in Cheltenham and visited customers in Northern
England with one of the Area Sales Engineers. I visited the
Watson-Marlow site in Falmouth, where I spent time on the factory
floor, talking with, amongst others, the leader of the local Employee
Engagement Team. I attended a Women in Engineering event in
Falmouth in June 2019 and, together with my fellow Non-Executive
Director Jane Kingston, met a wide range of employees; graduate
recruits, business leaders and HR professionals. With other
members of the Board, I visited the Chromalox manufacturing site
in Utah and spent time with management and also walking round
the factory.
Whilst at Chromalox, we held our first employee focus group,
listening to a representative and self-chosen group of non-
management employees. We were particularly interested to meet
them, given they are, like me, relatively new to the Spirax Sarco
Group, following the acquisition of Chromalox in 2017. We asked
for their input on a wide range of topics, including their views
on the Company values and how they think we live up to them.
The group were very forthcoming and open. They were passionate
and positive about the Company values. There were a number of
positive short and long-term actions that we have implemented to
continue the strengthening of our culture and values.
We have now agreed the Committee agenda for 2020, including
a series of employee engagement events. The outcomes
from Executive focus groups being held across the business
will also be fed back to the Committee throughout the year.
Employee engagement is on every Board agenda as part of each
business presentation.
We will continue our programme of events for Non-Executive
Directors to meet employees across the Group and we are
developing an informal agenda for us to share information.
The Committee will ensure that the employees’ voice is heard by
the Board.
Committee focus for 2020
• The Committee has planned a series of focus group
meetings in 2020. Committee members have also
scheduled some face-to-face visits with employees at
various sites.
• In view of the dispersed nature of the Group, the
Committee will also aim to engage with employees using
digital technology.
• A key objective for 2020 is following up on the 2019
employee engagement survey and reviewing the action
plans for different business units and functions.
• The Committee members will continue to visit various Group
sites and attend events so they can listen to employees at all
levels. The Board aims to visit Watson-Marlow in Falmouth
and the new Aflex Hose facility in Bradford, where the 2020
Women in Engineering Day celebrations are also scheduled
to be held.
Caroline Johnstone
Chair of Employee Engagement Committee
Caroline Johnstone induction
I have been impressed by the teamwork and strong
governance in evidence across the Group. As Chair of the
Employee Engagement Committee I have seen the culture
and values of the Group up close.
Since joining the Board in March 2019, I have had the
opportunity to visit a number of Group companies,
from Watson-Marlow’s operations in Falmouth, UK, to
Chromalox in Utah, USA, and visited customers with
field-based engineers. In all of these meetings I have felt
completely welcomed throughout the Group. The people I
met were passionate about our values of customer focus
and collaboration.
We are committed to taking the Group forward based on
a well-founded and excellently executed strategic plan.
Forward thinking is evident in the workings of all the Board
committees where I have seen thoughtful and thorough
reviews of all major business decisions.
Spirax Sarco is an exciting company and I look
forward to playing a part in the continued success of all
its businesses.
84
I have felt completely
welcomed throughout the
Group. The people I met
were passionate about our
values of customer focus
and collaboration.”
Caroline Johnstone
Independent
Non-Executive Director
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 1. Board leadership and Company purpose continued
2. Division of responsibilities
Employee Engagement Committee Report continued
The Chair
Independence
Jamie Pike has been a member of our Board since May 2014.
Having served over five years on the Board, we consider him to
have retained his independent status.
Responsibility
Jamie’s responsibilities are outlined in the table overleaf. In his
tenure to date we consider him to have upheld the responsibility
of the Chair as described in the Principle of the Code, such as his
independence, ability to work well with others and leadership skills.
Since stepping down as Chair of Cobham plc in January 2020,
Jamie has no other FTSE directorships.
A balanced Board
During 2019, in compliance with the Code, the number of
Non-Executive Directors was always equal to or more than the
number of Executive Directors (excluding the Chair). With effect
from 1st January 2020, our Board comprises three Executive and
five Non-Executive Directors (excluding the Chair). This ensures
that no one person or group of individuals dominates the
Board’s decision-making. All of our Non-Executive Directors are
considered independent.
Performance
The Chair confirms that, following a formal performance evaluation,
each Director’s performance continues to be effective and each
Director demonstrates commitment to the role.
Non-Executive Directors
Our Non-Executive Directors provide independent challenge
and review, bringing wide experience, specific expertise and
a fresh objective perspective. The Board is confident that the
Non-Executive Directors have sufficient time to meet their Board
responsibilities. External appointments held by our Non-Executive
Directors and full-time Executive Directors are set out on pages 74
to 75 and a summary is provided in the table on the top right of
this page.
Jane Kingston, Non-Executive Director and Chair of the
Remuneration Committee, stepped down from the Board of
National Express Group plc on 31st December 2019.
Senior Independent Director
Dr Trudy Schoolenberg was appointed as Senior Independent
Director in May 2019. With expertise in engineering, product
development and having significant Executive and Non-Executive
experience over many years, the Board is satisfied that Trudy has
the necessary qualities and experience for this role.
The Senior Independent Director carried out an interview with all
Directors to facilitate the appraisal of the Chair as part of our Board
and Committee annual internal evaluation process.
At year end
No. of other
Non-Executive
roles
No. of other
Executive
roles
Independent Non-Executive Directors
Jamie Pike (Chair)1
Peter France
Caroline Johnstone2
Jane Kingston3
Trudy Schoolenberg
Kevin Thompson
Full-time Executive Directors
Nicholas Anderson
Kevin Boyd
Neil Daws
Jay Whalen4
1
–
1
2
3
–
–
1
–
–
–
1
–
–
–
–
–
–
–
–
1 J. Pike stood down as Chair of Cobham plc in January 2020 and, therefore, has no other
Non-Executive roles.
2 C.A. Johnstone is also a Non-Executive Director of Shepherd Group Ltd, a private company.
3 J.S Kingston stood down as Non-Executive Director of National Express plc on
31st December 2019 and, therefore, has only one other Non-Executive role.
4 J.L. Whalen retired from the Board on 31st December 2019.
Non-Executive Director meetings
As per best practice, our Non-Executive Directors met with the
auditor and Korn Ferry, independent remuneration consultants,
separately from our Executive Directors.
Division of responsibilities
An overview of the division of responsibilities, as set out in the
Code, is provided in the table on page 86 and we comply with all
Principles and provisions.
The responsibilities of the Chair, Group Chief Executive, Senior
Independent Director, Board and Committees are set out in writing
and agreed by the Board. A clear division is made between the
leadership of the Board and Executive leadership.
Group General Counsel and
Company Secretary
The Group General Counsel and Company Secretary supports
the Chair and the Committee Chairs in making sure members are
equipped for informed decision-making and that they appropriately
allocate their time to subjects. All Directors have access to
the advice of the Group General Counsel, who is responsible
for advising the Board on all governance matters. Both the
appointment and removal of the Group General Counsel is a matter
for the whole Board.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report
2. Division of responsibilities continued
Division of responsibilities (based on 2018 Code’s Principles F–I)
Chair
Board (key matters)
• Leads the Board
• Responsible for overall effectiveness in directing the Company
• Demonstrates objective judgement
• Promotes a culture of openness and debate
• Facilitates constructive Board relations
• Facilitates effective contribution of all Non-Executive Directors
• Ensures Directors receive accurate, timely, information
• Holds meetings with Non-Executive Directors, without Executive Directors present
• The approval of corporate and strategic business plans
• The approval of the annual and interim results
• Trading updates
• Integrated risk management framework
• Major acquisitions/disposals
• Major capital expenditure
• Director appointments
• Material litigation
• Governance structure
Senior Independent Director
Non-Executive Directors
• Provides a sounding board to the Chair
• Serves as an intermediary for the other Directors and shareholders
• Leads an annual meeting of Non-Executive Directors to appraise the Chair’s performance
• Provide constructive challenge, strategic guidance and offer specialist advice
• Hold a prime role in appointing and removing Executive Directors
• Scrutinise and hold to account the performance of management and individual Executive
Directors against agreed performance objectives
Group General Counsel and
Company Secretary
• Advises the Board on all governance matters
• Supports the Board to ensure that it has the policies, processes, information, time and resources it
needs for the Board to function effectively and efficiently
• Advises the Board on important legal and regulatory matters
Executive leadership
There is a clear division of responsibilities between the leadership of the Board and our Executive
leadership. Our Group Chief Executive’s roles and responsibilities include: management of the Group’s
short, medium and long-term performance; stewardship of capital, technical and human resources;
corporate and business strategy; internal risk management controls; and organisational structure.
Governance structure
Group Board
See pages 74-75
Employee
Engagement
Committee
See pages 82-84
Nomination
Committee
Audit
Committee
See pages 89-91
See pages 93-97
Risk
Management
Committee
See pages 98-101
Remuneration
Committee
See pages 102-105
Further reading Board Committees overview
The Terms of Reference for all Board Committees are set out in detail on the
Group’s website. These terms are subject to regular review.
www.spiraxsarcoengineering.com
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 The Board of Directors
The Board relies on Executive management to run the business
and monitor management activities, and holds them accountable
against targets and standards. The Board also approves long-term
corporate and strategic plans after a full review and assessment of
market and technology trends, business drivers and risks. Having a
senior management team that is capable of executing the strategic
plans is a key focus for the Board.
The formal schedule of matters reserved for the
Board’s decision is available on the Group’s website,
www.spiraxsarcoengineering.com. The Board also has an Authority
Limits Policy that sets out clearly the primary responsibilities,
controls and authorisation limits on matters affecting the
Group’s business.
Board meetings
The Board meets as often as is necessary to discharge its duties.
In 2019, the Board met seven times. All Directors are expected to
attend all Board meetings and relevant Committee meetings unless
prevented by prior commitments, illness or a conflict of interest.
Directors unable to attend specific Board or Committee meetings
are sent the relevant papers and asked to provide comments in
advance of the meeting to the Chair of the Board or Committee.
In addition, all Board and Committee members receive the minutes
of meetings as a matter of course.
Board attendance 2019*
Board meetings
Attendance
J. Pike
N.J. Anderson
K.J. Boyd
N.H. Daws
P. France
J.S. Kingston
J.L. Whalen
C.A. Johnstone1
G.E. Schoolenberg2
K.J. Thompson3
100%
100%
100%
100%
100%
100%
100%
100%
87.5%
100%
* C.G. Watson attended four meetings prior to stepping down from the Board on
15th May 2019.
1 C.A. Johnstone appointed on 5th March 2019.
2 G.E. Schoolenberg absence due to illness.
3 K.J. Thompson appointed on 15th May 2019.
How the Board spent its time
5%
20%
10%
20%
15%
15%
15%
Strategy
Acquisitions
Operations and risk
Governance
and shareholders
People and succession
Finance
New product
development
Board activity 2019
The Board ensures good governance practices are embedded
throughout the Group as they are an integral part of running a
successful business. In the chart on the bottom left of the page, we
have set out how the Board spent its time during 2019.
The Board agendas are carefully planned to ensure focus on
the Group’s strategic priorities and key monitoring activities, as
well as reviews of significant issues. During 2019, the Board
devoted considerable time to ensuring that the post-acquisition
plans relating to the Electric Thermal Solutions business were
implemented. This was supported by the Board’s visit to
Chromalox’s site in Utah, USA in June, where we were able
to see an example of our Electric Thermal Solutions business’
manufacturing site up close and engage with our employees
through a focus group conducted under the auspices of our
Employee Engagement Committee.
We also reviewed the implementation of our strategic plan and
had an update on our corporate strategy in June. One outcome of
this review was the decision to place Chromalox and Thermocoax
under the umbrella of our Electric Thermal Solutions business and
to appoint Dominique Mallet as President of the business.
We monitored the significant investment we are making in Aflex
Hose, Yorkshire, where we are consolidating our four sites into a
purpose-built facility that will streamline our processes and prepare
us for the growth we anticipate in this business. Completion of
this site is scheduled for March 2020 with the Board visiting in
October 2020.
We considered a number of important finance matters during 2019
including the approval of a cash pooling arrangement with Bank
Mendes Gans, a foreign exchange risk management policy and
consideration of the renewal and extension of our revolving credit
facilities provided by Barclays Bank plc and HSBC plc in 2020.
Health & Safety is of fundamental importance to the business and is
considered at each Board meeting. It is also considered in detail at
each Group Executive Committee meeting.
The Board also concentrated its attention on formulating a
proactive Brexit strategy, looking at both the challenges and
opportunities for the Group posed by a UK exit from the EU.
The Board continued to engage with shareholders on governance,
remuneration and trading during the period.
Board focus for 2020
• Continue to support the Executive Committees with their
growth plans across all of our businesses. Key management
presentations and discussions are planned in 2020 across
all of our businesses.
• Further consolidate our position in the FTSE 100 through
both organic and inorganic growth.
• We see many opportunities to build on our success and
we look forward to realising and sharing these with our
shareholders as we effect them through our strategic plan.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report
2. Division of responsibilities continued
Key Board activities in 2019, by meeting
Standing agenda items
• An Environmental, Health and Safety update is the first
operational matter addressed by the Board at each meeting
• The Group Chief Executive and the Chief Financial Officer
report on monthly, quarterly, bi-annual and annual trading,
as appropriate
• The Group General Counsel and Company Secretary
regularly updates the Board on all material legal matters and
on our compliance programmes
• Company share performance and shareholder/analyst
feedback is discussed at most Board meetings
Feb
• Draft Annual Report
• Modern Slavery update
• Group litigation
• Thermocoax acquisition
• Business review –
EMEA, Asia Pacific
(Steam Specialties)
• Management presentations –
Americas (Steam Specialties)
• Watson-Marlow – Asia
Pacific and Africa
• Deloitte Academy
governance update
Board visit case study
Board visit to Electric Thermal Solutions,
Chromalox, Utah in June 2019
The Board met with Chromalox’s management team
and employees to better understand its operations, track
the cultural changes since the acquisition in 2017 and
discuss the main opportunities and risks for the Chromalox
business. This visit was timed just after Thermocoax joined
the Group in May 2019. Dominique Mallet, President of
Thermocoax at that time, joined the visit and the Board
were able to cement plans to amalgamate the companies,
under Dominique’s leadership, to create our Electric
Thermal Solutions business. In addition, the Employee
Engagement Committee held its first employee meeting and
the Chromalox team provided positive input. Key cultural
advances have been made since the Board’s visit.
Mar
Aug
• 2018 financial results
• 2018 final dividend
• Review and approval of
Annual Report
• Aflex Hose expansion
• Business review – Gestra
(Steam Specialties)
• Thermocoax acquisition
• Half-year results
• 2019 interim dividend
• Group litigation report
• Investor feedback
• Business review –
Watson-Marlow
• Management presentations
– Spirax Sarco USA and
Spirax Sarco Thailand (both
Steam Specialties)
May
Oct
• Foreign exchange
hedging programme
• New ERP system
(Steam Specialties)
• Business review – Asia
Pacific (Steam Specialties)
• Management presentation –
• Cash pooling
• Acquisition implementation
• Business review – Supply
• Management presentation
– Business Development
(Steam Specialties)
Watson-Marlow, USA
(Steam Specialties)
Jun
Dec
(Chromalox, Utah, USA)
• Succession planning
• Business and
corporate strategy
• Electric Thermal Solutions
• Corporate broker review
• Management presentation –
• Approval of budget
• Internal Board
effectiveness review
Chromalox
• Draft Annual Report and
Circular to Shareholders
• 2020 Plan and
business presentations
• Report by Risk Management
Committee including Brexit
and climate change
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Governance Report
3. Composition, succession and evaluation
Nomination Committee Report
We strive for greater diversity
on our Board, across the
Group and in our succession
planning. We met our target of
33% female representation on
our Board.”
Jamie Pike
Chair of Nomination Committee
Members
Our Nomination Committee comprises:
Jamie Pike (Chair)
Peter France
Caroline Johnstone1
Jane Kingston
Trudy Schoolenberg2
Kevin Thompson3
No. of meetings attended/
total no. of meetings held*
5/5
5/5
4/4
5/5
4/5
3/3
Attendance
%
100%
100%
100%
100%
80%
100%
* C.G. Watson attended two meetings prior to stepping down from the Board on
15th May 2019.
1 C.A. Johnstone appointed on 5th March 2019.
2 G.E. Schoolenberg absence due to illness.
3 K.J. Thompson appointed on 15th May 2019.
How the Committee spent its time
Executive succession
Non-Executive succession
Diversity
40%
30%
30%
Committee role and responsibilities
The main role of the Nomination Committee is to recommend
changes to the Board and consider succession planning for the
future. The Committee:
• makes appropriate recommendations to the Board for the
appointment, re-appointment or replacement of Directors;
• reviews the structure and composition of the Board with regard
to the overall balance of skills, knowledge and experience against
current and perceived future requirements of the Group;
• recommends any proposed changes to the Board; and
• considers succession planning arrangements for the Directors
and, more generally, senior executives.
Meetings
The Nomination Committee met five times in the year to address
the following matters:
• Executive Director succession planning;
• re-appointment of Non-Executive Directors; and
• Audit Committee Chair succession.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 3. Composition, succession and evaluation continued
Nomination Committee Report continued
Key Nomination Committee activities 2019
Feb Mar
Jun
• Executive Director
succession planning
• Appointment of Senior
Independent Director and
Chair of Audit Committee
• Group Chief Executive not
attending meetings for
governance reasons
Aug
Dec
• Re-appointment of
Non-Executive Director
• Executive Director
succession planning
Chair’s review of 2019
Board changes
In March 2019, we welcomed Caroline Johnstone to the Board
who, in due course, became Chair of our Employee Engagement
Committee. In May 2019 we welcomed Kevin Thompson who
took over from Clive Watson as Chair of the Audit Committee.
In addition, consequent on Clive’s completion of nine years
with the Board, Trudy Schoolenberg took over as our Senior
Independent Director.
We are delighted that Caroline Johnstone and Kevin Thompson
have joined the Board as independent Non-Executive Directors.
Caroline’s financial, people and advisory skills, together with her
international business experience across a range of different
industries, will benefit the further development of the Group.
Kevin’s international expertise and financial skills will also enhance
the Board’s overall skill set. In respect of Caroline’s and Kevin’s
appointments, we achieved a 50% female appointment ratio,
consistent with our stated policies. Should any Director succession
opportunities arise in the next 12 months, gender and ethnic
diversity will continue to be important selection criteria.
Korn Ferry was appointed in relation to the specification, search
and evaluation of these appointments and was instructed to
include candidates that advanced both our gender and ethnic
representation. It is our policy to consider overall Board balance
and diversity when appointing any new Director. Korn Ferry is an
independent search and recruitment agency.
With Caroline’s appointment and the retirement of Jay Whalen,
female representation on our Board increases to 33%.
Diversity and Inclusion Policy
We believe that the Board’s perspective and approach is greatly
enhanced by gender, age and cultural diversity and it is our policy to
consider overall Board balance and diversity when appointing new
Directors. As shown on page 63, we have made progress with our
diversity and inclusion agenda, which is particularly relevant given
the broad international reach of the Group and we will continue this
progress with future appointments to the Board.
Diversity and inclusion are key elements in our Group strategic
sustainability project where we undertook the following:
• progressed our external talent pools to increase the number of
female candidates;
• embedded and executed our Executive mentoring programme
for female talent with male and female mentors; and
• completed an equal pay audit for all UK employees.
Gender reporting
By the end of 2019, Board gender diversity changed with six
males and three females. During 2019, we participated in the
FTSE Women Leaders (Hampton-Alexander) Review. With 30%
female representation on our Board and 20% of the combined
Executive Committees and their direct reports being female,
we were ranked 69th in the FTSE 100 for women in leadership
and 4th in the industrial engineering category. Since 2015, we
have enhanced our focus and expanded our activities regarding
succession planning and talent development at the executive levels
of the Group so that we continue to have a strong, diverse bench
strength for the management and operation of our businesses.
Practical achievements in this field include the development
and implementation of a successful executive female mentoring
programme and the internal promotion and external recruitment
of 25 women for higher executive positions. In addition, we have
achieved 50% female representation when recruiting for our two-
year Global Graduate Programme. We will continue to take other
actions to increase the representation of women in our company.
We recognise that further actions need to be taken to increase the
representation of women.
As a Group we are committed to gender diversity and we made
good progress in 2019 achieving our minimum target of 33%
female representation on the Board. We will work to progress the
same targets that also apply to the Group Executive Committee
and their direct reports. We ensure that this target is taken into
account in our succession planning and recruitment.
More detailed figures on gender diversity can be found on page 63
in our Sustainability Report.
Committee focus for 2020
In 2020, we will focus on succession planning at Executive
levels of the Group and promoting talent across the Group
so that we continue to have a strong bench strength for the
management and operation of our businesses.
Jamie Pike
Chair of Nomination Committee
Further reading
Our Diversity and Inclusion Policy can be found on our website.
www.spiraxsarcoengineering.com
90
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Jay Whalen’s reflections
on 28 years with the Group
Most importantly, it has been a great pleasure to serve
our shareholders and employees as the President of the
Watson-Marlow Fluid Technology Group (WMFTG) for over
28 years.
I joined the Group in 1991 as President of Watson-Marlow Inc.
in the USA and was named Sales and Marketing Director of the
global Watson-Marlow pump business in 2002. In August 2010 I
became President of Watson-Marlow and in 2012 I was appointed
to the Spirax-Sarco Engineering plc Board.
During this time WMFTG has become an integral part of the
Group and its significant growth has been due to successful
geographic expansion, sectorised market penetration and a first
class acquisition strategy. I would like to say thank you to all my
colleagues and friends at Spirax Sarco and Watson-Marlow.
I wish you all the very best under the leadership of Andrew
Mines. Andrew and I have completed a smooth handover of
executive responsibilities and I know that I leave Watson-Marlow in
good hands.
Steering Watson-Marlow
through excellent growth and
high margin profitability has
been a pleasure.”
Jay Whalen
President,
Watson-Marlow
The Board and management’s
passion for the business have
fully met my expectations.”
Kevin Thompson
Independent Non-Executive Director
Kevin Thompson’s induction
and early reflections
I am delighted to have joined the Board of Spirax-Sarco
Engineering plc with its record of long-term success and exciting
business opportunity.
My expectations have been fully met by the Board and
management’s passion for the business and its growth, the
integrity and strong governance I have seen in every interaction.
I have found the people and operations of very high quality,
setting high expectations and with an open mindset for continued
improvement. As Chair of the Audit Committee I am very pleased to
see how seriously the Group takes its responsibilities.
I have been able to visit Chromalox in Utah, the Watson-Marlow
operations in Falmouth, the Spirax Sarco R&D and manufacturing
facilities in Cheltenham as well as visits to customers with a service
engineer. In all cases I have felt warmly welcomed and been struck
by the professionalism, care and commitment towards customers
and the growth of the business.
I observe that as well as its governance responsibilities, the Board
spends a lot of time considering opportunities and risks and looking
to the future through investment in resources and development
of our people. I very much hope to be able to contribute to the
Group’s success in these and other areas, and to its growth in the
long term.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 3. Composition, succession and evaluation continued
Board evaluation
The internal effectiveness review supported the overall conclusion
of the 2018 external evaluation that the expertise and experience of
the Board provided guidance and support on important decisions.
In particular, it was noted that the Board is well-balanced across
skill sets and backgrounds, and has a good dynamic with open
discussion and the ability to table challenging points of view.
The main recommendations, following the review, are:
• Improvements to Committee scope;
• Concentrating time on important matters; and
• Identifying priority areas for 2020.
Outcome and agreed focus for 2020
• 2020 Plan delivery.
• Executive succession planning.
• Continue to improve safety and sustainability.
Board evaluation process
In 2018, we commissioned an independently-facilitated
Board effectiveness review conducted by Independent Audit.
(Independent Audit provides no other services to the Group.) Our
aim was to capture open and constructive feedback from Board
members which would:
• provide insight into our effectiveness;
• point to actions for improving our performance; and
• establish a benchmark for measuring future progress.
The review was carried out in accordance with the guidance in
the Code.
In 2019, we followed up on the recommendations of Independent
Audit and the Board carried out an internal evaluation of the
performance of the Board and the Board Committees, in
accordance with the provisions of the Code. The Chair circulated
a comprehensive questionnaire to members of the Board covering
all issues related to the effective running of the Board and the
functioning of the Committees. The responses were consolidated
and anonymised and common themes identified in order for the
Board to determine key actions and next steps for improving Board
and Committee effectiveness and performance.
Evaluation cycle – three year
2018 External (complete)
2019 Internal (complete)
2020 Internal
Next
external
evaluation
2021
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 4. Audit, risk and internal control
Audit Committee Report
I recognise the solid
foundations established by
the Audit Committee over
many years and it is my
intention to build on them.”
Kevin Thompson
Chair of Audit Committee
Members
Our Audit Committee comprises:
Kevin Thompson1 (Chair)
Peter France
Jane Kingston
Caroline Johnstone2
Trudy Schoolenberg
No. of meetings attended/
total no. of meetings held*
2/2
3/3
3/3
3/3
3/3
Attendance
%
100%
100%
100%
100%
100%
* C.G. Watson attended one meeting prior to his retirement on 15th May 2019.
1 K.J. Thompson appointed to Board and as Chair of Audit Committee on 15th May 2019.
2 C.A. Johnstone appointed to Board and Board Committees on 5th March 2019.
How the Committee spent its time
5%
25%
10%
15%
15%
15%
15%
Finance and tax reviews
Corporate governance
External audit
Internal audit
Risk management
and controls
Results review
Whistle-blowing
Committee role and responsibilities
The main roles and responsibilities of the Audit Committee include:
• monitoring the integrity of the Financial Statements of the
Company and any formal announcements relating to the
Company’s financial performance, and reviewing significant
financial reporting judgements contained in them;
• providing advice (where requested by the Board) on whether
the Annual Report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Company’s financial position,
performance, business model and strategy;
• in conjunction with the Risk Management Committee and the
Board, reviewing the Company’s internal financial controls and
internal control and risk management systems;
• monitoring and reviewing the effectiveness of the Company’s
internal audit function and making recommendations to
the Board;
• conducting the tender process and making recommendations to
the Board about the appointment, re-appointment and removal
of the external auditor, and approving the remuneration and
terms of engagement of the external auditor;
• reviewing and monitoring the external auditor’s independence
and objectivity;
• reviewing the effectiveness of the external audit process,
taking into consideration relevant UK professional and
regulatory requirements;
• developing and implementing policy on the engagement of the
external auditor to supply non-audit services, ensuring there is
prior approval of non-audit services, considering the impact this
may have on independence, taking into account the relevant
regulations and ethical guidance in this regard, and reporting to
the Board on any improvement or action required; and
• reporting to the Board on how it has discharged its responsibilities.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 4. Audit, risk and internal control continued
Audit Committee Report continued
Meetings
The Committee met three times during 2019. Relevant members
of the Group’s senior management, including the Group Chief
Executive, the Head of Internal Audit, the Chief Financial Officer and
the Group Financial Controller, were also in attendance at these
meetings. Following an internal review by the Audit Committee of
its own performance, a number of changes to the way it operates
meetings were agreed upon. The more important of those changes
were (i) that the Committee will invite the Group Chief Executive to
attend all future meetings instead of just one a year (being clear to
note that “attendance” is in his capacity as Group Chief Executive
and that he is not a member of the Audit Committee) and (ii) to
seek more direct involvement from the Group’s Divisional Finance
Directors by inviting them to attend and present to the Committee
at least once a year.
During 2019, the Committee received reports from external
and internal auditors on the major findings of their work and the
progress of management follow-up by way of management
reports. As a safeguard, the Committee holds separate meetings
with the external and internal auditors without management present
to discuss their respective areas and any issues arising from
their audits.
Key Audit Committee activities 2019
Mar
Aug
• Reviewed the Annual
Report including:
– Viability Statement
– Going Concern basis
– that it is fair, balanced
and understandable
• Agreed updates to the
Internal Audit Charter
for 2019
• Reviewed the effectiveness
of internal controls
• Reviewed the half-
year results
• Reviewed the auditor
interim report
• On-going review of
risk areas such as
cybersecurity, GDPR and
whistle-blowing
• Consideration of Audit
Committee performance
• Approved amendments
to the Audit Committee’s
Terms of Reference
Oct
• External audit planning (including review and approval of audit
scope and fees)
• Reviewed updates from Tax and Group Treasury
• Reviewed internal audit process
• Reviewed and approved new Mandatory Contract Practices
process and documentation
Committee competence and governance
The Audit Committee operates under Terms of Reference,
which were reviewed by the Committee and updated in
August 2019, and can be found on the Group’s website,
www.spiraxsarcoengineering.com. The Terms of Reference set out
the membership and experience requirements of the Committee.
Collectively, the Committee is considered by the Board to possess
an appropriate level of independence (it is comprised solely of
Non-Executive Directors) and experience. The Chair has recent,
extensive and relevant financial experience and the required
competence in accounting and its members have a depth of
financial and commercial experience in various industries, as well
as the industrial engineering sector in which the Group operates.
A more detailed summary of the qualifications, skills and experience
of each Committee member can be found on pages 74 to 75.
Chair’s review of 2019
It is a pleasure to be presenting my first report as Chair of the Audit
Committee. I would like to thank Clive Watson for his support in my
transition into the role and for the solid foundations established over
his time as Chair. My intention is to build further on these.
The Committee has reviewed its Terms of Reference and will ensure
that the Committee agendas align fully with their requirements.
We have agreed that more time will be devoted to Committee
business (including an additional meeting each year) to ensure
that the Committee members receive adequate training as well
as exposure to senior finance executives. This will also enable
thoughtful review and implementation of increasing governance and
reporting requirements.
During 2019 the key areas of focus for the Audit Committee, in
addition to its on-going core responsibilities of monitoring the
integrity of the Group’s Financial Statements and the effectiveness
of its controls, were:
• monitoring the Group’s cybersecurity policies and
control processes;
• reviewing and updating the Committee’s Terms of Reference;
• monitoring the outcome of Internal Audits and agreeing the focus
for future audits;
• reviewing the progress on integration and accounting for
recent acquisitions;
• monitoring the implementation of new accounting standards
including IFRS 16; and
• monitoring the Group’s preparedness for Brexit.
The following matters considered by the Audit Committee were of
particular note:
Appointments
Since the appointments, in 2017, of a Head of Internal Audit and
a Group Tax Manager, the Committee noted that in 2019 the
Group had further strengthened its Finance team and the control
environment by appointing a Senior Internal Auditor.
94
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 GDPR and cybersecurity
The Committee was pleased to note that the 2018 GDPR
compliance project had been successfully completed and that
2019 saw compliance with GDPR carried out on a “business
as usual” basis by the Group. The Committee will continue to
monitor compliance.
In early 2019 the Group suffered a ransomware attack, which the
Group swiftly and successfully contained. No data of a business or
personal nature was accessed or compromised. We liaised with
the relevant authorities and no ransom was paid. The impact on
our business was immaterial. Whilst the attack demonstrated that
the Group had robust defences in place and its handling of, and
recovery from, the attack was excellent, lessons were learned by
the Group. The Committee was pleased to note that the Group
continues to invest in its cybersecurity defences to mitigate the
continued threat posed to businesses by online attacks.
Taxation
The Group Taxation Strategy, which can be found on the Group’s
website, www.spiraxsarcoengineering.com, on the Governance
Documents page, was published in 2018 and reviewed in 2019.
The Taxation Strategy sets out the Group’s approach to tax risk
management and governance, tax planning and relationship with
the relevant tax authorities.
The Committee noted that the Group is subject to HMRC Senior
Accounting Officer review and in June 2019 a clean certificate
was issued by the Senior Accounting Officer for the year ended
31st December 2018.
Review of effectiveness of internal controls
In its review of the Group’s internal controls, the Committee
considers the effectiveness of all material controls, including
financial, operational and compliance controls and risk
management systems.
The Committee continues to consider the Group to have a
strong and effective control environment in place. Further detail
on monitoring effectiveness of internal controls can be found on
page 100.
Mandatory Contract Practices
One of the areas identified by the Audit Committee for improvement
in 2019 was the Group’s contracting processes and a new
Mandatory Contract Practices process was established by
the Group. The Mandatory Contract Practices were reviewed
and approved by the Committee in October 2019 and have
subsequently been rolled out to all businesses of the Group for
implementation. The Mandatory Contract Practices detail the
processes and procedures that all Group sales and purchasing
teams are to follow to ensure that no Group business is exposed
to unacceptable contractual risks. Linked to the new contracting
procedures is the provision of new template documents (including
new terms and conditions of sale in 23 languages) for use by all
Group companies. The Committee will continue to monitor the
adoption, and impact, of these new mandatory practices.
Whistle-blowing
The Committee, in association with the Board, was pleased to
note that the Whistle-blowing Policy implemented in 2014 had
been successfully rolled out to the newest members of the Group
(Thermocoax). This roll out included the Group’s Safecall facility,
a confidential employee whistle-blowing hotline. The Committee
received updates on the use of Safecall at each meeting and noted
that, on the whole, this hotline continued to be used for its intended
purpose by employees. The Committee assessed management’s
responses to the reported cases (of which there were 13 in 2019)
and considered them to be appropriate and satisfactory.
Acquisitions and goodwill
Following the acquisitions and establishment of the Electric
Thermal Solutions business, the Group has made a number of
changes to its internal reporting and structure. This has clarified
three segments. As a result of this, the Group has considered how
goodwill is monitored and reported, ultimately concluding it is to be
consistent with the Groups segments.
In addition, the Committee has reviewed the work undertaken
to rationalise the number of cash generating units assessed for
goodwill impairment in line with the segmental reporting of the
Group. The results of this rationalisation are reflected in the Financial
Statements. See Note 15 on page 175 for further details.
Significant issues
During 2019, the Committee considered and addressed the
following significant issues in relation to the Group’s Financial
Statements and disclosures:
(i) Revenue recognition
In view of the profile of revenue and profit recognition in the final
quarter of the year, the need to focus on any new contracts
and revenue cut-off for certain businesses was highlighted to
ensure the appropriate recognition of revenue for the year ended
31st December 2019.
How this was addressed
The Committee received regular updates on significant new
contracts and the adequacy of the control environment for revenue
recognition during 2019.
(ii) Pensions
There are judgements and estimates made in selecting appropriate
assumptions in valuing the Group’s defined benefit pension
obligations, including discount ratios, mortality, inflation and
salary increases.
How this was addressed
The Committee considered reports by the Group, including those
from independent external advisers, and is comfortable that the key
assumptions are reasonable.
95
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 4. Audit, risk and internal control continued
Audit Committee Report continued
(iii) Management override of controls
Internal controls are the safeguards put in place by the Group to
protect its financial resources from fraud and abuse by employees.
Management is responsible for ensuring the internal controls are
followed by employees. As such, intervention by management in
the handling of financial information and making decisions contrary
to the internal control policy is a significant, if unlikely, risk.
How this was addressed
Regular cycles of internal and external audits by independent
parties have been put in place to review financial information.
These audits are objective reviews on compliance with the Group’s
accounting policies. The Group continues to provide additional
resource to its internal audit function having appointed its third
dedicated internal auditor in 2019. Also, a further review of certain
internal controls and related documentation will be carried out to
ensure they are fit for purpose in the now enlarged Group.
(iv) Acquisitions and Goodwill
Further acquisition activity during the year resulted in a focus on
the initial valuation of acquired intangibles and goodwill on the
Thermocoax acquisition. The carrying value of all goodwill and
acquired intangibles was also highlighted to ensure it is appropriate.
How this was addressed
The Committee reviewed and approved the valuation of acquired
intangibles and goodwill for the Thermocoax acquisition made
in 2019.
The Committee considered the key assumptions selected to
perform goodwill impairment reviews and concluded it was
comfortable that they were reasonable and resulted in value in use
exceeding carrying values.
The Committee has also reviewed and approved the work
undertaken to bring the number of cash generating units used for
goodwill impairment reviews into line with the segmental reporting
of the Group.
Critical judgements and key sources
of estimation uncertainty in the
Financial Statements
After reviewing the presentations and reports from management
and consulting with the auditor, the Committee is satisfied that the
Financial Statements appropriately address the critical judgements
and key sources of estimation uncertainty, 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,
challenged and are sufficiently robust. This includes the valuation
of the Group’s defined benefit obligation which is valued using key
assumptions. Further details can be found on page 154.
The Committee reviewed the 2019 Going Concern and Viability
Statements and were satisfied that these represented accurate
assessments of the Company’s position as at the date of
the Statements.
External audit process
This is the sixth financial year in which the Annual Report
and Financial Statements have been audited by Deloitte LLP,
following their appointment as the Company’s external auditor
as of 20th May 2014. This appointment is subject to on-going
monitoring and will run for a maximum of 10 years before being
tendered. One of the primary responsibilities of the Committee is
to assess the robustness of the external audit process and make
recommendations to the Board in relation to the appointment,
re-appointment or removal of the external auditor. The Committee
took a number of factors into account when evaluating the
effectiveness of the external audit including: the quality and
scope of the planning of the audit (in October 2019, Deloitte LLP
presented their plan for the 2019 audit to the Committee); and
feedback from all audited operating units, the Group Finance team,
senior management and Directors on the audit process and the
quality and experience of the audit partners engaged in the audit.
In accordance with the requirements to rotate the audit partner
at least every five years, 2019 saw Andrew Bond take over
responsibility for the audits from Mark Mullins.
The Group has complied with the provisions of the Competition
and Market Authority (CMA) Order, issued by the CMA in
September 2014, for “The Statutory Audit Services for Large
Companies Market Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee Responsibilities)”.
Audit fees
During 2019, the Committee reviewed and approved the proposed
audit fees and terms of engagement for the 2019 audit and
recommended to the Board that it proposes to shareholders that
Deloitte LLP be re-appointed as the Group’s external auditor for
2020 at the AGM to be held on 13th May 2020.
Safeguarding independence and objectivity
The Committee recognises that the independence of the external
auditor is an essential part of the audit framework and has adopted
a policy which sets out a framework for determining whether it is
appropriate to engage the Group’s auditor for non-audit services.
This policy states that any expenditure with the Group’s auditor on
non-audit fees should not exceed 70% of the average audit fees
charged in the last three-year period.
During the year, the Group spent £0.1 million on non-audit services
provided by Deloitte LLP (being 6% of the average of Group audit
fees charged over the past three years). Further details can be
found in Note 7 on page 168. No significant non-audit services
were provided by Deloitte LLP.
Auditor payments 2019 £m
Non-audit fees
0.1
Audit fees
1.9
1.7
17
16
96
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Internal audit
During 2019, the Committee assessed the effectiveness of the
internal audit process, noting the significant progress made over the
past three years. The Committee reviewed the schedule of planned
internal audits undertaken in 2019 and assessed the robustness of
the control framework that is in place to track and monitor progress
in remedying any identified deficiencies. This review ensures that
the Committee is able to give assurances that the Group has an
effective and integrated risk management framework, in addition
to the oversight provided by the Risk Management Committee.
During 2019, there were a total of 30 internal audits performed.
On the whole, the companies audited had an effective control
environment. Where issues were found, remediation actions were
agreed that are tracked to completion and validated before being
closed. To the extent that any internal audit action items become
overdue, the Divisional Finance Directors are notified to assist with
ensuring they are closed as soon as possible. The Committee
noted that with the increased internal audit resource and coverage,
more action items have been generated and requested that
management devote sufficient resource to their resolution with
regular reporting back to the Committee. The internal audit process
is explained in more detail on page 100.
Ensuring a fair, balanced and
understandable Annual Report
Review of Financial Statements
During 2019, the Committee considered many components of
business performance in order to ensure it has a full understanding
of the operations of the Group. Key matters considered by the
Committee include:
• determining the position adopted in judgement and estimate
areas for pensions;
• risk areas set out in the Risk Management Committee Report;
• receipt of regular strategy reports from the Group Chief Executive
and operational reports from the Divisional Directors;
• reviews of the budget and operational plan; and
• consideration of judgements and estimates.
Through these processes and its monitoring of the effectiveness
of controls, internal audit and risk management, the Committee is
able to maintain a good understanding of business performance,
key areas of judgement and decision-making processes within
the Group.
Fair, balanced and understandable
One of the key governance requirements of the Committee is for
the Annual Report to be fair, balanced and understandable.
The co-ordination and review of the Group-wide input into the
Annual Report is a significant exercise performed within an
exacting time frame, which runs alongside the formal audit process
undertaken by the external auditor.
The Directors acknowledge their responsibility for preparing the
2019 Annual Report. In accordance with the Code, the Directors
confirm that they consider the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s financial position,
performance, business model and strategy. An overview of the
processes involved to achieve this are set out in the following table.
Audit Committee oversight of the
Annual Report
• Assessed the consistency of the risks and judgements;
• reviewed the Board minutes to ensure issues of significance
were given prominence; and
• arrived at a position where initially the Committee and then
the Board were satisfied with the overall fairness, balance and
clarity of the Annual Report.
Specific actions taken to achieve this included:
• comprehensive guidance for contributors at operational level;
• verification process dealing with the factual content of
the reports;
• consideration of the appropriateness of alternative
performance measures;
• comprehensive reviews undertaken at different levels in the
Group that aim to ensure consistency and overall balance; and
• comprehensive review by the senior management team.
I will be attending the Company’s AGM in May 2020 and will be
happy to answer any questions on this report or the activities of
the Committee.
Committee focus for 2020
In addition to on-going monitoring of risks, Internal Audit
reviews and the quality of the Financial Statements, reporting
and governance, the focus of the Committee for 2020
will include:
• on-going review of 2019 improvement areas (including
Mandatory Contract Practices and cybersecurity);
• enhancing internal audit with increased attention to key
Group risks, use of analytics, KPI reporting and closure of
action items;
• increased Committee exposure to senior finance executives
and training; and
• further review of the internal control environment to ensure
it remains fit for purpose, including project OPAL. (See page
48 for further information on this project.)
Kevin Thompson
Chair of Audit Committee
Further reading
Our Going Concern Statement.
Our Viability Statement.
See page 136
See page 101
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 4. Audit, risk and internal control continued
Risk Management Committee Report
Our risk review covered our
principal risks and emerging
risks, including climate change.”
Nicholas Anderson
Chair of Risk Management Committee
Members
Our Risk Management Committee comprises:
Nicholas Anderson (Chair)
Kevin Boyd
Neil Daws
Jay Whalen
Jim Devine
Dominique Mallet/Chris Molnar1
Andy Robson
Dan Harvey2
No. of meetings attended/
total no. of meetings held
4/4
4/4
4/4
4/4
4/4
4/4
4/4
3/4
Attendance
%
100%
100%
100%
100%
100%
100%
100%
75%
1
In respect of the Electric Thermal Solutions business, Dominique Mallet (President) joined the
Committee on 1st September 2019 and succeeded Chris Molnar (Vice President, Chromalox)
acting President from 1st March 2019 to 31st August 2019.
2 Absence due to audit commitments.
How the Committee spent its time
10%
30%
20%
20%
20%
Internal audit
Bottom-up review
Internal controls (including
on-boarding Thermocoax)
Principal risks
Crisis management plan
Committee role and responsibilities
The Committee oversees the management and control of significant
risks affecting the Group. The Committee ensures that the Group has
risk management policies and procedures, including those covering
project governance, sanctions and embargoes, crisis management,
human rights, business continuity and business management.
The Committee’s responsibilities include:
• using top-down and bottom-up reviews, understanding the risks
facing the Group;
• determining our appetite for risk;
• accepting and managing within the businesses those risks which
our employees have the skills and expertise to understand and
leverage; and
• identifying appropriate risk mitigation techniques
and countermeasures.
Meetings
The Committee met four times in 2019. A summary of the
Committee’s activities throughout the year is overleaf.
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Key Risk Management Committee activities
Jun
Aug
• Group fully prepared for
• Reviewed the bottom-up
Brexit and all contingency
plans deployed
• Consideration of climate
change risk and inclusion
in the risk register
risk summary
• Confirmed risk
countermeasures
in place at Group
operating companies
• Climate change to be
included in the risk register
Oct
Dec
• Updated and approved the
risk register, based on the
bottom-up review
• Risk register extended to
cover Thermocoax
• Risk scoring
matrix reviewed
• Final approval of the
risk register
• Validation of scores
• Approval of principal risks
• Approval of changes
in trend
Chair’s review of 2019
Summary of key focus areas 2019
In keeping with the goals set for the year, in 2019 the Committee
reviewed and updated its Crisis Management Plan. In conjunction
with that process, the Committee undertook the additional
tasks of designating incident officers for each of the businesses,
agreeing to organise media training for senior management and the
appointment of KPMG LLP on retainer, as advisers.
The Committee completed its biennial bottom-up review of risks,
and updated the Group risk register accordingly. The Committee also
continued to monitor the on-going Brexit negotiations, and approved
specific preparedness actions for a potential “no deal” Brexit.
Anti-Bribery and Corruption (ABC)
The Group has continued to reinforce the message of zero
tolerance for bribery and corruption within its businesses.
In 2019, that message was further strengthened by the
improvement and expansion of our online ABC training. This new
ABC training is hosted by the Spirax Sarco Academy as part of
the Group Essentials training module, which also provides training
to employees on a range of fundamental topics, such as Group
Values, Health & Safety and cybersecurity. The reach of this training
has also been expanded so that every employee with an email
address is required to complete the course.
By the end of 2019, the new training was available in 16 key
languages. In 2019, 4,344 employees completed the new ABC
course. In total, over 5,400 employees (including Directors)
worldwide have undertaken the ABC training. This includes our
Electric Thermal Solutions business.
The Group also uses an independent, third-party whistle-blowing
hotline to enable employees to anonymously report any suspected
unethical, illegal or otherwise concerning conduct. Additionally, in
line with our Gifts, Entertainment and Hospitality Policy, we maintain
an online gift register, where employees record gifts so as to ensure
our conduct is in keeping with our highest ethical expectations and
within the law.
Further updates on whistle-blowing and ABC can be found in our
Sustainability Report on page 64.
Modern Slavery Statement
The Group has updated its Modern Slavery Statement to reflect
the Group’s Values and the interplay between those Values and our
commitment to the mission behind the UK Modern Slavery Act.
The updated Statement also tracks our progress in incorporating
our new acquisitions into our Global Excellence in Supply Chain
Initiative. The 2019 Statement can be found on the Group’s
website, www.spiraxsarcoengineering.com, under Sustainability
(Our supply chain).
Identifying emerging and principal risks
We have a robust risk management process in place through which
we identify, evaluate and manage the principal risks and emerging
risks that could impact the Group’s performance.
During 2019, we reviewed the Group’s exposure to risk using
a bottom-up approach. Following this process, the Committee
reviewed and confirmed the robustness of the countermeasures
that Group companies have in place to mitigate the principal risks
in the Group risk register. Our principal risks and the results of the
2019 review are set out in the Strategic Report on pages 22 to 25.
Our approach to emerging risks is further described on page 21.
Climate risk
As climate-related risks continue to evolve, we are regularly
assessing and monitoring the same with the aim of mitigating
their impact where possible. We also recognise the importance of
considering climate risks and opportunities in our business decisions
and acknowledge that adopting the recommendations of the
Task-Force on Climate-related Financial Disclosures (TCFD) is an
important step in supporting the transition to a low-carbon economy.
Our disclosures, set out on pages 68 to 69, demonstrate how we
are managing our climate impact and how our business is evolving in
response to the risks and opportunities arising.
Willis Towers Watson annually assess the impact of climate change
on our Group companies using Global Peril Diagnostic and Property
Quantified Results.
99
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 4. Audit, risk and internal control continued
Risk Management Committee Report continued
Going forward, climate risk will be managed holistically by the
Committee with regular updates to the Group Executive Committee
and the Board. We will also progress further with the implementation
of the TCFD recommendations, including alignment of our short,
medium and long-term outlook on climate risk with our Group’s
broader risk time horizons.
Monitoring effectiveness:
(i) Risk management systems
The Committee is responsible for reporting to the Board the risks
facing the Group and the countermeasures related to those risks.
To fulfil that responsibility, the Committee oversees the Group’s risk
management processes and procedures, with reliance on the Audit
Committee for oversight of the Group companies.
Further, the Committee is charged with the on-going monitoring
of sufficient and effective mitigation plans for relevant risks at each
Group operating company and business group.
Each operating company is required to undertake a formal
review, at least once a year, of the risks which impact, or have the
potential to impact, its business. The reviews are consolidated into
Group-wide risk reports which are maintained and reviewed by the
Committee on a regular basis. Additionally, the risk management
processes are monitored on an on-going basis via internal and
external audits of Group companies. Senior managers have full
accountability of the risk management within their businesses.
The governance structure provides three lines of defence in the
Group’s risk management, as illustrated below.
Three lines of defence
First line of defence
• The business is responsible for the identification, control and
management of its own risks.
Second line of defence
• The Risk Management Committee, with the Audit
Committee, ensures that the risk and compliance
framework is effective so as to facilitate the monitoring of risk
management with on-going challenge and review of the risk
profile in the business.
Third line of defence
• Internal audits provide independent testing and verification of
compliance with policies and procedures and monitoring of
follow-up actions where required.
(ii) Internal control systems
Since 2013 the Group has employed a specific on-going review
process for identifying and managing risks faced by the Group.
The process includes assessment of the effectiveness of all material
controls, including financial, operational and compliance controls,
as well as risk management systems.
The review confirms that proper accounting records have been
maintained, that financial information used within the business is
reliable and that the preparation of the Consolidated and Company
Financial Statements and the financial reporting process comply
with all relevant regulatory reporting requirements.
Every year, via a self-certification questionnaire, General Managers
and Finance Managers of every Group company are required
to self-certify compliance with the policies, procedures and
minimum requirements for an effective system of internal controls.
The Committee uses this information, as well as information from
the top-down and bottom-up risk review processes, to have
meaningful and on-going oversight of risks across the business.
Whilst internal controls are not an absolute assurance against
material misstatement or loss, the Board believes the regular cycle
of review paired with internal monitoring provides a commercially
sound approach to protect the Group from the risks that are a
necessary part of its operations. As required by the UK Listing
Authority, throughout the year and up to the date of the publication
of the Annual Report, the Group has complied with the Code
provisions on internal controls.
(iii) Internal audit
The Group’s standard policy regarding internal auditing is that each
operating company is audited once every five years (most more
frequently). Operating companies located in higher risk territories
are audited more frequently, and businesses acquired by the Group
are subject to internal audit within six months of acquisition.
The internal audit system is a crucial part of the risk management
process. The internal audits are conducted by our internal audit
team headed up by Dan Harvey, who has over 20 years of
professional experience.
Audit reports are made to the Audit Committee and the Board as
a whole. The Committee has ensured compliance with centrally
documented control procedures on such matters as capital
expenditure, information and technology security, and legal and
regulatory compliance.
Risk Appetite Statement
Risk is an inherent part of business and, in order to achieve
our business aims, we must accept certain risks. We seek to
implement a balanced approach to risk, ensuring that our resources
are protected while still pursuing opportunities to accelerate and
deliver growth.
The decision to take opportunity-based risks should, to the greatest
extent possible, be deliberate and calculated.
We aim to confirm that the level of risk is commensurate with
the strategic and economic benefits the risk might bring; we
evaluate our ability to control the risk or mitigate its effects, should
that risk materialise; and we always assess the potential ethical
considerations arising from knowingly accepting some level of risk.
An informed and well-considered process is crucial to any decision
to accept risk. The Committee has undertaken a thorough
evaluation process to determine an appropriate risk appetite rating
for each principal risk. These are set out in detail on pages 22 to 25.
100
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 In summary, the Group has a very low appetite for risks that could
lead to violations of health, safety and environmental legislation,
breaches of legal and regulatory requirements and climate change
that affects its operations.
In contrast, the Group has a high risk appetite in relation to
economic and political instability; with decades of experience in
successfully managing operations in volatile markets, we have the
control procedures in place to handle the challenges that come
with those risks and we appreciate that without taking risks in
new, albeit sometimes unstable, territories we would miss out on
valuable opportunities for growth.
As an organisation we are risk aware, but not risk averse.
We continually monitor and assess the risks facing the Group
and evaluate our ability to control them and mitigate their effects.
Focusing on our strategic objectives, we evaluate our risk appetite
and decisions to accept risk in a way that will ensure the on-going
financial health of the Group.
Viability Statement
In accordance with provision 31 of the UK Corporate Governance
Code 2018, the Board has assessed the viability of the Group
over a three-year period, taking into account the Group’s current
financial position, business strategy, the Board’s risk appetite and
the potential impacts of the principal risks outlined on pages 22 to
25 of the Strategic Report. Based on this assessment, the Board
confirms that it has a reasonable expectation that the Company will
be able to continue in operation and meet its liabilities as they fall
due over the three-year period to 31st December 2022.
The Board believe that a three-year viability assessment period
is appropriate as the timeframe is covered by the Group’s rolling
forecasts; takes into account the nature of the Group’s principal
risks, a number of which are external and have the potential to
impact over short time periods; and is in alignment with the Group’s
bank term-loan durations. While the Board has no reason to believe
that the Group will not be viable over a longer period, given the
inherent uncertainty involved, the Board believe that a three-year
period presents readers of the Annual Report with a reasonable
degree of confidence while still providing a longer-term perspective.
In making their assessment, the Board completed a robust
assessment of the principal risks facing the Group, including
those that would threaten its business model, future performance,
solvency or liquidity, and undertook sensitivity and stress testing
to determine the potential impacts of the occurrence of one or
more of the principal risks on sales, profit, margin, balance sheet,
cash and return on capital employed. In addition to completing an
impact assessment of the principal risks, the Board considered the
probability of occurrence of the principal risks, the Company’s ability
to control them and the effectiveness of mitigating actions.
The Group’s resilient business model has proven strong and
defensive in the long term and has enabled the business to prosper,
even in challenging market conditions. The diversity of our end-user
markets and customers, broad product range, wide geographic
spread, high replacement revenue streams and large base of
installed equipment worldwide, together with our effective direct
sales business model, enhances the viability of the Group in the
face of adverse economic conditions and/or political uncertainty,
as does our ability to self-generate business through identifying
solutions to our customers’ difficult process challenges and our
ability to adjust our cost base.
Whilst no Board can ever fully foresee all possible risks facing
the business in the future, the Board is of the view that a robust
assessment was undertaken of the severe but plausible scenarios
that may feasibly impact upon the business over the next three
years. Furthermore, the Board remains confident in the Group’s
risk management process and the risk mitigation actions taken to
address identified risks.
Committee focus for 2020
• Implementation of plans for Brexit.
• Continue to progress disclosure on climate change
based on Taskforce on Climate-related Financial
Disclosures guidelines.
• Top-down risk review.
Nicholas Anderson
Chair of Risk Management Committee
Further reading
Risk management and principal risks
See pages 20-25
101
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration
Remuneration Committee Report
In 2019, Executive Director
compensation fully complied
with our Policy. We recommend
our 2020 Policy after helpful
input from shareholders.”
Jane Kingston
Chair of Remuneration Committee
102
Members
Our Remuneration Committee comprises:
Jane Kingston (Chair)
Peter France
Caroline Johnstone1
Trudy Schoolenberg2
Kevin Thompson3
No. of meetings attended/
total no. of meetings held*
5/5
5/5
3/3
4/5
3/3
Attendance
%
100%
100%
100%
80%
100%
* C.G. Watson attended three meetings prior to stepping down from the Board on
15th May 2019.
1 C.A. Johnstone appointed 5th March 2019.
2 G.E. Schoolenberg absence due to illness.
3 K.J. Thompson appointed 15th May 2019.
How the Committee spent its time
5%
20%
10%
10%
10%
10%
15%
2020 Remuneration Policy
Shareholder consultation
Bonus target setting
20%
Bonus achievement
Gender pay gap
Government proposals
PSP target setting
PSP achievement
Committee role and responsibilities
The Committee determines the philosophy, principles and policy
of Executive and Senior Manager remuneration having regard to
the latest legislation, corporate governance, best practices and
the FCA Listing Rules. The Committee takes account of workforce
remuneration and related policies and the alignment of incentives
and rewards with culture. The Committee’s role has expanded with
the introduction of the UK Corporate Governance Code 2018,
which applied in 2019. The Committee now reviews remuneration
policy and practices that apply to the Group Chief Executive,
Executive Directors, the Group Executive Committee and Senior
Managers. The main role of the Committee is to determine
Executive remuneration policies, how they are applied and set
targets for the short and long-term incentive schemes. It also
monitors compliance with the presiding Remuneration Policy.
Key Remuneration Committee activities 2019
Feb Mar
May
• Shareholder consultation
• Executive Director salaries
• Statement by Committee Chair
• Annual Report on
Remuneration 2018
• Annual Bonus – 2018 outcome
and 2019 targets
• PSP – 2016 outcome and
2019 targets
Oct
• Newly-appointed ETS* and
Watson-Marlow leaders’ salaries
• 2020 Remuneration Policy
• Executive pensions
• PSP – 2019 award
Dec
• Shareholder consultation
• 2020 Remuneration Policy
• Group Chief Executive pay
ratio reporting
• UK gender pay gap reporting
• 2020 Remuneration
recommendations for Executive
Directors and the Group
Executive Committee
* Electric Thermal Solutions
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Statement by Committee Chair
Dear shareholder,
On behalf of the Board, I am pleased to present our Remuneration
Report for 2019. I confirm that the implementation of Executive
Director remuneration complied fully with our Remuneration Policy
approved by shareholders at the AGM in May 2017, and the
Committee has not exercised any discretion in arriving at 2019
reward entitlements.
I would like to thank shareholders for the support they showed for
the Annual Report on Remuneration 2018 which received 94.66%
votes in favour at the AGM in May 2019.
2019 Performance-based rewards
The Chair’s Statement on pages 30 to 32, shows that the
Company made impressive progress in 2019. On an organic basis,
Group revenue increased by 6% and adjusted operating profit was
up 7% (contributing to adjusted earnings per share (EPS) growth of
57.5% (over three years) and a return on capital employed (ROCE)
of 54.5% as determined under Annual Incentive Plan (AIP) rules)).
The Company delivered a total shareholder return (TSR) of 99.9%
for the three years ending 31st December 2019 (as determined
under our Performance Share Plan (PSP)) placing us 5th in the
ranking of our TSR comparator group, and qualifying participants
for 100% vesting. An increase in the total dividend for the year
extends our dividend progress to 52 years.
We are pleased that the Group’s strong and consistent financial
performance has delivered results in line with external expectations
and our challenging internal goals and targets during a year in
which the Company has continued to integrate and invest in
Chromalox, Thermocoax and Gestra, as well as develop further our
core businesses (Steam Specialties and Watson-Marlow).
TSR performance growth
The graph below demonstrates the growth in value of a £100
investment in the Company compared to the FTSE 350 Industrial
Goods and Services Supersector from December 2009 to
December 2019.
This comparison is chosen as it is the supersector within which
the Company is classified and it is a broad equity market index
including companies of a similar size, complexity and sector.
We have also shown a comparison relative to the FTSE 100.
Our Remuneration Policy is designed to ensure that a significant
percentage of Executive Director pay is based on the achievement
of demanding performance targets and is, therefore, “at risk”.
Maximum payout in the AIP and PSP is only possible as a result of
significant strong performance by the business.
The Committee has undertaken a robust and full assessment of
performance during the year, taking into account both financial and
non-financial measures. Arising from this, payments to Executive
Directors under the AIP range from 84.6% to 123.9% of salary and
I am pleased to confirm 100% vesting for the 2017 PSP award.
The Committee considers that the remuneration paid to Executive
Directors in 2019 (given as a single figure for each Director on page
107) reflects the excellent progress made by the Company during
2019, as well as over the last three years. As part of the review in
2019, the Group Chief Executive volunteered to defer any bonus
earned above 125% of base salary into shares for a two-year
holding period.
2019 Executive remuneration review and
shareholder engagement
The Executive remuneration review and the accompanying
shareholder consultation were the most important matters
addressed by the Committee in the first half of 2019. I was most
grateful for the very high level of shareholder engagement (over
40 organisations provided us with constructive feedback). I would
like to thank them all for the advice and support that enabled us to
re-position all four Executive Directors’ remuneration arrangements.
Full details are set out in pages 107 to 109 of the 2018 Annual
Report and do not need to be reprised here. However, it is
important to stress that, as part of this review, the Committee made
a number of commitments to be formalised in the 2020 Policy. All of
those commitments have been fully met in the updated 2020 Policy
(see pages 122 to 132).
i
l
g
n
d
o
h
0
0
1
£
l
a
c
i
t
e
h
t
o
p
y
h
f
o
e
u
a
V
l
1000
800
600
400
200
0
£881
£308
£204
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Spirax-Sarco Engineering plc
FTSE 350 Industrial Goods and Services Supersector
FTSE 100
Source: DataStream
103
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report
5. Remuneration continued
Remuneration Committee Report continued
2020 Remuneration Policy revision and
shareholder engagement
Having successfully completed the Executive remuneration
review, in the second half of 2019 the Committee reviewed all
aspects of the current Policy to ensure it remains fit for purpose.
Overall the Policy, and how we apply it, continues to be in line with
our long-term business strategy, our culture and values. We also
reviewed the Policy in light of the 2018 Code requirements including
the five additional tests of simplicity, clarity, risk, predictability and
proportionality. The updates we propose incorporate the prior
shareholder commitments mentioned above, the 2018 Code and
good practice changes, and further strengthen the link between
pay and performance.
Performance measures
One of our shareholders did challenge the decision to favour a cash
measure over ROCE.
This change reflects our Group-wide objective of reducing working
capital retained in the business and is understandable and
actionable by the wider management team. We believe this makes
for strong internal alignment of action and purpose. The focus
on working capital by our wider management also contributes
significantly to strong ROCE performance.
Key changes
We are grateful for the comments and advice and, as a result, have
made certain consequential changes to our original proposals.
In recommending an updated Policy, and further to the changes
of the remuneration review, we are not proposing any increase to
remuneration quantum in any way, other than salary increases in
line with the workforce.
Shareholder engagement on the 2020
Policy update
Notwithstanding the significant engagement of 2018/2019, we
sought feedback on all of our proposals from our top shareholders
as well as the Investment Association/IVIS, ISS and Glass Lewis.
Many of our changes were well understood as a result of last year’s
engagement. They are summarised below:
Pensions
Pensions were obviously a hot and current topic for UK investors.
All those we spoke to welcome the new UK Executive Director
pension rate set at the level of the wider employee population
in the market in which the Executive Director is based (10%
being the current value in the UK). Whilst the Committee fully
appreciated that we needed a plan to align incumbents to this
rate, we wanted to achieve this in a measured way that would not
risk business continuity. We discussed openly the challenges of
dramatically reducing fixed pay for our Group Chief Executive and
other Executive Directors and undoing the work of last year by
widening an already significant gap given our performance, current
market cap and position in the FTSE 100. We have agreed that
the incumbent Executive Directors’ pension allowance should be
frozen and reduced, by 2022, to the current blended average for all
employees in the market in which the Executive Director is based
(17% in the UK). It remains our intention to reduce to 10% by the
end of the following Policy period (31st December 2025).
On page 105 I have detailed the plan approved by the Committee.
LTIP policy maximum
In order to future-proof our policy for as yet unforeseen events
we propose to increase the LTIP policy maximum from 200% to
250% of salary. During consultation we discussed this with a few
of our shareholders. We explained that there was absolutely no
intention to use this headroom given recent changes, but felt it was
a prudent change in case of future events such as management
succession. Our shareholders appeared comfortable with this,
given our strong record of consultation and transparency.
The key changes are as follows:
Salary increases
Salary increases will continue to be in line with the wider UK
workforce norm (absent a significant change in the scale of the
Group) (shareholder commitment*).
In-post shareholding requirement
Increased from 200% to 300% of base salary for the Group Chief
Executive and from 125% to 200% for other Executive Directors.
This change was implemented in 2019 and is now formalised in the
2020 Policy (shareholder commitment*).
Post-termination shareholding requirements
In line with the Code it is proposed that Executive Directors’
shareholding guidelines will apply for two years following stepping
down from the Board (shareholder commitment*).
Bonus deferral
Executive Directors who already hold shares in excess of the above
requirement will be required to calculate the net of tax amount of
any bonus they earn above 80% of the bonus opportunity and
increase the level of shareholding they have to hold for a further
two years. This can be through the purchase of additional shares
or the locking up of shares that are surplus to their shareholding
requirements. If an Executive Director does not meet the in-post
guidelines at the time a bonus is paid this calculation increases to
be any bonus earned in excess of 60% of the bonus opportunity
(shareholder commitment*).
Policy maximum
Following the changes made in 2019 there is no change to the
AIP maximum (150%). To allow flexibility for future events/how
the policy may be operated in future years, we are proposing to
increase the limit on annual grants under the PSP by 50% to 250%
of base salary. There is absolutely no current intention to use this
headroom and should unforeseen circumstances arise, we would
fully consult with shareholders and representative bodies before
that flexibility is used. We trust that our track record of transparent
consultation gives our shareholders confidence on this matter.
LTIP threshold vesting
The Policy is being changed to cement the approach in 2019 of
reducing from 25% to 18% the proportion of an LTIP award that
vests at threshold (shareholder commitment*).
* Commitment to shareholders as part of the 2019 remuneration review.
104
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Performance measures
The performance measures we currently use for the PSP will
remain unchanged. We intend to retain the same measures and
weightings for the AIP with the exception of the ROCE measure
being replaced by increasing the existing cash generation measure.
This change reflects our Group-wide objective of reducing
working capital retained in the business and is understandable
and actionable by the wider management team. We believe
this makes for strong internal alignment of action and purpose.
The focus on working capital by our wider management also
contributes significantly to strong ROCE performance. Both ROCE
and Return On Invested Capital are key performance indicators
for the business. The Committee will continue to assess ROCE
performance to ensure no unacceptable deterioration.
Pensions
In accordance with the 2018 Code, the Investment Association/
IVIS, ISS, Glass Lewis and our shareholders’ guidance, we will limit
the maximum pension contribution for new Executive Directors
to the level of the wider employee population in the market in
which the Executive Director is based. At present, all of our
Executive Directors are based in the UK. Here, we operate defined
benefit, defined contribution and cash allowance arrangements.
The blended average for all employees within the UK (where most
employees and the Executives are based) is 17% of base salary.
However, a newly appointed Executive Director would only be able
to receive defined contribution/cash allowance arrangements on
the same basis as the majority of newly appointed UK employees,
which is currently 10%.
Pension – Group Chief Executive and
incumbent Executive Directors
In 2019 our consultation with shareholders explained that our
Group Chief Executive’s pay and that of the other Executive
Directors had slipped materially behind the appropriate market
rates and we made some adjustments to address this shortfall.
We remain concerned about the gap that exists given our
increased market cap and position in the FTSE 100. Compared to
companies in our broad sector, our Group Chief Executive’s salary
remains circa 15% to 20% below the median, even after the 2019
changes. The differential to similarly-sized companies in the FTSE
51 to 100 is significantly greater.
The Committee felt it would be wrong to cut incumbent Executive
Directors’ fixed pay by 15% of salary to 10% by way of reduced
pension. This would create an even wider gap. However, the
Committee and the Executive Directors have agreed that pensions
will be frozen at the 2020 sterling rate and will reduce, by 2022, to
the current blended average in the market in which the Executive
Director is based (17% in the UK). It remains our intention to reduce
this to 10% by the end of the following Policy period, namely, 2025.
PSP
Awards granted after the 2020 AGM will only vest at the end of the
performance period and not earlier, even for good leavers, and the
Committee will be able to add dividend equivalents accrued during
the vesting period to those awards.
Inappropriate outcomes
In line with the provisions in the Code under the proposed updated
Policy, the Committee will be able to override formulaic outcomes
where they have led to inappropriate outcomes.
Recovery provisions
Recovery provisions will be toughened so that bonus and
PSP payments can be recovered in the event of corporate
failure or reputational damage (in addition to financial
misstatement, erroneous calculations determining payments and
gross misconduct).
Wider workforce environment
I am encouraged by management’s commitment to invest in
employees at all levels. The Committee receives information on
regional pay norms and budgets as context to the remuneration
decisions it approves for the Executive Directors, the wider Group
Executive Committee and Senior Managers.
2020 Salary reviews
In accordance with our prior commitments, with effect from
1st January 2020, a salary increase of 2.9% was awarded to the
Group Chief Executive, the Chief Financial Officer and Managing
Director, Steam Specialties. The country norm for 2020 was 2.9%
(UK).
Retirement
Jay Whalen, President, Watson-Marlow, retired on 31st December
2019. His replacement, Andrew Mines, will not serve as an
Executive Director. Jay is entitled, under the relevant scheme rules,
to receive any bonus payment due for the performance year 2019
and the 2017 LTIP award. The 2018 and 2019 LTIP awards will be
prorated in accordance with the PSP rules.
UK Corporate Governance Code 2018
We have revised our Terms of Reference to align with the
Committee’s change of scope under the 2018 Code.
I hope that this provides a useful overview of the activities and
decisions the Committee has taken during 2019.
Committee focus 2020
• Implementation and oversight of 2020 Policy.
• Consideration of an appropriate ESG measure for the AIP.
Jane Kingston
Chair of Remuneration Committee
10th March 2020
105
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Remuneration at a glance 2019
How we performed
Remuneration key performance indicator
Group operating profit (£m)
Group cash generation (£m)
Group ROCE (%)
2017-2019 EPS (%)
2017-2019 relative TSR (percentile TSR)
The above figures exclude the acquisition of Thermocoax.
2019
actual
277.3
296.4
54.5
57.5
94th
2019
threshold
256.7
270.7
50.1
27.6
50th
2019
target
270.3
285.0
52.7
N/A
N/A
2019
maximum
283.8
299.2
55.3
52.3
75th
Remuneration measure
Annual Incentive Plan
Annual Incentive Plan
Annual Incentive Plan
Performance Share Plan
Performance Share Plan
Executive Directors’ remuneration and shareholdings
The Executive team has consistently delivered upper quartile performance for shareholders and this is reflected in the results of both
the annual bonus and LTIP. The Committee is pleased with the work of the Executive team and is confident that this vesting outcome is
reflective of the value delivered to the business.
Executive Director
Single total remuneration figure (£/$000)
Shareholding policy vs actual shareholding (% of salary)
N.J. Anderson
Group Chief Executive
K.J. Boyd
Chief Financial Officer
N.H. Daws
Managing Director, Steam Specialties
J.L. Whalen1
President, Watson-Marlow
2019
2018
757
725
1,304
£2,788
2019
300
545
704
628
990
£2,324
2018
200
321
2019
492
322
708
£1,524
2019
200
204
2018
458
335
643
£1,438
2018
63
125
2019
481
348
642
£1,473
2019
200
926
2018
434 262
582
£1,280
2018
125
554
2019
$643
$455
$822
$1,920
2019
200
423
2018
$696
$445
$722
$1,863
2018
125
242
Fixed
Annual Bonus
LTIP
Shareholding policy
Actual shareholding
1 Retired from the Board on 31st December 2019.
Overview of the Executive Directors’ Remuneration Policy
Base salary
To enable the Group to
attract, retain and motivate
high-performing Executive
Directors of the calibre
required to meet the Group’s
strategic objectives.
Benefits
To provide market
competitive benefits, and to
enable the Executive Directors
to undertake their roles
through ensuring their well-
being and security.
Pension
To offer appropriate levels of
pension, and to attract and
retain individuals with the
personal attributes, skills and
experience required to deliver
Group strategy.
Performance Share Plan
(PSP)
To incentivise and reward
Executive Directors for
delivering against long-term
Group performance, to align
Executive Directors’ interests
to those of shareholders, and
to retain key Executive talent.
Annual bonus award
To incentivise and
reward performance
against selected KPIs
which are directly linked
to business strategy, while
ensuring a significant
proportion of Executive
Director remuneration is
directly linked to business
performance.
Changes at a glance 2019
Executive Directors
Nicholas Anderson
Kevin Boyd
Neil Daws
Jay Whalen
2019 Base salary % Change from 2018
7.7
7.7
5.0
3.0
£585,000
£380,500
£369,600
$498,623
Non-Executive Directors
Jamie Pike
Peter France
Caroline Johnstone
Jane Kingston1
Trudy Schoolenberg1,2
Kevin Thompson
1 From 15th May 2019.
2019 Fee % Change from 2018
2.9%
2.9%
N/A
2.9%
2.9%
N/A
£216,090
£51,760
£61,760
£61,760
£61,760
£61,760
2 The 2.9% increase applies to base fee. Chair and Senior Independent Director fees
were unchanged.
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5. Remuneration continued
Annual Report on Remuneration 2019
Strategic alignment
The Committee ensures that the remuneration paid to the Executive Directors, and the Group Executive Committee, is closely aligned with
and reinforces the Group strategy. At their meeting in June 2019 the Board reviewed the strategic plan.
This alignment is achieved by using the strategic plan to set financial and individual strategic objectives for the Executive Directors, and the
Group Executives, and, from this, bonus targets are agreed and approved by the Committee. This process forms part of the annual Board
calendar, with the bonus targets approved in the early part of the financial year. The Group’s strategic themes are set out on page 34.
1.0 Annual Report on Remuneration 2019
This section sets out the Directors’ remuneration for the financial year ended 31st December 2019.
1.1 Single total figure of remuneration (audited)
Salary/Fees
Benefits1
Annual bonus
PSP2
Pension
ESOP3
Total
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
Executive Directors
N.J. Anderson
£543,000
£585,000 £24,828
£26,115 £627,708 £724,851 £990,103 £1,304,135 £135,750 £146,250 £2,089
£1,900 £2,323,478
£2,788,251
K.J. Boyd
£353,300
£380,500 £16,184
£16,644 £335,282 £321,918 £642,778
£708,066
£88,325
£95,125 £2,026
£1,900 £1,437,895
£1,524,153
N.H. Daws4
£330,933
£369,600 £20,366
£19,128 £261,941 £348,126 £581,558
£642,201
£82,733
£92,400 £2,089
£1,900 £1,279,620
£1,473,355
J.L. Whalen5
$484,100
$498,623 $50,112
$48,707 $445,372 $455,237 $721,614
$822,274 $161,390
$96,056
N/A
N/A $1,862,588
$1,920,897
Chair and
Non-Executive Directors
J. Pike6
P. France
£154,534
£216,090
£41,401
£51,760
C.A. Johnstone7
N/A
£46,769
J.S. Kingston
£60,300
£61,760
G.E. Schoolenberg8 £50,300
£58,042
K.J. Thompson9
N/A
£39,115
C.G. Watson10
£66,595
£26,956
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
£154,534
£216,090
£41,401
£51,760
N/A
£46,769
£60,300
£61,760
£50,300
£58,042
N/A
£39,115
£66,595
£26,956
1
2
The 2019 Benefits are set out in the table on page 108.
The 2019 column relates to vesting of the 2017 PSP award valued at 8655.0p or $110.82 for J.L. Whalen. Value converted at the 2019 average dollar/sterling exchange rate of 1.2804. The 2018
column relates to vesting of the 2016 PSP award valued at 6825.0p or $90.9636 for J.L. Whalen. Value converted at the 2018 average dollar/sterling exchange rate of 1.3328.
3 Matching shares awarded during the year based on the mid-market price of the shares on the date of award: 7600.0p for 2019 and 6330.0p for 2018.
4
5
N. Daws’ 2018 remuneration is based on a combined salary of £330,933: £320,400 per annum for the period 1st January to 31st August 2018 in the role of Divisional Director, EMEA and £352,000
per annum for the period 1st September to 31st December 2018 following promotion to his current role of Managing Director, Steam Specialties.
Paid in US dollars. All elements of J.L. Whalen’s remuneration are shown in US dollars because he lives and works mostly in the USA. Furthermore, converting to sterling is misleading due to the
movement in exchange rates. Original dollar value. J.L. Whalen retired from the Board on 31st December 2019.
6 J. Pike appointed Chair on 15th May 2018.
7 C.A. Johnstone appointed to the Board on 5th March 2019 and as Chair of the newly established Employee Engagement Committee on 1st June 2019.
8 G.E. Schoolenberg appointed Senior Independent Director on 15th May 2019.
9 K.J. Thompson appointed to the Board and as Audit Committee Chair on 15th May 2019.
10 C.G. Watson appointed Senior Independent Director on 15th May 2018 and stepped down from the Board and Board Committees on 15th May 2019.
Salary/fees
The following table sets out the 2019 base salary with effect from 1st January 2019 for each of the Executive Directors, compared to 2018.
Executive Directors
N.J. Anderson
K.J. Boyd
N.H. Daws (refer to note 4 above)
J.L. Whalen
2018
£543,000
£353,300
£352,000
$484,100
2019
£585,000
£380,500
£369,600
$498,623
Increase
7.7%
7.7%
5.0%
3.0%
The 2019 base salary increases were implemented after significant shareholder consultation to partially address a substantial gap in
on-target remuneration versus pay levels in the Company’s peer group companies. For the purpose of assessing pay levels relative to
market, the Committee primarily considered practices in 15 peer companies (Bodycote, Cobham, Halma, IMI, Meggitt, Morgan Advanced
Materials, QinetiQ Group, Renishaw, Rotork, RPC Group, Senior, Smiths Group, Spectris, Ultra Electronics Holdings and Weir Group).
In 2019, Nicholas Anderson’s and Kevin Boyd’s salaries increased by 7.7%, Neil Daws’ salary increased by 5.0% and Jay Whalen’s salary
increased by 3.0%. Increases for the broader employee population were on average 2.9% in the UK and 3.0% in the USA, with above
average increases available for top performers in accordance with internal guidelines. The increases for Executive Directors, like those for
the broader UK employee population, took account of both individual performance and market data.
107
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Annual Report on Remuneration 2019 continued
The following table sets out the Policy fees for the Chair and Non-Executive Directors for 2019. Actual fees received, based on role and
date of appointment, are set out in the Single Total Figure of Remuneration table on page 107. Pay for the Chair and Non-Executive
Directors does not vary with performance. Fees for Non-Executive Directors are reviewed annually. The Chair and Non-Executive Directors
did not receive any taxable benefits.
Chair and
Non-Executive Directors
J. Pike
C.G. Watson1,2
G.E. Schoolenberg2
P. France
C.A. Johnstone3
J.S. Kingston3
K.J. Thompson3
Changes during 2019
Date
Stepped down
Appointed Senior Independent Director
15.05.19
15.05.19
Appointed
Appointed
05.03.19
15.05.19
Basic fees Additional fees
£216,090
N/A
£20,000
£51,760
£10,000
£51,760
£51,760
N/A
£10,000
£51,760
£10,000
£51,760
£10,000
£51,760
2019 Total fees
£216,090
£71,760
£61,760
£51,760
£61,760
£61,760
£61,760
1 C.G. Watson stepped down from the Board and Board Committees on 15th May 2019.
2 G.E. Schoolenberg appointed Senior Independent Director on 15th May 2019. In respect of their duties as Senior Independent Director, C.G. Watson received £3,718 prorated to 15th May 2019
and G.E. Schoolenberg received £6,282 prorated from 15th May 2019.
3 J.S. Kingston received £10,000 in respect of her role as Remuneration Committee Chair. C.G. Watson received £3,718 prorated to 15th May 2019 and K.J. Thompson received £6,282
prorated from 15th May 2019 in respect of their roles as Audit Committee Chair. C.A. Johnstone received £4,167 prorated from 1st August 2019 in respect of her role as Employee Engagement
Committee Chair.
The Chair and Non-Executive Director fees were reviewed at the end of 2018 and were increased by 2.9%, consistent with the
average rate of increase in the UK. The fee for the Senior Independent Director and Committee Chairs remained at £10,000, the
benchmarked median.
Benefits (excluding pension)
Benefits
Company car and associated running costs or cash
alternative allowance
Private health insurance
Telecommunications and computer equipment
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen1
£25,721
£394
–
£16,250
£394
–
£18,734
£394
–
$26,531
$19,508
$2,668
1
Paid in US dollars. All elements of J.L. Whalen’s remuneration are shown in US dollars because he lives and works mostly in the USA. Furthermore, converting to sterling is misleading due to the
movement in exchange rates.
Pension
Full details of the pension benefits are set out at section 1.2 on pages 114 to 115.
Annual bonus
Executive Directors participate in the annual bonus plan, which rewards them for financial performance both at Group level and, where
relevant, the business segment for which they are responsible. Targets are reviewed annually to ensure continuing alignment with strategy
and are agreed at the start of the year. Resulting awards are determined following the end of the financial year by the Committee, based on
performance against these targets.
For the Group Chief Executive, achievement of target performance results in a bonus of 90% of salary, increasing to 150% of salary
for maximum performance. For the other Executive Directors, achievement of target performance results in a bonus of 60% of salary,
increasing to 100% of salary for maximum performance.
Bonus payments are subject to a contractual right for the Company to clawback or apply malus for up to three years following payment.
Circumstances that may result in a clawback or malus include financial misstatement, erroneous calculations determining bonus payments
or gross misconduct.
108
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 In accordance with Policy, Executive Directors must use any bonus earned over 60% of base salary, or 90% of base salary for the Group
Chief Executive, net of tax, to buy shares until their shareholding guideline has been met. This is, in effect, a bonus deferral mechanism.
To demonstrate our commitment to this principle, prior to the introduction of our 2020 Policy, in 2019 our Group Chief Executive
volunteered that any bonus earned above 125% (his maximum bonus opportunity at that time) would be subject to this mechanism for a
two-year holding period.
The majority of each Executive Director’s bonus opportunity (90%) is based on the achievement of stretching financial performance
targets in areas that directly align with our areas of strategic focus. The remaining 10% is based on the achievement of individual strategic
objectives, tailored to each Director’s areas of responsibility. Performance standards are agreed and communicated at the start of the year.
Financial measures have an established threshold, target and maximum with a sliding scale between each. Individual strategic measures
are subject to three possible achievement levels: fully achieved, partially achieved and not achieved.
The table below sets out the performance measures that each of the Executive Directors’ bonus awards were subject to.
Achieved (% of bonus)
Executive Directors
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen
2019 Measures (% of bonus)
Group operating profit (70%)
Group cash generation (10%)
Group ROCE (10%)
Personal strategic objectives (10%)
Segmental operating profit (50%)
Group operating profit (20%)
Group cash generation (10%)
Group ROCE (10%)
Personal strategic objectives (10%)
N.J. Anderson
56.6%
9.2%
8.8%
8.0%
K.J. Boyd
56.6%
9.2%
8.8%
10.0%
N.H. Daws
J.L Whalen
50.0%
16.2%
9.2%
8.8%
10.0%
47.1%
16.2%
9.2%
8.8%
10.0%
The performance measures are adjusted to reflect certain items including the amortisation of acquisition-related intangible assets and
exceptional reorganisational costs and to exclude any profit contribution and other impacts such as major acquisitions during the period.
2019 was a good year for the Group, which delivered strong organic sales growth, grew earnings per share and increased dividend to
shareholders. The annual bonus payments to Executive Directors ranged between 84.6% and 123.9% of salary. The bonus is payable in
cash where the relevant Executive Director has met the share ownership requirement, otherwise any part of the bonus above target, net of
tax, must be used to buy shares until the shareholding requirement has been met.
The table below summarises the achieved performance in 2019 in respect of each of the measures used in the determination of annual
bonus, together with an indication of actual performance relative to target. (Figures exclude the acquisition of Thermocoax.)
Group operating profit
Group cash generation
Group ROCE
Steam Specialties operating profit
Watson-Marlow operating profit
Actual
performance1
£277.3m
£296.4m
54.5%
£177.9m
£99.9m
Achieved
(% of target)
102.6%
104.0%
103.4%
105.8%
104.3%
Threshold
£256.7m
£270.7m
50.1%
£159.8m
£91.0m
Target
£270.3m
£285.0m
52.7%
£168.2m
£95.8m
Maximum
£283.3m
£299.2m
55.3%
£176.6m
£100.5m
1
To comply with the annual bonus plan rules these metrics use, as a base, the actual adjusted operating profit of £282,733 for segmental operating profit performance, and exclude centrally allocated
overheads from both the target measure and actual performance.
Personal strategic objective assessment
The Executive Directors were each obliged to complete an appraisal self-assessment on their performance against each personal strategic
objective. The Group Chief Executive reviewed this self-assessment with the Executive Director and made his own assessment. In the
case of the Group Chief Executive, the Chair of the Board conducted the assessment. A report was submitted to the Committee and, at
its February 2020 meeting, the Committee reviewed the recommendations and approved a final decision.
The personal strategic objectives for 2019 are detailed on pages 110 to112.
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Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Annual Report on Remuneration 2019 continued
Personal strategic
objective 2019
Description
Achievement
Nicholas Anderson
Health, Safety and
Sustainability (HS&S)
Accelerate and embed a step change in the HS&S
performance of the Group, significantly improving the
HS&S awareness and culture. Enhance the Group’s
Sustainability programme.
Strategy
implementation
Materially progress the implementation of the Customer
First strategy, including the Spirax Sarco Academy, in
the Steam Specialties business.
Gestra
integration
Ensure successful implementation of the acquisition
plans, with particular emphasis on sales growth plans.
Chromalox
trading margin
Improve the profitability of the Chromalox business,
with resources from across the Group mobilised to
support initiatives.
Thermocoax
integration
Ensure successful implementation of the acquisition
integration plans.
Kevin Boyd
Health, Safety and
Sustainability (HS&S)
Accelerate and embed a step change in the HS&S
performance of the Group, significantly improving the
HS&S awareness and culture. Enhance the Group’s
Sustainability programme.
Information Technology
and Systems
Advance the Group’s global cybersecurity infrastructure,
processes and responsiveness. Support the Steam
Specialties’ development of a global Enterprise
Resource Planning (ERP), Customer Relationship
Management (CRM) and Business Intelligence (BI)
proposal.
110
The Group’s EHS performance improved in 2019, with both leading
and lagging indicators making progress on full year 2018 and 2017.
The number of “over three-day lost time injuries” was down 29% on
2018 and the number of “all accidents” was 7% below prior year.
The Group recorded 46,700 more training units in 2019 than in 2018.
The “all accidents” rate was 15% below 2018. There has been renewed
focus across the Group to increase the number of Sustainability projects,
particularly those engaging with local communities.
All elements of our Customer First strategy made good progress in 2019.
The most compelling evidence of a positive transformation in the Steam
Specialties business was the out-performance of real terms orders
growth vis-à-vis the historical correlation to global industrial production
growth rates, in addition to incremental pricing across the Group when
compared to pre-Customer First pricing levels. The above-average sales
growth rates achieved in our chosen industry sectors, end user channels
and self-generated solutions are further evidence of our successful
strategy implementation. On the Corporate strategy, in May 2019 we
acquired Thermocoax, which is being integrated with the Chromalox
business as planned.
The Gestra division achieved its overall integration objectives for 2019,
which included the opening of Gestra China in April 2019, the first
new Gestra operating company under our ownership; the successful
launch of the world’s most advanced line of industrial boiler controls; the
introduction of cross-selling initiatives; and trading margin improvements
through stronger pricing and manufacturing efficiency initiatives.
The three-year cumulative orders and sales performance is in line with the
acquisition case, while the trading profit is 7% ahead of target.
Multiple actions were put in place during 2019 to improve the profitability
of the Chromalox business. These included a new Enterprise Resource
Planning system in France; a comprehensive organisation review; and a
marked step-up in price management performance. In September 2019,
Dominique Mallet, Chief Executive Officer, Thermocoax, was promoted
to the role of President of the new Electric Thermal Solutions business.
In the second half of 2019, the trading margin increased to 15.1%,
40 bps above the 2018 trading margin. Despite achieving this trading
margin, the full year 2019 margin was lower than full year 2018 and,
therefore, this objective was not achieved.
The acquisition of Thermocoax was completed in May 2019 and the
Board-approved actions for on-boarding were rolled out. These included
on-site audits by the Group Head of EH&S; the signing of contracts for
a site consolidation in Normandy; and an integration visit to Cheltenham
by the Thermocoax leadership team. In October 2019, the merger
of Chromalox Germany GmbH with Thermocoax Isopad GmbH was
completed. In November 2019, Inès Hamon, previously Sales and
Marketing Director, was promoted to the role of Managing Director,
replacing Dominique Mallet.
The Group’s EHS performance improved in 2019, with both leading
and lagging indicators making progress on full year 2018 and 2017.
The number of “over three-day lost time injuries” was down 29% on
2018 and the number of “all accidents” was 7% below prior year.
The Group recorded 46,700 more training units in 2019 than in 2018.
The “all accidents” rate was 15% below 2018. There has been renewed
focus across the Group to increase the number of Sustainability projects,
particularly those engaging with local communities.
Proposal for global ERP, CRM and BI systems developed and
approved for the Steam Specialties business. Dedicated resources
to further strengthen cybersecurity in existing Group companies and
new acquisitions.
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Personal strategic
objective 2019
Description
Kevin Boyd continued
Achievement
Treasury
Taxation
External advisers
Neil Daws
Health, Safety and
Sustainability (HS&S)
Strategy
implementation
Customer service
Gestra development
Project OPAL
Sustainability
Develop and implement a new Group foreign
exchange hedging policy. Strengthen Group cash
flow management and reporting practices across
the Group’s operating companies. Appoint a
third bank and implement cash pooling in Europe
and the USA. Support mergers and acquisitions
funding requirements.
Continue the implementation of the new Group Tax
Strategy to improve the Group’s Effective Tax Rate in a
sustainable manner. Ensure progress on Base Erosion
and Profit Shifting, Anti-Tax Avoidance Directive,
financing company structure, transfer pricing review
and compliance tax register. Assess the cost/benefit of
expanding the Group’s in-house tax resource.
Ensure successful completion of Deloitte LLP’s audit
programme and transition of senior audit partner.
Conduct a review of the Group’s brokers and Investor
Relations (IR) resources, proposing a new way forward.
Ensure improved Health & Safety performance in
the Steam Specialties business, strengthening the
EH&S awareness and culture. Implement Behavioural
Based Safety (BBS) in all Supply companies
and continue the implementation of the Group’s
Sustainability programme.
Embed the Customer First strategy sponsorship
changes during the first quarter to maintain growth,
progress Customer Value Propositions roll-outs,
continue building the Spirax Sarco Academy belts and
the Consultative Selling programme. Initiate transition
of sales management to full leadership role in the
second half.
Improve global “on time to request” (OTTR) to a
specified target by December 2019. Reduce global
sales at risk (IQM zone 1) to less than 3.0% by
October 2019. Reduce the global Total Surplus Stock
(IQM zones 5 & 6 plus non-stock) to a maximum of
£10 million of total stock by December 2019.
Maintain progress of the integration plans.
Emphasise advancing Market Intelligence Committee
coordination, completing senior management
recruitments, start-up Gestra China, launch Gestra’s
new range of boiler controls, advance boiler house
controls upgrades and initiate cross-selling programme.
Ensure successful roll-out across the Nordics region
in 2019. Propose and ensure approval of a globally
expanded scope of project OPAL (see page 48).
Initiate review of Zero-Carbon Future to provide feed
into next Customer First strategic review cycle.
New foreign exchange hedging policy implemented, as well as improved
cash flow reporting. Enhanced functional capability on cash management
across all business units in the Group. Additional bank relationship
implemented and cash pooling arrangements now in place.
New Group tax function now in place and strategy developed and
approved by the Group Executive Committee. A large number of
transfer pricing reviews have been completed and a compliance tax
register established.
A full tender exercise of potential brokers was completed and two
appointments made. The 2019 internal audit schedule was completed
with regular reviews by the Group Executive Committee in order to further
improve the control environment. Completed a review of IR capability and
appointed a dedicated IR Officer.
Successful implementation of quarterly safety themes and the roll-out of
BBS. “Over three-day lost time injuries” fell 15%, “one to three-day lost
time injuries” fell 33% and “all accidents” fell 4%. Increased awareness
of “green” issues with new Group risk recognised and “Future of Steam”
strategy work initiated to plan future growth opportunities.
Market strategies delivering double-digit growth with an additional project
initiated to drive Gestra sales, five-year plan to grow our business through
stronger targeting, sectorisation, cross-selling Spirax Sarco and Hiter (our
Brazilian control valve business) products and deeper application training.
Spirax Sarco Academy Consultative Selling programme launched and
Sales Management module ready for pilot roll-out in the first quarter
of 2020. Strong improvement in the employee engagement survey
participation level to 84%.
Sales OTTR hit a new record of 93.3% against a plan of 93%. A stronger
progress in Steam Specialties Supply units ending the year at 91.2%
versus plan of 88%. The “sales at risk” metric declined by 20%, double
the 10% reduction planned. Total surplus stock fell to £9.6 million, 5.9%
year-on-year.
Gestra’s profit exceeded plan by 1.6%, keeping the three-year business
plan on track. Rebuilt management team to full strength, completing
most of the integration projects. Opened the Chinese operating company,
launched Gestra’s new range of boiler controls and progressed upgrades
to the new Spirax Sarco boiler house controls. Progressed Customer
First strategy to accelerate sector-led growth opportunities.
By year end, the vast majority of system testing of all configurations had
proven positive. Work commenced in August 2019 with roll-out planned
for October 2020.
A pilot will commence in the first quarter 2020 to prove customer needs
and incremental value. A strategic project is underway to ensure that
we stay abreast of customers’ requirements, which will be progressed
through 2020 in preparation for the strategic review cycle update in
2021. In parallel, we are increasing our customer carbon avoidance
data capture and researching potential for steam storage and hydrogen
fuelling of steam boilers.
111
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Annual Report on Remuneration 2019 continued
Personal strategic
objective 2019
Description
Achievement
Jay Whalen
Health, Safety and
Sustainability (HS&S)
AX deployment
Ensure improved Health & Safety performance of the
Watson-Marlow Division, strengthening the EH&S
awareness and culture. Support the implementation of
the Group’s Sustainability programme.
Ensure on time and on budget roll-out of the AX ERP
and BI system to Australia and New Zealand, Spain,
Aflex USA, Southeast Asia and South Africa.
In 2019 “over three-day lost time injuries” were down 25% and the “one
to three-day lost time injuries” were down 59%. Training units were up
98% in 2019.
ERP rolled in Australasia, Spain, Aflex USA, Singapore, Malaysia,
Philippines and South Africa. Completed on budget and on time.
New
product introduction
Ensure successful and timely launch of specific
innovative, new products.
Aflex
Territorial expansion
Successful execution of the Bradley Park single site
project. Secure a high-calibre replacement for the Aflex
Managing Director role.
Successful start-up of new sales companies in Iberia,
the Philippines and Colombia, as well as the successful
conversion to direct selling organisations of the Aflex
distributors in Ireland, Switzerland, Italy, Brazil, India,
Japan, South Africa and California, USA (Biopharm).
The personal strategic objective achievement levels are set out below.
New innovative pump head developed for 2020 launch for Qdos product.
Completed development of new Certa pump for Pharma sector and new
Flexicon product developed and ready for launch in 2020.
High-calibre Managing Director appointed to oversee transition to new
facility. Building project on plan and transition to start in 2020.
Iberia, the Philippines and Colombia commenced trading in the first half
of 2019. All distributor conversions were achieved as planned.
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen
Performance targets
Fully achieved
4
5
6
5
Partly achieved
0
0
0
0
Not achieved
1
0
0
0
As a result of this performance in 2019, the following bonuses were achieved:
Executive Directors
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen1
Bonus achieved
£724,851
£321,918
£348,126
$455,237
% of bonus
8%
10%
10%
10%
Bonus
(% of salary)
123.9%
84.6%
94.2%
91.3%
1
Paid in US dollars. All elements of J.L. Whalen’s remuneration are shown in US dollars because he lives and works mostly in the USA. Furthermore, converting to sterling is misleading due to the
movement in exchange rates. Original dollar value.
The following graph provides a six-year summary of bonus outcomes for the Group Chief Executive against the performance of adjusted
Group operating profit and ROCE. This illustrates the strong historical alignment between pay and performance.
54.5%
54.3%
52.9%
277.3
ROCE
264.9
235.5
Adjusted Group operating profit* (£m)
Actual bonus as a %
of CEO maximum opportunity
* Excludes the acquisition of Thermocoax.
47.9%
180.6
44.1%
44.3%
0
25
152.4
153.0
50
75
100
Actual bonus as a percentage of maximum opportunity
2019
2018
2017
2016
2015
2014
112
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Spirax Sarco Performance Share Plan (PSP)
The Committee makes an annual conditional award of shares to each Executive Director under the PSP. Prior to award, the Committee
reviews the performance targets for each measure to ensure they remain sufficiently stretching. For EPS this includes a review of
analysts’ forecasts.
PSP awards are subject to malus (reduction in the amount of deferred and as yet unpaid remuneration) and clawback (reimbursement
of remuneration that has already been paid) for up to three years following the award, and can be applied during a holding period.
Circumstances that may result in a clawback or malus adjustment include financial misstatement, erroneous calculations determining
bonus payments or gross misconduct.
Vesting is based on two performance conditions measured over a three-year period, which have been chosen as they are aligned with
our strategy:
Performance measure
EPS growth
Relative TSR
Weight
60%
40%
Threshold requirement
Global IP +2% pa1
Median TSR
Maximum requirement
Global IP +8% pa
Upper quartile TSR
1 The Global Industrial Production (IP) data source is the CHR Metals Global IP Index, providing data that incorporates over 90% of global industrial output.
For awards made in 2019 onwards, the Committee has reduced the value that can be earned for threshold performance from 25% of the
award to 18%. Vesting between threshold and maximum is calculated on a straight-line basis.
The EPS element of the PSP is based on growth in excess of global industrial production growth rates, often referred to in our industry
as “Global IP”, rather than UK RPI. Global IP is a measure that the Board and management have used for some time as there is well
documented evidence that it is the best predictor of the global and industrial markets within which the Group operates. For these reasons,
Global IP was used in the formulation of the long-term strategic plan and targets for EPS growth approved by the Board. In setting the
initial performance range in 2016, which was intended to be long-term in nature, the Committee reviewed the historical and projected data
(2007 to 2020), including the Group’s performance, market benchmarks and analysts’ consensus. The Committee remains confident that
this range remains sufficiently challenging across various market environments. Since 2018, EPS targets are also augmented to reflect the
EPS obtained through major acquisitions. EPS disposed through the divestment of operating companies reduces EPS targets.
The TSR element of the PSP assesses TSR performance relative to a comparator group of companies that comprises the constituents of
the FTSE 350 Industrial Goods and Services Supersector at the start of the performance period. This is the same sector classification as
Spirax Sarco, and was selected as it objectively provides a sufficiently robust number of companies to compare performance against, that
also operate in the industrial goods and services arena. While the exact number of companies varies from year-to-year, the comparator
group generally has between 50 and 60 companies.
PSP awards vesting over 2017-2019
In 2017 the Executive Directors received share awards under the PSP, with vesting subject to EPS growth and relative TSR performance.
The following diagrams set out details of the performance measures and targets that applied, along with the actual performance during the
period 1st January 2017 to 31st December 2019.
Relative TSR performance (40% of PSP award)
Over the three-year period to 31st December 2019, the Company delivered a TSR of 99.9%. This ranked in the top decile TSR of the
comparator group significantly above the level required for full vesting. The comparator group, comprising 50 companies, for the purpose
of measuring relative TSR performance was the FTSE 350 Industrial Goods and Services Supersector constituents at the start of the
performance period.
100%
75%
50%
25%
0%
g
n
i
t
s
e
v
R
S
T
o
t
j
t
c
e
b
u
s
s
e
r
a
h
S
0%
25%
50%
TSR performance*
75%
100%
Threshold
Maximum
Actual
Target
Median TSR
Upper quartile TSR or above
TSR Vesting
25%
24.8%
52.7% 100%
99.9% 100%
* Vesting is calculated based on Spirax Sarco’s TSR relative to the median and upper quartile TSR of the peer group.
113
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report
5. Remuneration continued
Annual Report on Remuneration 2019 continued
EPS growth (60% of PSP award)
Over the three-year period to 31st December 2019, the Company delivered adjusted EPS growth of 57.5%. This equated to growth of
approximately 16.3% per annum over the three years. EPS is derived from the audited Annual Report for the relevant financial year but
adjusted to exclude the items shown separately on the face of the Consolidated Income Statement. EPS is based on growth in excess of
Global IP growth rates and augmented following the acquisitions of Gestra and Chromalox (see page 113).
100%
75%
50%
25%
0%
g
n
i
t
s
e
v
S
P
E
o
t
j
t
c
e
b
u
s
s
e
r
a
h
S
10%
20%
30%
40%
50%
60%
Point-to-point EPS growth
Threshold
Maximum
Actual
Performance (over 3 years)
27.6%
52.3%
57.5%
Vesting
25.0%
100.0%
100.0%
Actual EPS growth*
Maximum target:
57.5%
31.4%
20.9%
Threshold target:
11.0%
16.6%
Growth on 2016 EPS base
Target adjustments for acquisitions
* Excludes the contribution of HygroMatik, which was sold in 2018, from the 2016 base.
As a result of the very strong Company performance, as measured by relative TSR and EPS growth, 100% of the shares awarded under
the 2017 PSP vested. The Committee considers that this result reflects holistic performance and a very positive return for shareholders.
Executive Directors
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen
Award
15,068
8,181
7,420
7,420
Vested
15,068
8,181
7,420
7,420
Lapsed
0
0
0
0
Value on vesting1
£1,304,135
£708,066
£642,201
$822,274
1 Based on share price at date of vesting, 5th March 2020 (8655.0p or $110.82 for J.L. Whalen). Value converted at the 2019 average dollar/sterling exchange rate of 1.2804.
1.2 Pension (audited)
In lieu of pension benefits, Nicholas Anderson and Kevin Boyd receive 25% of their basic salary in cash which, in the year ended
31st December 2019, amounted to £146,250 and £95,125 respectively.
Neil Daws became a deferred member of an HMRC registered, contributory defined benefit scheme, the Spirax-Sarco Executives’
Retirement Benefits Scheme, with effect from 31st December 2012, and is, therefore, no longer accruing any pension benefits within the
defined benefit scheme. His defined benefit rights in the Scheme at 31st December 2019 were £5,242,000 and his normal retirement
date is 1st January 2025 (age 62½). In lieu of pension benefits, he receives 25% of his basic salary in cash which, in the year ended
31st December 2019, amounted to £92,400.
Jay Whalen retired from the Company on 31st December 2019. He became a deferred member of the Spirax Sarco Inc. defined benefit
plan on 31st December 2018 when the plan was frozen and closed to all future service and accruals.
The benefit paid under normal retirement from the US defined benefit plan is a single life annuity equal to the number of years of service
multiplied by the sum of 1.0% of pensionable salary up to social security covered compensation, plus 1.45% of pensionable salary in
excess of social security covered compensation. Final average salary is the average of the highest pensionable pay for any five consecutive
years prior to retirement up to a ceiling. Jay Whalen’s final average salary is higher than the salary ceiling as at 31st December 2018.
Additionally, Jay Whalen benefited from Company contributions to a personal plan (choice of a personal US defined contribution pension
plan or cash in lieu of pension benefits) and to a 401k plan. The total amount contributed by the Group was $95,056.
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019
Jay Whalen’s defined benefit plan arrangements are as follows:
Executive Director
J.L. Whalen
Age attained at
31.12.19
63
Accrued pension
at 31.12.18
$95,830
Accrued pension
at 31.12.19
$95,830
Change in
accrued pension
during the year
–
Change in
accrued pension
during the year
–
On 31st December 2018 the plan was frozen and closed to all future service and accruals.
Jay Whalen retired from the Company on 31st December 2019.
Change in the
value of accrued
pension over the
year net of inflation
and Director’s own
contributions
–
1.3 Scheme interests awarded during the financial year (audited)
Spirax Sarco Performance Share Plan (PSP)
All awards were granted under the PSP as a contingent right to receive shares, with the face value calculated as a percentage (200%
for the Group Chief Executive and 175% for the Executive Directors) of base salary, using the share price at date of award (8161.3p).
Awards were made on 15th May 2019.
Executive Director
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen1,2
PSP award
14,335 shares
8,158 shares
7,925 shares
7,925 shares
Face value
£1,169,922
£665,799
£646,783
$828,141
Last day of the
performance
period
31.12.21
31.12.21
31.12.21
31.12.19
Vesting at
threshold
performance
18%
18%
18%
18%
1 Value converted at the 2019 average dollar/sterling exchange rate of 1.2804.
2 The performance period for J.L. Whalen’s award ended on 31st December 2019, his date of retirement. Therefore, the award has been reduced by two thirds (to 2,641 shares) to reflect the
shortened performance period of one year.
For awards made in 2019, vesting is based on two performance conditions measured over a three-year period, which have been chosen
as they are aligned with our strategy. In addition to the three-year vesting period, a two-year holding period applies. These performance
conditions are explained further on page 113.
Spirax-Sarco Engineering plc Employee Share Ownership Plan (ESOP)
Executive Directors (excluding Jay Whalen who is a US citizen) are eligible to participate in an HMRC approved Share Incentive Plan known
as the ESOP. Nicholas Anderson, Kevin Boyd and Neil Daws are participants.
During the year ended 31st December 2019: Nicholas Anderson, Kevin Boyd and Neil Daws each purchased 25 partnership shares, were
each awarded 25 matching shares and received seven, one and 12 dividend shares respectively. Further information is set out in the table
on page 117.
The maximum annual investment in shares is £1,800 (the HMRC limit) for Executive Directors (and eligible UK employees). This can be
matched by the Company on a one-for-one basis for each share that is purchased. Dividends paid can be reinvested as shares.
Shares acquired under the ESOP are not subject to performance measures as the aim of the ESOP is to encourage increased
shareholding in the Company by all eligible UK employees. In 2019, 76.6% of eligible UK employees purchased partnership shares and
were awarded matching shares under the ESOP.
115
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Annual Report on Remuneration 2019 continued
1.4 Payments to past Directors (audited)
There were no payments to former Directors during the year ended 31st December 2019.
1.5 Payments for loss of office (audited)
There were no payments made to Directors for loss of office during the year ended 31st December 2019.
1.6 Statement of Directors’ shareholding and share interests (audited)
Progress towards share ownership guideline
In January 2019, the Executive Directors’ share ownership guidelines were increased from 200% to 300% of base salary for the Group
Chief Executive and from 125% to 200% of base salary for the other Executive Directors. These increased guidelines are included in our
2020 Policy.
The share ownership guidelines have been met by all Executive Directors, as illustrated in the chart below. The value of the shareholding is
taken at 31st December 2019 as a percentage of 2019 base salary. The share price on 31st December 2019 was 8890.0p.
EDs’ May 2025
target
200%
CEO May 2025
target
300%
N.J. Anderson1
545.2%
K.J. Boyd2
204.3%
N.H. Daws2
J.L. Whalen2
422.6%
926.5%
0
75
150
225
300
375
450
525
600
675
750
825
900
975
Group FD May 2021
and other EDs target
Share ownership (% of salary)
1 Target increased from 200% to 300% of base salary, with effect from January 2019 (to be formally adopted in our 2020 Policy).
2 Target increased from 125% to 200% of base salary, with effect from January 2019 (to be formally adopted in our 2020 Policy).
Outstanding share interests
The following table summarises the total interests of the Directors in shares of the Company as at 31st December 2019. These cover
beneficial and conditional interests. No Director had any dealing in the shares of the Company between 31st December 2019 and
10th March 2020.
J. Pike
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen5
P. France
C.A. Johnstone6
J.S. Kingston
G.E. Schoolenberg
K.J. Thompson
C.G. Watson7
Beneficial1
8,646
35,191
8,631
37,441
18,511
980
0
2,580
2,754
2,500
2,446
PSP awards2, 5
N/A
44,052
24,281
22,548
22,548
N/A
N/A
N/A
N/A
N/A
N/A
PSP nil-cost
options3
N/A
0
0
3,995
0
N/A
N/A
N/A
N/A
N/A
N/A
ESOP shares4
N/A
683
115
1,080
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total 31.12.19
(or date of
retirement
if earlier5)
8,646
79,926
33,027
65,064
41,059
980
0
2,580
2,754
2,500
2,446
Total
10.03.20
8,646
79,926
33,027
65,064
–
980
0
2,580
2,754
2,500
–
1 Shares include any owned by connected persons.
2 Subject to the performance measures as set out on pages 113 to 114.
3 Explained in table overleaf.
4 Not subject to performance measures.
5 J.L. Whalen retired from the Board on 31st December 2019 and his 2018 and 2019 PSP awards have been reduced to reflect the interim TSR and EPS performance updates and the shortened
performance periods set out below.
2018 award: 7,203 shares, TSR = 100%, EPS = 86.3%, two year performance period = 4,407 shares vested;
2019 award: 7,925 shares, TSR = 100%, EPS = 63.1%, one year performance period = 2,056 shares vested.
6 C.A. Johnstone has indicated a firm intention to purchase shares.
7 C.G. Watson stepped down from the Board on 15th May 2019.
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019
Spirax-Sarco Engineering plc Share Option Schemes (Option Schemes)
No Directors had interests under the Option Schemes.
Spirax Sarco Performance Share Plan (PSP)
The interests of Executive Directors in the PSP are set out below.
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen5
05/11.04.161
14,507
9,418
8,521
7,933
Date of award
26.05.172
15,068
8,181
7,420
7,420
04.04.183, 5
14,649
7,942
7,203
7,203
Balance
01.01.19
44,224
25,541
23,144
22,556
Vested
04.03.191
14,507
9,418
8,521
7,933
Lapsed
04.03.191
0
0
0
0
Awarded
15.05.194, 5
14,335
8,158
7,925
7,925
Balance
31.12.19
44,052
24,281
22,548
22,548
1
2
The mid-market prices of the shares on 5th April 2016 (N.J. Anderson, N.H. Daws and J.L. Whalen) and 11th April 2016 (K.J. Boyd) were 3550.0p and 3557.0p respectively. 100% of the PSP
award vested on 4th March 2019 as the performance measures applicable were fully met. During the performance period 1st January 2016 to 31st December 2018, the TSR and the EPS
performance of the Company resulted in 100% vesting of this element. The mid-market price of the shares on 4th March 2019 was 6825.0p. The 2016 awards vested in the form of whole shares.
The average mid-market price of the shares from 19th May to 25th May 2017 inclusive was 5256.0p. This was applied in determining the number of shares subject to the PSP awards granted on
26th May 2017. The period over which performance measures are measured is 1st January 2017 to 31st December 2019. Details of the performance measures attached to these PSP awards are
set out on pages 113 to 114.
3 The mid-market price of the shares on 4th April 2018 was 5560.0p. The period over which performance measures are measured is 1st January 2018 to 31st December 2020. There are two
performance measures governing vesting of this PSP award: 40% of the PSP award is subject to a TSR performance measure which requires the Company to rank at median relative to a
comparator group of the constituents of the FTSE 350 Industrial Goods and Services Supersector for 25% of this portion of the PSP award to vest, increasing to full vesting for ranking at the upper
quartile; 60% of the PSP award is subject to an EPS performance measure which requires growth of Global IP +2% per annum for 25% of this portion of the PSP award to vest, increasing to full
vesting for growth of Global IP +8% per annum. A two-year post-vesting holding period applies to these awards.
4
The average mid-market price of the shares from 9th May to 14th May 2019 was 8161.3p. This was applied in determining the number of shares subject to the PSP awards granted on 15th May
2019. The period over which performance measures are measured is 1st January 2019 to 31st December 2021. Details of the performance measures attached to these PSP awards are set out on
page 113. A two-year post-vesting holding period applies to these awards.
5 J.L. Whalen retired from the Board on 31st December 2019 and his 2018 and 2019 PSP awards have been reduced to reflect the interim TSR and EPS performance updates and the shortened
performance periods set out below.
2018 award: 7,203 shares, TSR = 100%, EPS = 86.3%, two year performance period = 4,407 shares vested;
2019 award: 7,925 shares, TSR = 100%, EPS = 63.1%, one year performance period = 2,056 shares vested.
As noted in previous years, the 2010 and 2011 awards that vested in 2013 and 2014 respectively took the form of nil-cost options.
The following table summarises the outstanding options.
N.H. Daws
N.H. Daws
Balance at
01.01.19
12,740
3,995
Vested
05.03.13
12,740
–
Exercised
24.04.19
12,740
–
Balance at
31.12.19
0
3,995
Spirax-Sarco Engineering plc Employee Share Ownership Plan (ESOP)
The interests of eligible Executive Directors are set out below.
N.J. Anderson
K.J. Boyd
N.H. Daws
Balance
01.01.19
626
64
1,018
Partnership shares
purchased1
25
25
25
Matching shares
awarded1
25
25
25
Dividend
shares2
7
1
12
Balance
31.12.19
683
115
1,080
Period of qualifying
conditions3
3 years
3 years
3 years
1
2
3
Partnership shares were purchased, at a price of 7240.0p, and matching shares were awarded on 9th October 2019. The mid-market price of the shares on that date was 7600.0p.
13 dividend shares were received on 24th May 2019, on which date the mid-market price of the shares was 8870.0p. Seven dividend shares were received on 8th November 2019, on which date
the mid-market price of the shares was 8440.0p.
Partnership shares are not subject to qualifying conditions. No matching shares or dividend shares were released from the ESOP or forfeited during the year ended 31st December 2019.
1.7 Directors’ service agreements and letters of appointment
Chair and Non-Executive Directors
The Chair and Non-Executive Directors have letters of appointment with the Company for a period of three years, subject to annual
re-election at the AGM. Appointments may be terminated by the Company or individual with one month’s notice. The appointment letters
for the Chair and Non-Executive Directors provide that no compensation is payable on termination, other than accrued fees and expenses.
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5. Remuneration continued
Annual Report on Remuneration 2019 continued
Directors’ terms of service
The table below sets out the dates on which each Director was initially appointed, their latest service agreement or letter of appointment
and their notice period. All Directors are subject to election or re-election (as the case may be) at the AGM.
Executive Directors
N.J. Anderson
K.J. Boyd
N.H. Daws
J.L. Whalen
Chair and Non-Executive Directors
J. Pike
P. France
C.A. Johnstone
J.S. Kingston
G.E. Schoolenberg
K.J. Thompson
Original
appointment date
15.03.12
11.05.16
01.06.03
15.03.12
Current agreement/
appointment/
re-appointment letter1
13.12.13
26.10.15
25.09.12
17.04.12
01.05.14
06.03.18
05.03.19
01.09.16
01.08.12
15.05.19
15.05.18
05.03.18
27.02.19
05.08.19
12.07.18
15.05.19
Expiry
date
N/A
N/A
N/A
31.12.19
14.05.21
05.03.21
04.03.22
31.08.22
31.07.21
14.05.22
Notice
period
12 months
12 months
12 months
12 months
1 month
1 month
1 month
1 month
1 month
1 month
1 All letters of appointment and service agreements are available for inspection at the Group’s headquarters in Cheltenham.
1.8 External Directorships
Kevin Boyd served as a Non-Executive Director and Audit Committee Chair at EMIS Group plc during 2019, for which he received and
retained total fees of £46,708.
1.9 TSR performance graph
This graph demonstrates the growth in value of a £100 investment in the Company compared to the FTSE 350 Industrial Goods and
Services Supersector from December 2009 to December 2019. This comparison is chosen as it is the supersector within which the
Company is classified and it is a broad equity market index including companies of a similar size, complexity and sector.
i
l
g
n
d
o
h
0
0
1
£
l
a
c
i
t
e
h
t
o
p
y
h
f
o
e
u
a
V
l
1000
800
600
400
200
0
£881
£308
Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Spirax-Sarco Engineering plc
FTSE 350 Industrial Goods and Services Supersector
Source: DataStream
The graph in the Statement by Committee Chair on page 103 also includes a comparison to the FTSE 100 and shows a similar level of
out-performance.
The table below shows the historic levels of the Group Chief Executive’s pay (single figure of total remuneration) and annual variable and
PSP awards as a percentage of maximum.
2019
2018
2017
2016
2015
2014 (N.J. Anderson appointed Group Chief Executive in January 2014)
2013
2012
2011
2010
Single figure of
annual remuneration
£2,788,251
£2,323,478
£2,172,620
£1,610,891
£1,191,137
£1,000,115
£1,593,150
£1,402,668
£1,516,798
£1,720,765
Annual variable pay
as % of maximum
82.60%
92.48%
100.00%
99.20%
61.39%
55.76%
95.24%
31.69%
80.08%
100.00%
Vested PSP awards
value as % of maximum
100.00%
100.00%
100.00%
40.00%
80.33%
33.06%
29.93%
74.60%
100.00%
100.00%
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019
Group Chief Executive pay ratio
The table below details the ratio of the Group Chief Executive’s single figure of total remuneration to the median, 25th and 75th percentile
total remuneration of the Group’s full-time equivalent UK employees.
Financial year
2019
Method*
Option B
25th percentile
pay ratio
110:1
50th median
pay ratio
74:1
* Option B has been chosen for these calculations. The data used is consistent with that collected to inform the Group’s UK gender pay gap report.
Single figure total
remuneration
Salary
Benefits
Bonus
PSP
Pension
ESOP
Total pay
CEO
£585,000
£26,115
£724,851
£1,304,135
£146,250
£1,900
£2,788,251
25th
(lower quartile)
£24,414
–
–
–
£977
–
£25,391
50th
(median)
£32,773
£397
£728
–
£2,622
£983
£37,503
75th percentile
pay ratio
46:1
75th
(upper quartile)
£45,000
£8,733
£1,035
–
£4,500
£1,350
£60,618
The reward policies and practices for our workforce as a whole follow those set for the Executive Directors, including the Group
Chief Executive, as detailed on page 107. The Committee has responsibility for setting and making any changes in remuneration for
the senior management. This includes the reviewing of policies and practices for our workforce and consideration of shareholders’
and other stakeholders’ views as part of designing the Remuneration Policy and its operation for the Executive Directors. On this
basis, the Committee is satisfied that the median pay ratio is consistent with the pay, reward and progression policies across the
Company’s employees.
The Committee will review any changes in the ratio over the forthcoming year and will provide an analysis of any changes in the 2020
Annual Report.
1.10 Percentage change in remuneration of the Group Chief Executive
The following table provides a summary of the 2019 increase in base salary, benefits and bonus for the Group Chief Executive
compared to the average increase for the general UK employee population across the Group in the same period.
Salary
Benefits
Bonus
Group Chief Executive
General employee population
Group Chief Executive
General employee population
Group Chief Executive
General employee population*
2019 change
7.7%
2.9%
5.2%
2.9%
15.5%
22.2%
2018 change
2.7%
2.7%
3.2%
2.7%
-4.9%
1.6%
* 2018 percentage restated to include all UK bonuses for the general UK employee population across the Group.
UK gender pay gap
A detailed narrative relating to the UK gender pay gap can be found on our website, www.spiraxsarcoengineering.com.
1.11 Relative importance of spend on pay
The table below demonstrates the relative importance of total pay spend relative to total employee numbers, profit before tax (selected as
the best measure of efficiency) and dividends payable in respect of the year.
Total pay spend
Group average headcount
Adjusted profit before tax
Dividends payable
2019
£438.7m
7,833
£274.5m
£81.1m
2018
£403.9m
7,403
£254.6m
£73.6m
Change
8.6%
5.8%
7.8%
10.2%
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Annual Report on Remuneration 2019 continued
1.12 Changes for 2020
Shareholder consultation
As part of our Policy review, we again consulted with leading shareholders and their representative bodies to seek to understand their
views. As a result of the commitments made last year, and the feedback from the consultation, a number of changes are being made.
These changes are set out on pages 120 to 121 and explained in the Remuneration Committee Chair’s Statement on pages 103 to 105.
Changes to Policy and/or how it will be operated
Shareholding guidelines (in-post and post-termination)
Bonus deferral
PSP threshold vesting level
Pension alignment for future Directors
Pension alignment for current Directors
PSP vesting delay for “good leavers”
PSP policy maximum
Discretion to override formulaic outcomes for incentives
Enhanced malus/clawback
Allowing minor changes to the Policy in the next three years
Changes committed to in 2019
Change made to provide additional flexibility and to comply with
the UK Corporate Governance Code and investor expectations
2020 Salaries
The Committee reviewed salary levels and agreed that Executive Directors should receive an increase of 2.9% in line with the wider UK
workforce increase from 1st January 2020.
2020 Annual bonus
The same opportunity, performance measures and weighting apply in 2020 as was the case in 2019, except that ROCE will be replaced
by increasing the existing cash generation measure. This change reflects our Group-wide objective of reducing working capital retained in
the business and is understandable and actionable by the wider management team. We believe this makes for strong internal alignment
of action and purpose and simplifies the bonus plan. The focus on working capital by our wider management also contributes significantly
to strong ROCE performance. Both ROCE and Return on Invested Capital are important performance indicators for the business. As part
of its overall assessment of whether the formulaic outcome of the bonus calculation is representative of the performance delivered, the
Committee will assess the quality of ROCE achieved in the year. If it is not satisfied with the performance, then the Committee is able to
reduce the level of bonus for the year. These measures continue to align with our strategic focus to deliver growth that outperforms our
markets, by improving on what we already do well. As in previous years, the specific targets associated with each measure that were
approved in February 2020 are not disclosed in this Report as they are considered by the Board to be commercially sensitive. The targets
will be retrospectively reported in the Annual Report next year.
2020 PSP awards
The same award levels, performance measures and weights apply in 2020 as was the case in 2019. In February 2020, the Committee
approved the three-year EPS targets, which remain unchanged at Global IP +2% per annum to Global IP +8% per annum. Having
reviewed our own forecasts, analysts’ expectations and performance expectations of our peers, we remain satisfied that to achieve growth
of Global IP +2% per annum to Global IP +8% per annum over the coming three years remains appropriately challenging and exceeds
market consensus. These targets are set out in the table on page 113. As promised, the PSP threshold vesting level was reduced from
25% to 18% from 2019 onwards.
Pensions
To comply with the UK Corporate Governance Code and UK institutional investors’ expectations, the Executive Directors requested that
the Committee lower their pension benefit, by 31st December 2022, to the current blended average for all employees in the market in
which the Executive Director is based (17% in the UK). The Committee accepted this request although is cognisant that this will materially
increase the extent to which the Executive Directors’ fixed pay lags the UK market. The intention is to reduce this to 10% by the end of the
following Policy period, 31st December 2025.
Annual bonus deferral
As of the 2020 annual bonus award, Executive Directors who already hold shares in excess of their in-post shareholding guideline will be
required to calculate the net of tax amount of any bonus they earn above 80% of their maximum bonus opportunity and increase the level
of shareholding they have to hold for a further two years. This can be through the purchase of additional shares, or by locking up shares
that are surplus to their shareholding requirements. If an Executive Director does not meet the in-post shareholding guideline at the time a
bonus is paid, the bonus deferred increases to be any bonus earned in excess of 60% of their maximum bonus opportunity.
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 In-post and post-termination shareholding requirements
The in-post shareholding requirement was increased in 2019 from 200% to 300% of base salary for the Group Chief Executive and from
125% to 200% for other Executive Directors. In line with the UK Corporate Governance Code, Executive Directors’ shareholding guidelines
will apply for the two years following stepping down from the Board. If the guideline has not been met by the time of departure then the
number of shares held at that time have to be retained for that two year period. The Committee does retain the discretion to relax these
guidelines if it feels the circumstances warrant it. To avoid creating a disincentive for Executive Directors to purchase shares from their own
resources, they are free to exclude any such shares purchased from counting towards meeting their shareholding requirement.
2020 Non-Executive Director fees
Effective from 1st January 2020, the Non-Executive Director basic fee was increased by 2.9%, which is in line with the average UK
employee salary increase of 2.9%. The Committee Chair and Senior Independent Director’s fees were unchanged.
1.13 Consideration by the Directors of matters relating to Directors’ remuneration
Operation of the Remuneration Committee in 2019
Membership and attendance
Each Committee member is an independent Non-Executive Director and thus brings independence to all aspects of Board remuneration
and the application of professional advice to matters relating to remuneration.
During 2019, the Committee was chaired by Jane Kingston and the members comprised: Trudy Schoolenberg, Peter France,
Caroline Johnstone (with effect from her appointment to the Board on 5th March 2019), Kevin Thompson (with effect from his appointment
to the Board on 15th May 2019) and Clive Watson (up to his stepping down from the Board on 15th May 2019).
In 2019, the Committee met five times. All members attended each meeting relative to their Committee membership, with the exception
of Trudy Schoolenberg who was unable to attend one meeting due to illness, but reviewed all the papers and provided her views to the
Committee Chair in advance. Caroline Johnstone, Kevin Thompson and Clive Watson each attended three meetings. On his appointment
to Chair of the Board in May 2018, Jamie Pike ceased being a formal member of the Committee, but continued to attend meetings at the
invitation of the Committee Chair. The Chair of the Board was independent on appointment and did not formally vote on matters approved
by the Committee.
Advisers to the Committee
During 2019, the Committee sought advice and information from Jamie Pike, the Chair; Nicholas Anderson, the Group Chief Executive;
and Jim Devine, the Group Human Resources Director. None of the invitees participated in any discussions regarding their own
remuneration or fees. The General Counsel and Company Secretary acts as Secretary to the Committee.
In addition, the Committee received external advice from Willis Towers Watson and Korn Ferry. Following a formal tendering process, Korn
Ferry replaced Willis Towers Watson during the year. These firms provided material advice to the Committee on various matters such as
Executive remuneration levels and structure, performance updates in respect of the PSP, the Remuneration Report and attendance at
Committee meetings. In 2019, on a time and materials basis, Willis Towers Watson’s fees in respect of these services totalled £76,203 and
Korn Ferry’s fees in respect of these services totalled £51,587. In addition, Korn Ferry work with management on other matters relating to
remuneration with the approval of the Committee. A separate advisory team within Willis Towers Watson provides support and advice to
management on pensions and insurance matters. The Committee is of the opinion that the advice received is objective and independent,
given that Korn Ferry are a signatory to the Remuneration Consultants Group Code of Conduct, the manner in which advice is delivered
and the separate teams that advise management more generally.
In 2019, Baker & McKenzie LLP provided legal advice to the Company (which was available to the Committee). Legal fees relate to advice
provided to the Company and not the Committee, and are charged on a time-cost basis.
1.14 Statement of voting at general meeting
At the AGM in 2017, shareholders approved the Remuneration Policy 2017 (mandatory) and at the AGM in 2019, shareholders approved
the Annual Report on Remuneration 2018 (advisory). The table below shows the results which required a simple majority (i.e. 50%) of the
votes cast to be in favour for the resolutions to be passed.
Remuneration Policy 2017 (2017 AGM)
Annual Report on Remuneration 2018 (2019 AGM)
Votes for
57,778,590
57,432,155
%
95.06
94.66
Votes against
3,005,646
3,243,057
% Votes withheld
278,674
276,582
4.9
5.3
This Annual Report on Remuneration 2019 has been approved by the Board of Directors of Spirax-Sarco Engineering plc and signed on
its behalf by:
Jane Kingston
Chair of Remuneration Committee
10th March 2020
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Remuneration Policy 2020
2.0 Remuneration Policy
The table below summarises the Remuneration Policy which will take effect, if approved, from the AGM to be held on 13th May 2020.
Purpose and link
to strategy
Element
Operation
Fixed elements of Executive Director remuneration
To enable the Group
Base salary
to attract, retain and
motivate high performing
Executive Directors
of the calibre required
to meet the Group’s
strategic objectives.
the role;
Reviewed annually by the
Committee, taking into account:
• scale, scope and complexity of
Reviews take into
account Company
and individual
performance.
• skills and experience of
the individual;
• wider workforce comparisons;
Performance
measures
Maximum potential value
Ordinarily, salary increases
will not exceed the average
increase awarded to other
Group employees from the
same country/region.
A salary increase may be
higher than the average
increase awarded to
employees in circumstances
such as (i) where a new
recruit or promoted Executive
Director’s salary has been set
lower than the market level
for such a role; (ii) where there
is a significant increase in the
size and responsibilities of the
Executive Director’s role; or (iii)
where the salary level has fallen
below the lower quartile level
against market benchmarks.
The maximum pension
contribution for new Executive
Directors will be the same
basis as the majority of newly
appointed employees receive
in the market in which the
Executive Director is based.
Incumbent Executive Directors’
maximum pension to be, by
31st December 2022, the
current blended average in the
market in which the Executive
Director is based (17% of
salary in the UK), reducing to
the new Executive Director
level by 2025.
No element other than base
salary is pensionable.
Pension
To offer appropriate levels
of pension and benefit.
To attract and retain
individuals with the
personal attributes, skills
and experience required to
deliver Group strategy.
and
• market benchmarking, within
defined external comparator
groups. The Committee uses
this information with caution,
given the limited number of
direct comparators and to avoid
remuneration inflation as a result
of benchmarking exercises with
no corresponding improvement
in performance.
The Committee considers
the impact of any base
salary increase on the total
remuneration package.
For eligible Executive Directors
who joined the UK Company
before 2001 the Company
provides a UK defined benefits
pension scheme (DB scheme) or
cash alternative allowance.
For UK nationals who joined the
UK Company after 2001 the
Company provides a defined
contribution pension arrangement
(DC plan) and/or contributions
to a private pension and/or a
cash allowance.
Executive Directors who have
transferred internally from
overseas may continue to
participate in home country
pension arrangements and/or
receive a cash allowance.
N/A
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to strategy
Element
Operation
Fixed elements of Executive Director remuneration
To provide market
Common
competitive benefits.
benefits
To enable the Executive
Directors to undertake their
roles through ensuring their
wellbeing and security.
The Company provides common
benefits including:
• Company car and associated
running costs or cash
alternative allowance;
• private health insurance;
telecommunications and
computer equipment;
Performance
measures
N/A
Maximum potential value
The aggregate maximum cash
cost of providing all common
benefits will not exceed 20% of
base salary.
Based on individual
circumstances and subject
to written agreement.
Maximum values will not
exceed the normal market
practice of companies of a
similar size and nature at the
time of relocation.
Mobility-related
benefits
To ensure that Executive
Directors who have
relocated nationally
or internationally are
compensated for
costs incurred.
N/A
• life assurance; and
• long-term disability insurance.
The Company will pay all
reasonable expenses and
applicable tax due for the
Executive Director and his/her
family to relocate on appointment
and for repatriation to the original
home country at the end of their
assignment and/or employment.
Executive Directors are personally
responsible for all taxes and social
charges incurred in the home and
host locations as a result of their
appointment. The Company will
pay for reasonable tax advice and
filing support in relation to work
related income for international
Executive Directors.
Executive Directors are
reimbursed under a Tax Treaty
Adjustment for any double tax
they might be liable for as a result
of being subject to home country
and host country taxation typically
for days worked in the home
location.
Executive Directors are not
entitled to tax equalisation.
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measures
Maximum potential value
150% of salary.
No more than 60% of the
bonus opportunity can be
earned for target performance
in any year.
Any measure can
be incorporated at
the Committee’s
discretion provided
it is clearly aligned to
the Group’s strategic
objectives. At least
70% of the bonus
opportunity will be
governed by financial
performance
measures.
5. Remuneration continued
Remuneration Policy 2020 continued
Purpose and link
to strategy
Element
Variable elements of Executive Director remuneration
Annual bonus
Operation
To incentivise and reward
performance against
selected KPIs which
are directly linked to
business strategy.
Measures, targets and their
relative weightings are reviewed
regularly by the Committee to
ensure continuing alignment with
strategic objectives and will be
detailed in the relevant Annual
Report on Remuneration.
Bonus is based largely or
entirely on the achievement
of challenging financial
performance measures, which
have been selected to ensure
the Company is focused on its
strategic objectives.
Bonus is delivered in cash.
However, Executive Directors
must use the net of tax
amount of any bonus they earn
above 80% of the maximum
opportunity to increase the level
of shareholding they have and
to hold for a further two years.
Where a Director has not met
their shareholding requirement,
the bonus deferred increases to
any bonus they earn above 60%
of the maximum opportunity.
Bonus is subject to clawback
and/or malus for up to three
years following payment.
Circumstances include financial
misstatement, erroneous
calculations determining bonus
payments, gross misconduct,
corporate failure and
reputational damage.
The Committee can adjust
some performance targets to
reflect certain non-operating
items and retains the ability
to adjust the amount of
a bonus if the formulaic
outcome is not reflective of the
business performance.
To recognise performance
through variable
remuneration and enable
the Company to flexibly
control its cost base
and react to events and
market circumstances.
To ensure a significant
proportion of Executive
Director remuneration
is directly linked to
business performance.
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to strategy
Element
Variable elements of Executive Director remuneration
Performance
Share Plan (PSP)
Operation
To incentivise and reward
Executive Directors for
delivery against long-term
Group performance.
To align Executive
Directors’ interests to
those of shareholders.
To drive sustainable
Company performance.
To retain key
executive talent.
The Committee makes
conditional awards of shares
to each Executive Director.
Annual participation is subject to
Committee approval.
Measures, targets and their
relative weightings are reviewed
regularly by the Committee to
ensure continuing alignment with
strategic objectives and will be
detailed in the relevant Annual
Report on Remuneration.
Performance is measured over
a three-year period, normally
starting at the beginning of the
financial year in which awards
are granted.
An additional two-year post-
vesting holding period will apply.
Awards can vest in the form
of shares, a nil-cost option or,
exceptionally, cash.
Share awards made from 2012
are subject to clawback and/
or malus for up to three years
following award. Circumstances
include financial misstatement,
erroneous calculations
determining bonus payments,
gross misconduct, corporate
failure and reputational damage.
PSP awards accrue dividends
between grant and vesting.
The Committee retains the ability
to adjust awards if the formulaic
outcome is not reflective of the
business performance.
The Committee will be able
to add dividend equivalents
accrued during a vesting period
to any award granted under
this policy.
Performance
measures
Maximum potential value
250% of the annual rate of
salary at the time of award.
Currently the maximum award
level is 200% of salary (for the
CEO). Any increase beyond
this level will only take place
following consultation with
leading shareholders.
Vesting is currently
based on two
performance
measures, which
have been chosen
as they are clearly
aligned with our
strategic objectives:
• TSR; and
• EPS growth.
To ensure continued
alignment with
the Company’s
strategic priorities,
the Committee may,
at its discretion,
vary the measures
and their weightings
for future grants
from time-to-
time including
the consideration
of financial and
non-financial
measures.
The Committee
reserves the right
to adjust targets,
for example for
the effects of
divestments or
major acquisitions,
to ensure that those
results are in line
with the principles
that supported the
targets when they
were originally set.
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measures
N/A
Maximum potential value
Executive Directors will be
subject to the same limitations
as all other participants.
N/A
N/A
5. Remuneration continued
Remuneration Policy 2020 continued
Purpose and link
to strategy
Operation
Element
Variable elements of Executive Director remuneration
To offer all eligible UK-
Employee Share
based employees the
Ownership Plan
opportunity to build a
(ESOP)
shareholding in a tax-
efficient way.
Eligible UK Executive Directors
are entitled to participate in an
HMRC approved Share Incentive
Plan known as the ESOP.
Whilst not currently operated,
if in the future employee share
plans are offered outside the
UK, or if alternative or additional
plans are operated within the
UK, eligible Executive Directors
will be entitled to participate
on the same basis as all other
eligible employees.
Awards granted under the ESOP
are not subject to clawback
or malus.
The ESOP operates over a five-
year period.
Executive Directors are required
to accumulate through retaining
at least half of the shares
acquired (after sales to meet
tax due) from PSP awards and
the investment of bonus, a
shareholding in the Company
worth a minimum of 200%
(300% for the CEO) of their
annual salary. Subject to the level
of PSP awards that vest and of
bonus invested, it is anticipated
that this will be achieved within
five years of appointment.
In addition, on departure as
an Executive Director, the
required shareholding (or level
of holding achieved by the date
of departure), normally has to
be retained for two years. If an
Executive Director purchases
shares from his/her own
resources then he/she can deem
those shares as not counting
towards the share ownership
guidelines and therefore also
the two year post-cessation
requirement. This retention
policy applies to all Executive
Directors not under notice at
the time the Policy is approved
by shareholders.
To align Executive
Director interests to
those of shareholders.
Other
Share ownership
guidelines
To provide alignment with
shareholder interests.
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to strategy
Element
Chair and Non-Executive Directors
Fees
To attract and retain high
calibre individuals, with
appropriate experience
or industry related skills,
by offering market
competitive fee levels.
Operation
Performance
measures
Maximum potential value
The aggregate value of
fees paid to the Chair and
Non-Executive Directors will
not exceed the amount set out
in the Articles of Association.
The Chair is paid a single fee for
all responsibilities.
N/A
The Non-Executive Directors
are paid a basic fee. The Chairs
of the main Board Committees,
the Senior Independent Director
and any individual with other
separate responsibilities are paid
an additional fee to reflect their
extra responsibilities.
Fees for the Chair and the
Non-Executive Directors are
reviewed annually by the Board,
with reference to any change in
the time commitment required,
UK market levels and the
average base salary increase
across the wider workforce.
The Chair and the
Non-Executive Directors do
not participate in any annual
bonus or incentive plans,
pension schemes, healthcare
arrangements, the Company’s
PSP or ESOP.
The Company repays the
reasonable expenses (including
any tax due thereon) that the
Chair and the Non-Executive
Directors incur in carrying out
their duties as Directors.
2.1 Notes to the Policy table
Changes to the Remuneration Policy
The main proposed changes to the Remuneration Policy are as follows:
• AIP award: introduce deferral of bonus;
• PSP award: increase potential maximum award from 200% of salary to 250% of salary (subject to shareholder consultation) and
dividend equivalents to apply;
• pensions: set the level of pension benefit for newly appointed Executive Directors to no higher than the level available to the workforce
and incumbent Directors to move, by 31st December 2022, to the current blended average for all employees in the market in which the
Executive Director is based (17% in the UK), reducing to the new Executive Director level by 2025;
• enhancement of the clawback/malus arrangements;
• share ownership requirements: increase guideline levels to 300% for the CEO and 200% for other Executive Directors and introduce
post-cessation shareholding requirements for the two-year period following an Executive Director’s departure; and
• permit minor changes to be made to the Policy without shareholder approval in a General Meeting.
Additional details and an explanation of the changes can be found in the Statement by Committee Chair on pages 104 to 105.
Outstanding incentive awards
Details of outstanding incentive awards granted to Executive Directors prior to the Policy coming into force, including awards granted in
2019, and details of the performance targets are set out on pages 108 to 114.
All incentive awards granted prior to this Policy coming into force will continue on their existing terms including the exercise of discretion to
amend such awards.
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Remuneration Policy 2020 continued
Remuneration policy for other employees
The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role, level
of experience, responsibility, individual performance and market pay levels. The most senior managers in the business (approximately
150 people globally) participate in bonus arrangements with similar targets, measures and relative weightings to the Executive Directors.
Target and maximum potential values are lower and determined by the grade of the manager’s role. Performance targets are based on an
appropriate combination of Group, divisional and local operating company financial measures, in addition to personal strategic objectives.
Contractual terms and benefits for the wider workforce are subject to local employment legislation and best practice.
Measure selection and the target setting process
Measures are selected taking into account the key strategic priorities of the Company, shareholder expectations and factors that sit within
an individual’s span of control.
Targets are set with reference to internal and external forecasts to ensure that they are realistic, yet sufficiently stretching. An appropriate
mix of long- and short-term targets will be used, informed by the nature of the measure.
The Committee may make minor amendments to the policy set out in this Policy Report (for regulatory, exchange control, tax or
administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment.
2.2 External directorships
Directors are permitted to hold external directorships in order to broaden their experience, to the benefit of the Company. Such
appointments are subject to approval by the Board and the Director may retain any fees paid in respect of such directorships. The Board
ensures compliance by Directors with Code provision B.3.
2.3 Approach to recruitment and promotion remuneration
When appointing external hires, promoting executives, or an Executive Director internally, the Committee will continue to act in the best
interests of shareholders when determining remuneration, in line with the stated policy. The main elements of the Remuneration Policy for
Executive Director appointments are:
• base salary will be set on appointment taking into account the factors set out in the Policy table, but also the individual’s experience.
Depending on an individual’s prior experience, the Committee may set salary below market norms, with the intention that it is realigned
over time, typically two to three years, subject to performance in the role;
• pension benefits will not exceed the rate applicable to the relevant country’s workforce, as determined by the Committee;
• mobility related benefits may include the payment of some or all of an individual’s tax on relocation expenses incurred within 12 months
of joining;
• on-going annual incentive pay opportunity will not exceed 400% of salary, in line with the maximums stated in the Policy table (up
to 150% of salary for annual bonus and an award of up to 250% of salary under the PSP). In the year of appointment an off-cycle
award under the PSP and different annual bonus conditions may be made by the Committee to ensure an immediate alignment of
individual interests;
• in addition to the standard elements of remuneration, on the appointment of an external candidate, the Committee reserves the right
to buy-out incentives that the individual has foregone by accepting the appointment, if appropriate. The terms of such awards would
be informed by the amounts being forfeited and the associated terms (for example the extent to which the outstanding awards were
subject to performance, the vehicles and the associated time horizons). Awards would be made either through the existing share plans
or in accordance with the relevant provisions contained within the Listing Rules; and
• when an internal appointment to the Board is made, any pre-existing obligations may be honoured by the Committee and payment will
be permitted under this Remuneration Policy.
Details of the remuneration for any new Chair or Executive Director appointed to the Board will be disclosed on the Group’s website,
www.spiraxsarcoengineering.com.
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Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 2.4 Service agreements and termination policy
The Company’s policy on service agreements and termination arrangements for Executive Directors is set out below. Service agreements
are designed to reflect the interests of the Company, as well as the individual concerned. Executive Directors’ service agreements are kept
at the Company’s headquarters in Cheltenham.
In accordance with the Code and guidelines issued by institutional investors, Executive Directors have service agreements that are
terminable by either the Company or the Executive Director on 12 months’ notice. In the event of termination or resignation, and subject to
business reasons, the Company would not necessarily hold the Executive Director to his or her full notice period. All Directors are subject
to election (if newly appointed in the year) or re-election at the AGM.
Service agreements set out restrictions on the ability of the Executive Director to participate in businesses competing with those of the
Group or to entice or solicit away from the Group any senior employees or to solicit/deal with clients of the Group or interfere with supply, in
the 12 months following the cessation of employment.
Salary, pension and benefits are included in the agreements and are treated as described in the policy table on pages 122 to 127. There is
no contractual entitlement to payment of an annual bonus or granting of an award under the PSP, until individual participation, level of
award, measures and targets have been set for a particular year.
The Chair and Non-Executive Directors do not have service agreements but serve the Company under letters of appointment, for an initial
period of three years, subject to annual re-election at the AGM. Appointments may be terminated by the Company or individual with one
month’s notice.
Group Chief Executive and new appointments from 1st January 2013
The details of the service agreements of the Group Chief Executive and for new appointments to the Board are outlined below and comply
with best practice. In the event of a material change in role, function or responsibilities, Executive Directors’ agreements will be reviewed
and will be expected to be updated to meet the requirements outlined below.
Notice period
Termination
Clawback or
malus
12 months by the Executive Director and 12 months by the Company
No payment if Executive Director commits a repudiatory breach of the service agreement or for gross misconduct or in
certain circumstances.
No additional termination payment if notice worked.
If notice only part worked/part on garden leave, payment in respect of unexpired period of notice, otherwise 12
months’ base salary only.
Company discretion to pay in lieu of notice in lump sum or monthly except within 12 months of a change of control,
when a lump sum will be paid.
If paid monthly, payment will be reduced by the value of any salary, fees and benefits, excluding long-term incentives,
earned in new paid employment in that period (mitigation clause).
No automatic entitlement to payments under the annual bonus or PSP. See pages 130-131.
Payment of reasonable legal fees and any legally enforceable entitlements.
Garden leave clause.
Robust post-termination restrictions on confidentiality, non-compete, non-solicitation and non-interference with
customers or suppliers.
Service agreements may be terminated without notice and without payment of compensation on the occurrence of
certain events, such as gross misconduct or financial misstatement.
Bonus payments and PSP awards are subject to clawback or malus until the third anniversary of bonus payment and
PSP vesting respectively. Circumstances include financial misstatement, erroneous calculations determining bonus
payment, gross misconduct, reputational damage and corporate failure.
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Remuneration Policy 2020 continued
Executive Directors’ legacy agreements (appointments before 2013)
Within the legacy agreements of Executive Directors, termination of agreements is subject to a 12 month notice period. Where payment
is made in lieu of notice on termination, the payment of a sum in respect of lost future bonus opportunity (based on an average of the
preceding three years’ bonus payments) is subject to the Committee’s discretion. The Committee has the power to reduce the amount to
reflect performance on the part of the Executive Director that is considered by the Committee to be unsatisfactory. On termination of such
an Executive Director’s service agreement, the Committee will take into account the departing Executive Director’s need to mitigate his or
her loss when determining the amount of bonus. Payment will only be made at the discretion of the Committee after taking into account
individual performance in order to ensure that there will be no “payments for failure”. In any event, payments will be subject to clawback or
malus provisions.
Executive Directors’ service agreements may be terminated without notice and without payment of compensation on the occurrence of
certain events, such as termination for gross misconduct or financial misstatement.
While the Executive Directors’ service agreements include a provision to deal with termination on a change of control, in the event of an offer being
made, shareholders have discretion to accept the offer or not. The decision to recommend acceptance, or not, is a matter for the Board, and the
Committee is of the clear view that the change of control provision within the Executive Directors’ service agreements would have no influence on
the voting pattern of those Executive Directors. Executive Directors’ legacy agreements are summarised in the table below.
Notice period
Termination
Clawback or
malus
12 months by the Executive Director and 12 months by the Company
No payment if Executive Director commits a repudiatory breach of the service agreement or for gross misconduct or in
certain circumstances.
No additional termination payment if notice worked.
If notice only part worked/part on garden leave, payment in respect of unexpired period of notice.
Otherwise 12 months’ base salary, the value of other benefits, plus the cost of pension credits or contributions for the
period plus the average of the prior three years’ annual bonus payments, with Committee discretion to reduce the
amount of the bonus that would otherwise be calculated, to reflect performance on the part of the Executive Director
that is considered by the Committee to be below the required standards, provided that termination by the Company
does not occur within 12 months of a change of control.
Committee discretion to pay in lump sum or monthly except within 12 months of a change of control when a lump sum
will be paid.
If paid monthly, payment will be reduced by the value of any salary, fees and benefits excluding long-term incentives,
earned in new paid employment in that period.
No automatic entitlement to payments under the current annual bonus or PSP. See pages 130-131.
Garden leave clause.
Robust post-termination restrictions on confidentiality, non-compete, non-solicitation and non-interference with
customers or suppliers.
Bonus payments and PSP awards are subject to clawback or malus for up to three years following award.
Circumstances include financial misstatement, erroneous calculations determining bonus payments, reputational
damage or gross misconduct.
Treatment of leavers under the incentive plans
Whilst it is not an entitlement, it is expected that where an Executive Director is a “good leaver” (ie where the cessation of employment is
due to death, disability, redundancy, retirement or the company business in which he/she works being disposed of or where the ending
of employment is instigated by the Company and is not for cause), payments will be made under the annual bonus plan if performance
targets are met subject to, and in accordance with, the plan rules. If the Executive Director is not a “good leaver” it is expected that no
bonus will be paid.
The treatment of leavers under the PSP is determined in accordance with the shareholder approved PSP rules. Any awards granted within
six months prior to termination (or the giving or receiving of notice) will lapse. Any awards granted six months or longer prior to termination
of employment (but prior to the end of the performance period) will lapse unless the Executive Director is considered to be a “good leaver”.
In the case of such a “good leaver” the award will vest on the termination date, or the normal vesting date, at the Committee’s discretion.
This is subject to the satisfaction of the performance targets at that date and a pro-rata reduction in the number of shares to take account
of the shortening of the performance period. For awards granted after the 2020 AGM, the award will vest on the normal vesting date.
If the Executive Director is a “good leaver” where the ending of employment is not for cause, the number of shares vested may be reduced
(including to zero) by the Committee in its absolute discretion.
Where an Executive Director ceases employment (or notice is given) on or after the end of the performance period but prior to the date on
which the Committee has determined the extent to which the award has vested, if the Executive Director is a “good leaver”, his/her award
will be preserved and will be treated in the same way as if his/her employment had continued, whereas if the Executive Director is not a
“good leaver”, his/her award will lapse on the earlier of his/her cessation of employment and the giving of notice.
130
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 In relation to the ESOP, as an HMRC approved plan, where an Executive Director leaves the treatment will be in line with the approved plan
rules and HMRC guidance.
Change of control
Bonus: if termination occurs within 12 months following a change of control, the Executive Director is entitled to (i) a lump sum payment
in lieu of notice and (ii) receive a full bonus payment calculated by reference to the average of the preceding three years’ bonus payments
(without any reduction for performance).
PSP: the rules provide that in the event of a change of control, outstanding share-based awards will vest to the extent that performance
targets are met at the date of the event. Any such vesting would generally be on a time prorated basis. The Committee may, at its
discretion, increase the level of vesting if it believes that exceptional circumstances warrant such treatment.
2.5 Illustrations of application of the Remuneration Policy
Under the Remuneration Policy, a significant portion of remuneration is variable and depends on the Company’s performance. Below we
illustrate how the total pay opportunity for the Executive Directors varies under three performance scenarios: maximum, on target, and
below threshold.
The scenarios for 2020, informed by the current application of our pay policy, are as follows:
Element
Fixed pay, benefits and ESOP
Fixed pay and ESOP does not vary with performance and comprises:
• base salary effective 1st January 2020;
• benefits value based on 2019 disclosure;
• pension value (DB 2019: cash allowance: rate applied to 2020 salary); and
• ESOP participation of up to £1,800 1:1 matching shares for eligible Executive Directors.
Percentage of base salary
Annual bonus (% of salary)
Below threshold
0%
PSP1 (% of salary at award)
0%
On target
90% CEO
60% ED
36.0% CEO
31.5% ED
Maximum
150% CEO
100% ED
200% CEO
175% ED
1
A level of 18% vesting for “on target” performance is equivalent to threshold performance under the PSP, which the Committee believes to be a fair assumption for on target performance given the
approach taken to setting performance targets.
Nicholas Anderson (Group Chief Executive)
Kevin Boyd (Chief Financial Officer)
Maximum
Target
Threshold
27%
31%
42%
51%
35%
100%
0%
£0.78m
14%
£1.54m
0%
£2.89m
Total, including
share price growth:
£3.49m
32%
25%
43%
£1.58m
59%
27%
Maximum
Target
Threshold
100%
0%
£0.51m
14%
£0.87m
0%
Total, including
share price growth:
£1.97m
£0.0m
£1.0m
£2.0m
£3.0m
£4.0m
£0.0m
£0.5m
£1.0m
£1.5m
£2.0m
£2.5m
Neil Daws (Managing Director, Steam Specialties)
32%
25%
43%
£1.54m
59%
27%
Maximum
Target
Threshold
100%
0%
£0.50m
14%
£0.84m
0%
Total, including
share price growth:
£1.87m
£0.0m
£0.5m
£1.0m
£1.5m
£2.0m
£2.5m
Fixed
Annual bonus
PSP
PSP value with 50% share price growth
131
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report 5. Remuneration continued
Remuneration Policy 2020 continued
2.6 Statement of consideration of employment conditions elsewhere in the Group
When determining the remuneration of Executive Directors, the Committee considers the pay of employees across the Group.
When conducting the annual salary review, the average base salary increase awarded to the UK workforce and senior managers across
the Group provides a key reference point when determining levels of increase for Executive Director remuneration. The Remuneration
Policy was drawn up by the Committee without the need for any consultation with employees.
The Committee also determines the principles and policy of remuneration which shall apply to the Group’s senior managers.
The responsibility for determining precise compensation packages that meet local practice and performance targets lies with the Group
Chief Executive and the responsible Executive Director.
To ensure consistency in Remuneration Policy across the Group and to encourage a performance culture, senior managers participate
in the PSP. The Board believes that share ownership is an effective way of aligning the interests of managers and shareholders and to
strengthen the development of the business.
2.7 Statement of consideration of shareholder views
In developing and reviewing the Company’s Remuneration Policy for Executive Directors and other senior executives, the Committee seeks
and takes into account the range of views of shareholders and institutional shareholder advisers. The Committee Chair actively engages
with major shareholders and institutional shareholder advisers when appropriate and takes into account their views when reviewing and
implementing the Company’s Remuneration Policy.
The Committee considers shareholder feedback received in relation to the AGM each year and guidance from institutional shareholder
advisers more generally. This feedback, plus any additional feedback received during the year at meetings with shareholders, is considered
as part of the Company’s annual Remuneration Policy review. At the AGMs in 2019 and 2018, the advisory votes on the 2018 and 2017
Annual Reports on Remuneration received 94.66% and 98.96% in favour respectively. At the AGM in 2017 the Remuneration Policy
received 95.06% in favour.
132
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Regulatory disclosures
Compliance and regulations
are used to steer the Group
forward in the right way.”
Andy Robson
Group General Counsel and
Company Secretary
Principal activities
Spirax-Sarco Engineering plc is a multi-national industrial
engineering group that is domiciled and incorporated in the UK
under registration number 596337 and which has expertise in
steam, electric thermal solutions, peristaltic pumping and fluid path
technologies. An overview of our principal activities, by business, is
given on pages 4 and 8 to 11 of the Strategic Report.
Future development
An indication of likely future developments in the Group is given in
the Strategic Report.
Strategic Report
This is set out on the inside front cover to page 71 of the
Annual Report.
Risk management and principal risks
A description of risk management and the principal risks facing the
business are on pages 20 to 25 and 98 to 101.
Constructive use of AGM
We are delighted when our shareholders attend our AGM.
Those who are unable to attend are encouraged to vote online or
using the proxy card posted to them.
In 2019, 74.36% of the proxy votes received were lodged
electronically through the CREST system.
At the AGM, the Group Chief Executive will give a short
presentation about the previous year and, more generally, about
current trading and the Group’s future plans. The Chair and other
Board members are available to answer questions raised by
shareholders. Shareholders are invited to vote on the resolutions by
way of a polled vote. The results are announced instantaneously
at the AGM using the Equiniti “Vote Now” polling system, and
on the London Stock Exchange and the Group’s website,
www.spiraxsarcoengineering.com, shortly after the conclusion of
the meeting. Following the AGM the Board is available to answer
questions and meet informally with individual shareholders.
The Notice of Meeting convening the AGM, to be held on
Wednesday, 13th May 2020, and an explanation of the resolutions
sought, is set out in the Circular posted on our website and sent to
shareholders in the format selected by them.
Results
The Group’s results for the year have been prepared in accordance
with the International Financial Reporting Standards as adopted by
the European Union. They are set out in the Consolidated Income
Statement, which appears on page 150.
Dividend
The Directors are proposing the payment of a final dividend of
78.0p (2018: 71.0p) which, together with the interim dividend
of 32.0p (2018: 29.0p), makes a total distribution for the year of
110.0p (2018: 100.0p). If approved at the AGM, the final dividend
will be paid on 22nd May 2020 to shareholders on the register at
the close of business on 24th April 2020.
133
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report Regulatory disclosure continued
Directors’ interests
The interests of the Directors in the share capital of Spirax-
Sarco Engineering plc as at 31st December 2019 are set out on
page 116.
New Directors are required to declare any conflicts, or potential
conflicts, of interest to the Board at the first Board meeting after
his or her appointment. The Board believes that the procedures
established to deal with conflicts of interest are operating effectively.
Directors’ and Officers’ Insurance
The Company provides Directors’ and Officers’ Insurance for Board
members, Directors of the Group’s operating companies and
senior officers.
The Company has also provided each Director with an indemnity to
the extent permitted by law in respect of the liabilities incurred as a
result of their holding office as a Director of the Company.
Articles of Association
The Company’s Articles of Association are available from
Companies House in the UK or by writing to the General Counsel
and Company Secretary at the Group’s registered office in
Cheltenham. They are also available on the Company’s website.
Amendments to the Articles of Association can only be made
by means of a special resolution at a general meeting of the
shareholders of the Company.
Appointment and replacement of Directors
The appointment and replacement of Directors is governed by the
Company’s Articles of Association, the Code, the Companies Act
2006 and related legislation.
Share capital
As at 29th February 2020 there were no treasury shares held by
the Company. Details of shares issued during the year are set out in
Note 21 on page 180.
All Directors will seek election or re-election (as the case may be) at
the AGM, with the exception of Jay Whalen, who retired from the
Board on 31st December 2019.
The Directors stand for election or re-election on an annual basis at
each AGM, in accordance with the Code. The Board considers that
all Directors standing for election or re-election continue to perform
effectively and demonstrate commitment to their roles. In addition,
the Board considers that all Directors have the necessary skills and
experience, as set out in their biographies on pages 74 to 75.
Conflicts of interest
Under the Companies Act 2006 and the provisions of the
Company’s Articles of Association, the Board is required to
consider potential conflicts of interest. The Company has
established formal procedures for the disclosure and review of
any conflicts, or potential conflicts, of interest which the Directors
may have and for the authorisation of such matters of conflict by
the Board. To this end the Board considers and, if appropriate,
authorises any conflicts, or potential conflicts, of interest as they
arise and reviews any such authorisation annually.
As at 31st December 2019 the Company’s share capital was
made up of Ordinary shares which each carry one vote at general
meetings of the Company. Except as set out in the Articles of
Association or in applicable legislation, there are no restrictions on
the transfer of shares in the Company and there are no restrictions
on the voting rights in the Company’s shares.
The Company is not aware of any agreements entered into
between any shareholders in the Company which restrict the
transfer of shares or the exercise of any voting rights attached to
the shares.
Substantial shareholdings
The voting rights in the table below have been determined in
accordance with the requirements of the UK Listing Authority’s
Disclosure and Transparency Rules DTR 5, and represent 3% or
more of the voting rights attached to issued shares in the Company
as at 28th February 2020 and 31st December 2019. There are no
Controlling Founder Shareholders.
Substantial shareholdings
The Capital Group Companies, Inc.
Sun Life Financial, Inc.
BlackRock, Inc.
Fiera Capital Corporation
APG Groep N.V.
The Vanguard Group, Inc.
As at 31.12.19
As at 28.02.20
Number of
Ordinary shares
6,584,006
5,566,823
4,624,204
4,764,251
4,068,000
2,569,081
% of issued
share capital
8.9%
7.5%
6.3%
6.5%
5.5%
3.5%
Number of
Ordinary shares
6,598,428
5,481,561
4,913,790
4,768,688
4,068,000
2,637,287
% of issued
share capital
8.9%
7.4%
6.7%
6.5%
5.5%
3.6%
134
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Powers of the Directors and purchase of
own shares
Subject to the provisions of the Articles of Association, the Directors
may exercise all the powers of the Company.
A shareholder’s authority for the purchase by the Company of a
maximum of 10% of its own shares was in existence during the
year. However, the Company did not purchase any of its shares
during that time. This authority expires at the forthcoming AGM and
it is proposed that a similar authority be approved. The total number
of shares in issue as at 31st December 2019 was 73,736,888.
PSP and Employee Benefit Trust (EBT)
The number of shares held in the EBT at 31st December 2019
was 79,489 for the purpose of satisfying the vesting of awards
and options granted to employees under the various Company
schemes. Dividends on shares in the EBT are waived.
Significant contracts
The Company is not a party to any significant agreements that take
effect, alter or terminate upon a change of control of the Company
following a takeover bid.
There are provisions in the Executive Directors’ service agreements
which state that following a takeover or change of control, if the
Executive Director’s employment is terminated then both salary/
benefits and a sum in respect of lost future bonus opportunity
become payable as a lump sum.
The Strategic Report contains all the information required to comply
with Section 414(c) of the Companies Act 2006 and there are no
contractual arrangements that need to be disclosed which are
essential to the business of the Group.
Disclosure of information to the auditor
As at the date of the approval of this Annual Report, as far as each
Director is aware, there is no relevant audit information of which the
Company’s auditor is unaware. Each Director has taken all such
steps as he or she ought to have taken as a Director in order to
make himself/herself aware of any relevant audit information and to
establish that the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of Section 418 of the Companies Act 2006.
Auditor
The Company’s auditor throughout the period of this Annual Report
was Deloitte LLP, who was appointed on 20th May 2014.
Deloitte LLP has expressed its willingness to continue in office as
auditor and a resolution to re-appoint Deloitte LLP will be proposed
at the forthcoming AGM.
Research and development
The Group continues to devote significant resources to the
research and development and the updating and expansion of its
range of products in order to remain at the forefront of its world
markets. The R&D functions in Cheltenham (Spirax Sarco Steam
Specialties), Falmouth (Watson-Marlow), Bradford (Aflex Hose),
Bremen (Gestra), Normandy (Thermocoax) and the Product
Development function in Pittsburgh and Utah (Chromalox) are
tasked with improving the Group’s pipeline of new products,
decreasing the time to launch, expanding the Group’s addressable
market and realising additional sales. Further information on
the expenditure on R&D is contained in Note 1 on page 157.
The amount of R&D expenditure capitalised, and the amount
amortised, in the year, are given in Note 15 on page 174.
Relationships with suppliers and customers
Our relationship with our customers is explained throughout
the Report, including pages 70 and 81 (Our customers).
Our relationship with our suppliers is specifically addressed on
pages 66 (Our supply chain) and 81 (Our suppliers).
Treasury and foreign exchange
The Group has in place appropriate treasury policies and
procedures, which are approved by the Board. The treasury
function manages interest rates for both borrowings and cash
deposits for the Group and is also responsible for ensuring there
is sufficient headroom against any banking covenants contained
within its credit facilities, and for ensuring there are appropriate
facilities available to meet the Group’s strategic plans.
In order to mitigate and manage exchange rate risk, the Group
routinely enters into forward contracts and continues to monitor
exchange rate risk in respect of foreign currency exposures.
All these treasury policies and procedures are regularly monitored
and reviewed. It is the Group’s policy not to undertake speculative
transactions which create additional exposures over and above
those arising from normal trading activity.
Political donations
The Group has a policy of not making political donations and no
political donations were made during the year (2018: nil).
135
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report Regulatory disclosures continued
Greenhouse gas emissions
Details of our greenhouse gas emissions can be found on page 68.
Going concern
The Group’s business activities, together with the main trends and
factors likely to affect its future development, performance and
position, and the financial position of the Group, its cash flows,
liquidity position and borrowing facilities, are set out in the Financial
Review on pages 54 to 58. In addition, Note 28 on pages 190 to
196 includes the Group’s objectives, policies and processes for
managing its capital, its financial risk management objectives, its
financial instruments and hedging activities, its exposures to credit
risk and liquidity risk.
The Group has considerable financial resources together with
contracts with a diverse range of customers and suppliers across
different geographic areas and industries. No one customer
accounts for more than 1% of Group turnover.
As a consequence, the Directors believe that the Group is well
placed to manage its business risks successfully.
The Directors, having made appropriate enquiries, consider that
the Company and the Group have adequate resources to continue
in operational existence and that the Directors intend to do so,
for at least one year from the date the Financial Statements were
signed, and that it is appropriate to adopt the going concern basis
in preparing the Annual Report.
Scope of the reporting in this Annual Report
The Board has prepared a Strategic Report (including the Chair’s
Statement, the Strategic Review and the Review of Operations)
which provides an overview of the development and performance
of the Group’s business in the year ended 31st December
2019 and its position at the end of that year, and which covers
likely future developments in the business of the Company and
the Group.
For the purposes of compliance with DTR 4.1.5 R(2) and
DTR 4.1.8 R, the required content of the management report can
be found in the Strategic Report and these Regulatory disclosures,
including the sections of the Annual Report incorporated
by reference.
The Strategic Report and the Directors’ Report were approved
by the Board on 10th March 2020. Pages 133 to 136 form the
Directors’ Report for the purposes of the Companies Act 2006.
The Annual Report contains the information required for compliance
with the Companies, Partnerships and Groups (and Non-Financial
Reporting) Regulations 2016.
For the purposes of LR 9.8.4C R, the information required to be
disclosed by LR 9.8.4 R is set out in the following table.
Section Topic
(1)
Interest capitalised
Location
Not applicable
(2)
(4)
(5)
(6)
(7)
(8)
(9)
Publication of unaudited financial information
Not applicable
Details of long-term incentive schemes
Waiver of emoluments by a Director
Waiver of future emoluments by a Director
Non pre-emptive issues of equity for cash
Remuneration
Report, pages
113-114
Not applicable
Not applicable
Not applicable
Item (7) in relation to major subsidiary undertakings
Not applicable
Parent participation in a placing by a listed subsidiary Not applicable
(10)
Contracts of significance
Regulatory
Disclosures,
page 135
(11)
(12)
(13)
(14)
Provision of services by a controlling shareholder
Not applicable
Shareholder waivers of dividends
Shareholder waivers of future dividends
Regulatory
Disclosures,
page 135
Not applicable
Agreements with controlling shareholders
Not applicable
Andy Robson
General Counsel and Company Secretary
10th March 2020
Spirax-Sarco Engineering plc
Registered no. 596337
136
Governance ReportSpirax-Sarco Engineering plcAnnual Report 2019 Statement of Directors’ Responsibilities
Board of Directors
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable laws
and regulations.
Company law requires the Directors to prepare consolidated Group
Financial Statements for each financial year in accordance with
IFRS as adopted by the EU and applicable law. Parent Company
Financial Statements are prepared under FRS 101.
In addition, by law the Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company and
of their profit or loss for that period. In preparing these Financial
Statements, the Directors are required to:
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
• make an assessment of the Company’s ability to continue as a
going concern.
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 are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Group’s
website, www.spiraxsarcoengineering.com. Legislation in the
UK governing the preparation and dissemination of Financial
Statements may differ from legislation in other jurisdictions.
Cautionary statement
All statements other than statements of historical fact included in
this document, including those regarding the financial condition,
results, operations and businesses of Spirax-Sarco Engineering plc
(its strategy, plans and objectives), are forward-looking statements.
These forward-looking statements reflect management’s
assumptions made on the basis of information available to it at
this time. They involve known and unknown risks, uncertainties
and other important factors which could cause the actual results,
performance or achievements of Spirax-Sarco Engineering plc
to be materially different from future results, performance or
achievements expressed or implied by such forward-looking
statements. Spirax-Sarco Engineering plc and its Directors accept
no liability to third parties in respect of this Report save as would
arise under English law.
We focus on our Annual Report
being fair, balanced and
understandable and giving you a
true and fair view of our Group.”
Kevin Boyd
Chief Financial Officer
Any liability to a person who has demonstrated reliance on any
untrue or misleading statement or omission shall be determined
in accordance with schedule 10A of the Financial Services and
Markets Act 2000. Schedule 10A contains limits on the liability of
the Directors of Spirax-Sarco Engineering plc and their liability is
solely to Spirax-Sarco Engineering plc.
Responsibility statement
We confirm that to the best of our knowledge:
• the Financial Statements, prepared in accordance with IFRS
as adopted by the EU, 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 includes a fair review of the development
and performance of the business and the position of the
Company 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 2019 taken as a whole, is fair, balanced
and understandable and provides the information necessary
for shareholders to assess the Company’s financial position,
performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 10th March 2020 and is signed on its behalf by:
Kevin Boyd
Chief Financial Officer
10th March 2020
137
Spirax-Sarco Engineering plcAnnual Report 2019Governance Report Financial Statements
Financial Statements
In this section
Independent Auditor’s Report
Consolidated Statement of Financial Position
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
Company Statement of Financial Position
Company Statement of Changes in Equity
Notes to the Company Financial Statements
139
149
150
151
151
153
154
198
199
200
138
Spirax-Sarco Engineering plc
Annual Report 2019
Independent Auditor’s Report
to the members of Spirax-Sarco Engineering plc
Report on the audit of the Financial Statements
1. Opinion
In our opinion:
• the Financial Statements of Spirax-Sarco Engineering plc (the “Parent Company”) and its subsidiaries (the “Group”) give a true and fair
view of the state of the Group’s and of the Parent Company’s affairs as at 31st December 2019 and of the Group’s profit for the year
then ended;
• the Group Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (IFRS) as
adopted by the European Union;
• the Parent 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 Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group Financial Statements, Article 4 of the IAS Regulation.
We have audited the Financial Statements which comprise:
• the Consolidated and Parent Company Statement of Financial Position
• the Consolidated Income Statement;
• the Consolidated Statement of Comprehensive Income;
• the Consolidated and Parent Company Statements of Changes in Equity;
• the Consolidated Statement of Cash Flows; and
• the related Notes 1 to 28 to the Consolidated Financial Statements and 1 to 11 for the Parent Company Financial Statements.
The financial reporting framework that has been applied in the preparation of the Group 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 Parent Company
Financial Statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework”
(United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISA (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the Financial Statements section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of
the Financial Statements in the UK, including the 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 Parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Revenue recognition in relation to cut off for certain components and revenue recognition on any
significant new and/or one-off contracts spanning the year end.
• Defined benefit pension liability valuation focusing on the judgements and assumptions made by
management in determining the discount rate, mortality assumption and inflation rate.
• Goodwill impairment review for the Chromalox CGU on transition to a new CGU structure.
• Valuation of acquired intangible assets from the purchase of Thermocoax pinpointed to the identified
customer relationships.
Within this report, key audit matters are identified as follows:
Newly identified
Similar level of risk
Materiality
Scoping
Significant changes
in our approach
The materiality that we used for the Group Financial Statements was £11.5m, which was determined on the
basis of 5% of statutory profit before tax.
We focused our Group audit scope primarily on the audit work at 33 components. These components
represent the principal business units and account for 82% of the Group’s net assets, 76% of the Group’s
revenue and 77% of the Group’s profit before tax.
We included the following two additional key audit matters in our report this year: valuation of acquired
intangible assets from the purchase of Thermocoax in the current year, and the recoverability of Chromalox
goodwill due to margin performance being below forecast.
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Financial Statements
Independent Auditor’s Report continued
4. Conclusions relating to going concern, principal risks and viability statement
4.1. Going concern
We have reviewed the Directors’ statement on page 136 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 12 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.
4.2. 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 20 to 25 that describe the principal risks, procedures to identify emerging
risks, and an explanation of how these are being managed or mitigated;
• the Directors’ confirmation on page 101 that they have carried out a robust assessment of the
principal and emerging risks facing the Group, including those that would threaten its business
model, future performance, solvency or liquidity; or
• the Directors’ explanation on page 101 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.
Going concern is the
basis of preparation of
the Financial Statements
that assumes an entity
will remain in operation
for a period of at least
12 months from the
date of approval of the
Financial Statements.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
Viability means the ability
of the Group to continue
over the time horizon
considered appropriate by
the Directors.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
5. 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.
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Spirax-Sarco Engineering plcAnnual Report 2019 5.1. Revenue recognition
Key audit
matter
description
How the
scope of
our audit
responded
to the key
audit matter
The Group generates revenue primarily from the sale of goods with revenue being recognised on delivery or dispatch.
We have identified a key audit matter relating to two risks of material misstatement, whether due to fraud or error, in
relation to cut off for revenue recognition:
• Potential overstatement of revenue within certain components where a significantly higher proportion of annual
revenue is recognised in December 2019 compared to the rest of the year. The risk for these components focuses
on the recognition of revenue by reference to the contracted shipping terms and the transfer of control for product
despatches and deliveries spanning year end.
• There may be significant new and/or one-off contracts spanning the year end where specific alternative revenue
recognition policies are required to ensure revenue has been recorded within the appropriate period.
Refer to Note 1 for the Group’s revenue recognition policy and the significant issues section of the Audit Committee
Report on pages 95 to 96.
In response to the key audit matter described above, we performed a risk assessment across the Group to identify
specific areas of risk, focusing our testing accordingly. Our audit response consisted of several procedures including
those summarised below.
We obtained an understanding of the controls relating to the revenue cycle. At significant components, we mapped
the end-to-end controls and processes in place.
We reviewed the product despatch cycle and revenue recognition profile across the year-end period and tested
a sample of items by confirming the date of transfer of control was in line with the revenue recognition date in
accordance with the terms of trade with customers. We focused our procedures on those components with a higher
than average volume of trade in December 2019.
We audited a sample of contracts spanning the year end, challenging the performance obligation, tracing back to the
contract and external evidence where possible, and the associated revenue recognition.
Key
observations
From the work performed above we are satisfied that there are no material cut-off errors and revenue recognition for
significant new contracts is appropriate.
5.2. Defined benefit pension liability valuation
Key audit
matter
description
At 31st December 2019 the gross retirement benefit liability recognised in the Consolidated Statement of Financial
Position was £559.1m (2018: £526.1m). There is a risk of material misstatement relating to the judgements made
by management in valuing the defined benefit pension liabilities including the use of key model input assumptions
specifically the discount rate, mortality assumption and inflation rate over the five main schemes (three in the UK,
one in Germany and one in the USA). These variables can have a material impact in calculating the quantum of the
retirement benefit liability.
Refer to Note 1 for the Group’s policy on defined benefit plans, Note 23 for the financial disclosure including the key
estimates and assumptions used in the defined benefit pension plan valuation and the significant issues section of the
Audit Committee Report on pages 95 to 96.
How the
scope of
our audit
responded
to the key
audit matter
Working with our internal actuarial specialists we assessed the key assumptions applied in determining the pension
obligations for the five main pension schemes, and determined whether the key assumptions are reasonable.
Testing covered 97.4% (2018: 96.9%) of defined benefit pension liabilities. For each of the five schemes, we challenged
management’s key assumptions by reference to illustrative benchmark rates, sensitising any difference between
management’s rates and the illustrative benchmark rates. Additionally we benchmarked the key assumptions against
other listed companies to check for any outliers in the data used.
Key
observations
From the work performed above we are satisfied that the key assumptions applied in respect of the valuation of the
schemes’ liabilities are appropriate.
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Independent Auditor’s Report continued
5.3. Goodwill impairment review for the Chromalox CGU
Key audit
matter
description
During 2019 management determined that goodwill should be monitored at an operating segment level and therefore
combined CGUs to change their CGU structure. As part of this transition, IAS 36 requires goodwill impairment to be
reviewed under the old and new CGU structure to assess if any material benefits are being derived from this transition.
How the
scope of
our audit
responded
to the key
audit matter
We identified a risk of material misstatement for the Chromalox CGU (being on the historic CGU basis) recognising
that profit margin has been below management forecast. The value of goodwill for the Chromalox CGU was £175.9m
(2018: £183.0m). We have specifically pinpointed this risk to the key assumptions in the model – revenue growth
rates, trading margin and discount rate.
The Audit Committee Report on page 96 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 15 to
the Consolidated Financial Statements, including details of the discount rates and growth rates used. Note 15 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.
In response to the significant risk for material misstatement identified, we performed the following procedures to
challenge management’s assumptions and assessment:
• we obtained an understanding of the controls relating to 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;
• 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 benchmarking exercise to assess and challenge the
growth rates forecasted by management in revenue and trading profit margins;
• considered the potential impact of Brexit and Coronavirus 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.
Key
observations
From the work performed above we are satisfied with management’s impairment model for Chromalox which shows
that the value in use supports the carrying value. This was on the basis that the assumptions applied, when taken in
aggregate, are within our acceptable range.
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Spirax-Sarco Engineering plcAnnual Report 2019 5.4. Valuation of certain acquired intangible assets from the purchase of Thermocoax
Key audit
matter
description
How the
scope of
our audit
responded
to the key
audit matter
During the year the Group acquired Thermocoax Developpment (“Thermocoax”) for a total consideration of
£121.4 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 specifically the primary
intangible asset identified is customer relationships of £34.6m and we pinpointed the risk to the key assumptions
in forecast revenue growth, trading margin growth, discount rate and customer attrition rates.
The associated disclosure is included in Note 26. The Audit Committee has included their assessment of this risk on
page 96. For specifics of the Group’s accounting policy please see page 157.
Our procedures for challenging management’s key assumptions in relation to the Thermocoax acquisition included:
• we obtained an understanding 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 using
independent benchmarking;
• evaluated the reasonableness of the forecast from which the customer relationship asset valuation is derived and
the profitability pertaining to this intangible asset working with our valuation experts and benchmarking;
• assessing the excess earnings intangible assets valuation methodology used by management; and
• working with our valuation specialists to assess the valuation methodology and certain key assumptions including
the discount rate and attrition rate.
Key
observations
From the work performed above we are satisfied that the acquisition of Thermocoax, in particular the valuation
of the customer relationship intangible asset, has been appropriately accounted for in accordance with IFRS 3
(Business Combinations).
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Independent Auditor’s Report continued
6. Our application of materiality
6.1. 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
£11.5m (2018: £11.4m)
£4.0m (2018: £4.2m)
Group Financial Statements
Parent Company Financial Statements
Basis for determining materiality 5% of statutory profit before tax.
Rationale for the benchmark
applied
In the prior year, due to material one-off gains
included in the statutory profit before tax,
we used adjusted profit before tax as our
benchmark balance. Adjusted for one-off
gains in the prior year being £47.4m gain on
disposal of subsidiary, £6.5m gain on disposal
of property and £6.0m past service cost credits
from freeze of pension scheme.
We have used statutory profit before tax for
determining materiality. This is considered to be
a key benchmark as 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.
Statutory PBT £236.8m
Statutory profit before tax (PBT)
Group materiality
Parent Company materiality equates to 5%
of profit before tax, which is capped at 35%
(2018: 40%) of Group materiality.
In determining our final materiality based
on our professional judgement we have
considered net assets as the appropriate
measure given the Parent Company is
primarily a holding company for the Group.
We then capped materiality at the highest
component materiality for the Group.
Group materiality
£11.5m
Component
materiality range
£4.0m to £2.8m
Audit Committee
reporting threshold
£0.575m
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the Financial Statements as a whole. Group performance materiality was set at 70% of Group
materiality for the 2019 audit (2018: 70%). In determining performance materiality we considered our risk assessment, including our
assessment of the Group’s overall control environment and the level of misstatements identified in previous audits.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £575,000
(2018: £530,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report
to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the Financial Statements.
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Spirax-Sarco Engineering plcAnnual Report 2019 7. An overview of the scope of our audit
7.1 Identification and scoping of components
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 level. Based on that assessment, we focused our Group audit scope
primarily on the audit work at 33 (2018: 28) components. 26 (2018: 25) of these were subject to a full audit, whilst the remaining
seven components (2018: three components) were subject to specified audit procedures where the extent of our testing was based
on our assessment of the risks of material misstatement and of the materiality of the Group’s operations at those components.
These components represent the principal business units and account for 82% (2018: 93%) of the Group’s net assets, 76% (2018: 73%)
of the Group’s revenue and 77% (2018: 80%) of the Group’s profit before tax. They were also selected to provide an appropriate basis for
undertaking audit work to address the risks of material misstatement identified above. Our audit work at the components was executed
at levels of materiality applicable to each individual entity which were lower than Group materiality and ranged from £2.8m to £4.0m
(2018: £3.2m to £4.2m).
At the Parent Company level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion
that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not
subject to audit or audit of specified account balances.
7.2. Working with other auditors
The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group
audit team visits each of the key components where the Group audit scope was focused on a rotational basis and the most significant of
them at least once a year. In the current year we visited the UK, USA, Germany, France, China and South Korean components. As part
of these visits, meetings were held with both component management and the component audit team. For all components, we held
close calls after they reported into us and as deemed necessary, reviewed their work papers.
24%
Revenue
6%
70%
Full audit scope
Specified audit
procedures
Review at
Group level
23%
Profit before
tax
10%
67%
Full audit scope
Specified audit
procedures
Review at
Group level
2%
18%
Net
assets
80%
Full audit scope
Specified audit
procedures
Review at
Group level
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Independent Auditor’s Report continued
We have nothing to
report in respect of
these matters.
8. 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.
9. Responsibilities of Directors
As explained more fully in the Statement of Directors’ Responsibilities, 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 Parent 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 Parent Company or to cease operations, or have no realistic
alternative but to do so.
10. 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 ISA (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 and non-compliance with laws
and regulations 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.
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Spirax-Sarco Engineering plcAnnual Report 2019 11. 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.
11.1. 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, we considered the following:
• the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration
policies, key drivers for Directors’ remuneration, bonus levels and performance targets;
• results of our enquiries of management, internal audit and the Audit Committee about their own identification and assessment of the
risks of irregularities;
• any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to:
o identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
o detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
o the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
• the matters discussed among the audit engagement team including significant component audit teams, and involved relevant internal
specialists, including tax, valuations, pensions and IT regarding how and where fraud might occur in the financial statements and any
potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following area: cut off for certain components and revenue recognition on any significant
new and/or one-off contracts spanning year end. In common with all audits under ISA (UK), we are also required to perform specific
procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those
laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements.
The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation and
tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the Financial Statements but
compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty.
11.2. Audit response to risks identified
As a result of performing the above, we identified cut off for certain components and revenue recognition on any significant new and/or
one-off contracts spanning year end a key audit matter related to the potential risk of fraud. The key audit matters section of our report
explains the matter in more detail and also describes the specific procedures we performed in response to that key audit matter.
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 provisions of
relevant laws and regulations described as having a direct effect on the Financial Statements;
• 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.
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Spirax-Sarco Engineering plcAnnual Report 2019Financial StatementsGovernance Report Independent Auditor’s Report continued
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the Financial Statements are
prepared is consistent with the Financial Statements; and
• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Parent 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.
13. Matters on which we are required to report by exception
13.1. 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 Parent Company, or returns adequate for our
We have nothing to
report in respect of
these matters.
audit have not been received from branches not visited by us; or
• the Parent Company Financial Statements are not in agreement with the accounting records and returns.
13.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’
remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in
agreement with the accounting records and returns.
We have nothing to
report in respect of
these matters.
14. Other matters
14.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Directors and subsequently at the Annual General
Meeting on 11th May 2014 to audit the Financial Statements for the year ending 31st December 2014 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is six years, covering the years
ended 31st December 2014 to 31st December 2019.
14.2. 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 ISA (UK).
15. 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.
Andrew Bond, FCA
(Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
10th March 2020
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Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Consolidated Statement of Financial Position
at 31st December 2019
Assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Goodwill
Other intangible assets
Prepayments
Investment in Associate
Deferred tax assets
Current assets
Inventories
Trade receivables
Other current assets
Taxation recoverable
Cash and cash equivalents
Total assets
Equity and liabilities
Current liabilities
Trade and other payables
Provisions
Bank overdrafts
Short-term borrowings
Current portion of long-term borrowings
Short-term lease liabilities
Current tax payable
Net current assets
Non-current liabilities
Long-term borrowings
Long-term lease liabilities
Deferred tax liabilities
Post-retirement benefits
Provisions
Long-term payables
Total liabilities
Net assets
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Equity shareholders’ funds
Non-controlling interest
Total equity
Total equity and liabilities
Notes
2019
£m
2018
£m
13
14
15
15
12
16
17
28
18
24
19
20
24
24
24
24
16
23
20
2, 3
21
21
251.2
40.8
417.7
303.9
0.9
0.2
40.8
1,055.5
185.9
240.7
35.3
8.4
168.5
638.8
1,694.3
174.8
3.5
0.2
–
34.3
11.1
26.7
250.6
388.2
429.2
27.8
83.9
71.3
1.3
3.9
617.4
868.0
826.3
19.8
81.0
(10.6)
735.1
825.3
1.0
826.3
1,694.3
230.8
–
368.0
277.2
6.2
–
41.3
923.5
160.6
245.1
32.9
4.6
187.1
630.3
1,553.8
167.0
5.0
0.4
15.7
41.5
–
23.7
253.3
377.0
365.3
–
76.8
85.1
3.7
2.7
533.6
786.9
766.9
19.8
77.8
22.2
646.0
765.8
1.1
766.9
1,553.8
These Financial Statements of Spirax-Sarco Engineering plc, company number 00596337, were approved by the Board of Directors and
authorised for issue on 10th March 2020 and signed on its behalf by:
N.J. Anderson
K.J. Boyd Directors
149
Spirax-Sarco Engineering plcAnnual Report 2019Financial StatementsGovernance Report Financial Statements
Consolidated Income Statement
for the year ended 31st December 2019
Notes
3
4
2, 3
3, 6
12
7
9
2, 10
11
Revenue
Operating costs
Operating profit
Financial expenses
Financial income
Net financing expense
Share of profit of Associate
Profit before taxation
Taxation
Profit for the period
Attributable to:
Equity shareholders
Non-controlling interest
Profit for the period
Earnings per share
Basic earnings per share
Diluted earnings per share
Dividends
Dividends per share
Dividends paid during the year
(per share)
Adjustments
2019
£m
–
(37.7)
(37.7)
–
–
–
–
(37.7)
8.5
(29.2)
(29.2)
–
(29.2)
Adjusted
2019
£m
1,242.4
(959.7)
282.7
(9.9)
1.5
(8.4)
0.2
274.5
(78.3)
196.2
195.8
0.4
196.2
265.7p
264.9p
Adjustments
2018
£m
–
34.2
34.2
–
–
–
–
34.2
5.0
39.2
39.2
–
39.2
Adjusted
2018
£m
1,153.3
(888.4)
264.9
(11.4)
1.1
(10.3)
–
254.6
(70.4)
184.2
183.9
0.3
184.2
250.0p
249.1p
Total
2019
£m
1,242.4
(997.4)
245.0
(9.9)
1.5
(8.4)
0.2
236.8
(69.8)
167.0
166.6
0.4
167.0
226.2p
225.5p
110.0p
103.0p
Total
2018
£m
1,153.3
(854.2)
299.1
(11.4)
1.1
(10.3)
–
288.8
(65.4)
223.4
223.1
0.3
223.4
303.1p
302.0p
100.0p
91.0p
Adjusted figures exclude certain items, as set out and explained in the Financial Review and as detailed in Notes 2 and 3. All amounts
relate to continuing operations.
The Notes on pages 154 to 196 form an integral part of the Financial Statements.
150
Spirax-Sarco Engineering plcAnnual Report 2019 Consolidated Statement of Comprehensive Income
for the year ended 31st December 2019
2018
£m
223.4
(5.9)
1.2
(4.7)
4.2
–
(0.1)
4.1
222.8
222.5
0.3
222.8
Total
equity
£m
766.9
(2.4)
764.5
167.0
Profit for the year
Items that will not be reclassified to profit or loss:
Remeasurement gain/(loss) on post-retirement benefits
Deferred tax on remeasurement (gain)/loss on post-retirement benefits
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences and net investment hedges
Non-controlling interest foreign exchange translation differences
Profit/(loss) on cash flow hedges net of tax
Total comprehensive income for the year
Attributable to:
Equity shareholders
Non-controlling interest
Total comprehensive income for the year
Notes
23
23
21
21, 28
2019
£m
167.0
9.0
(1.4)
7.6
(33.5)
(0.1)
3.3
(30.3)
144.3
144.0
0.3
144.3
Consolidated Statement of Changes in Equity
for the year ended 31st December 2019
Share
premium
account
£m
77.8
–
Other
reserves
£m
22.2
–
Retained
earnings
£m
646.0
(2.4)
Equity
shareholders’
funds
£m
765.8
(2.4)
Non-
controlling
interest
£m
1.1
–
77.8
–
22.2
–
643.6
166.6
763.4
166.6
1.1
0.4
–
–
–
–
–
–
(33.5)
–
–
3.3
–
9.0
(1.4)
–
(33.5)
(0.1)
(33.6)
9.0
(1.4)
3.3
–
–
–
9.0
(1.4)
3.3
(30.2)
7.6
(22.6)
(0.1)
(22.7)
(30.2)
174.2
144.0
0.3
144.3
Notes
1
21
23
16, 23
21, 28
Share
capital
£m
19.8
–
19.8
–
–
–
–
–
–
–
Balance at 1st January 2019
Adoption of IFRS 16
Balance at 1st January 2019
(restated)
Profit for the year
Other comprehensive
(expense)/income:
Foreign exchange translation
differences and net investment hedges
Remeasurement gain on
post-retirement benefits
Deferred tax on remeasurement gain
on post-retirement benefits
Cash flow hedges
Total other comprehensive
(expense)/income for the year
Total comprehensive (expense)/
income for the year
Contributions by and distributions
to owners of the Company:
Dividends paid
Equity settled share plans net of tax
Issue of share capital
Employee Benefit Trust shares
Transfer between reserves
Balance at 31st December 2019
11
21
21
21
–
–
–
–
–
19.8
–
–
3.2
–
–
81.0
–
–
–
(4.0)
1.4
(10.6)
(75.9)
(5.4)
–
–
(1.4)
735.1
(75.9)
(5.4)
3.2
(4.0)
–
825.3
(0.4)
–
–
–
–
1.0
(76.3)
(5.4)
3.2
(4.0)
–
826.3
Other reserves represent the Group’s Translation, Net investment hedge, Cash flow hedges, Capital redemption and Employee Benefit
Trust reserves (see Note 21). The non-controlling interest is a 2.5% share of Spirax-Sarco (Korea) Ltd held by employee shareholders.
151
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Financial Statements
Consolidated Statement of Changes in Equity
for the year ended 31st December 2018
Notes
21
23
16, 23
21, 28
Share
capital
£m
19.8
–
19.8
–
–
–
–
–
–
–
Balance at 1st January 2018
Adoption of IFRS 15
Balance at 1st January 2018
(restated)
Profit for the year
Other comprehensive
(expense)/income:
Foreign exchange translation
differences and net investment hedges
Remeasurement loss on
post-retirement benefits
Deferred tax on remeasurement loss
on post-retirement benefits
Cash flow hedges
Total other comprehensive income/
(expense) for the year
Total comprehensive income for
the year
Contributions by and distributions
to owners of the Company:
Dividends paid
Equity settled share plans net of tax
Issue of share capital
Employee Benefit Trust shares
Balance at 31st December 2018
11
21
21
21
–
–
–
–
19.8
–
–
2.7
–
77.8
Share
premium
account
£m
75.1
–
Other
reserves
£m
19.3
–
Retained
earnings
£m
494.2
0.7
Equity
shareholders’
funds
£m
608.4
0.7
Non-
controlling
interest
£m
1.1
–
75.1
–
19.3
–
494.9
223.1
609.1
223.1
1.1
0.3
–
–
–
–
–
–
4.2
–
–
(0.1)
4.1
4.1
–
–
–
(1.2)
22.2
–
(5.9)
1.2
–
(4.7)
4.2
(5.9)
1.2
(0.1)
(0.6)
–
–
–
–
–
218.4
222.5
0.3
222.8
(67.0)
(0.3)
–
–
646.0
(67.0)
(0.3)
2.7
(1.2)
765.8
(0.3)
–
–
–
1.1
(67.3)
(0.3)
2.7
(1.2)
766.9
Total
equity
£m
609.5
0.7
610.2
223.4
4.2
(5.9)
1.2
(0.1)
(0.6)
In 2018, included in foreign exchange translation differences and net investment hedges is £0.3m for historic currency translation gains
transferred to the income statement relating to the disposal of a subsidiary (see Note 27).
152
Spirax-Sarco Engineering plcAnnual Report 2019 Consolidated Statement of Cash Flows
for the year ended 31st December 2019
Cash flows from operating activities
Profit before taxation
Depreciation, amortisation and impairment
Loss/(profit) on disposal of fixed assets
Profit on disposal of subsidiary
Reversal of acquisition-related fair value adjustments to inventory
Cash payments to the pension schemes greater than the charge to operating profit
Equity settled share plans
Net financing expense
Operating cash flow before changes in working capital and provisions
Change in trade and other receivables
Change in inventories
Change in provisions
Change in trade and other payables
Cash generated from operations
Income taxes paid
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of software and other intangibles
Development expenditure capitalised
Disposal of subsidiary
Acquisition of businesses net of cash acquired
Interest received
Net cash (used in)/from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Employee Benefit Trust share purchase
Repaid borrowings
New borrowings
Interest paid including interest on lease liabilities
Repayment of lease liabilities
Dividends paid (including minorities)
Net cash used in financing activities
Net change in cash and cash equivalents
Net cash and cash equivalents at beginning of period
Exchange movement
Net cash and cash equivalents at end of period
Borrowings
Net debt at end of period
Lease liabilities (including IFRS 16 transition adjustment)
Net debt and lease liabilities at end of period
Notes
3, 4
7
27
2
23
23
6
27
26
21
24
24
24
24
24
24
24
24
24
24
2019
£m
236.8
76.6
0.4
–
4.1
(5.2)
6.2
8.4
327.3
2.4
(23.8)
(2.4)
2.3
305.8
(78.4)
227.4
(50.9)
3.4
(8.3)
(3.2)
–
(117.9)
1.5
(175.4)
2.1
(14.7)
(80.2)
129.8
(7.0)
(11.2)
(76.3)
(57.5)
(5.5)
186.7
(12.9)
168.3
(463.5)
(295.2)
(38.9)
(334.1)
2018
£m
288.8
58.1
(8.6)
(47.4)
–
(10.1)
5.7
10.3
296.8
(16.0)
(15.5)
0.8
8.1
274.2
(61.6)
212.6
(33.5)
11.9
(8.3)
(1.6)
51.5
(2.7)
1.1
18.4
1.8
(6.7)
(111.6)
0.1
(7.7)
–
(67.3)
(191.4)
39.6
151.6
(4.5)
186.7
(422.5)
(235.8)
–
(235.8)
153
Spirax-Sarco Engineering plcAnnual Report 2019Financial StatementsGovernance Report Notes to the Consolidated Financial Statements
1 Accounting policies
Basis of preparation
The Consolidated Financial Statements have been prepared
on a historical cost basis except for items that are required
by International Financial Reporting Standards (IFRS) to be
measured at fair value, principally certain financial instruments.
The Consolidated Financial Statements have been prepared
in accordance with IFRS which includes the standards and
interpretatons issued by the International Accounting Standards
Board (IASB) that have been adopted by the European Union (EU).
The preparation of Financial Statements in conformity with IFRS
requires the Directors to apply IAS 1 and make judgements,
estimates and assumptions about the carrying amounts of
assets and liabilities that are not apparent from other sources.
The estimates and associated assumptions are based on historical
experiences and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
on-going basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future periods
if the revision affects both current and future periods.
Critical judgements in applying the Group’s
accounting policies
The Directors have concluded that no critical judgements, apart
from those involving estimations (which are dealt with separately
below) have been made in the process of applying the Group’s
accounting policies.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key
sources of estimation uncertainty at the reporting period that
may have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial
year, are outlined below.
(i) Post-retirement benefits
The Group’s defined benefit obligation is assessed by
selecting key assumptions. The selection of mortality rates,
inflation and pay increases are key sources of estimation
uncertainty which could lead to material adjustment in the
defined benefit obligation within the next financial year.
These assumptions are set with close reference
to market conditions.
The Group’s defined benefit obligation is discounted at a rate
set by reference to market yields at the end of the reporting
period on high quality corporate bonds. The most significant
criteria considered for the selection of bonds include the issue
size of the corporate bonds, quality of the bonds and the
identification of outliers which are excluded.
The assumptions selected and associated sensitivity analysis
are disclosed in Note 23.
The impact the COVID-19 outbreak has had on our business in
the first two months of 2020 and the anticipated impact on our
full year results along with the actions we are taking to mitigate its
impact are discussed in the Chair’s Statement starting on page
30. Whilst the situation is evolving rapidly the final outcome is very
difficult to assess, we expect an impact to sales and operating
profit in 2020 from COVID-19. Our view is that we do not
believe there is a significant risk of COVID-19 causing a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year, so therefore it does not represent a material
estimation uncertainty.
Climate change is a global challenge and an emerging risk to
businesses, people and the environment across the world. We
have a role to play in limiting warming by improving our energy
management, reducing our carbon emissions and by helping our
customers do the same. Growing awareness of climate change
and customer sustainability targets will provide impetus for
business growth as we provide products, services and solutions
that increase efficiency and reduce customers’ energy use and
carbon emissions. As a result, in our view climate change doesn’t
represent a material estimation uncertainty. For further detail
see the Risk Management and Sustainability sections of the
Strategic Report.
The possibility of a “no deal” Brexit has created economic
uncertainties for business. The Group’s Risk Management
Committee has taken action to mitigate these uncertainties as
outlined in the Risk Management section on page 21. The Group
has prepared for delays at ports and the application of tariffs
for goods moving in and out of Europe as disclosed in the
Financial Review on page 56. However we are also poised to take
advantage of opportunities that are presented and to mitigate any
adverse trading impact on the Group. The Group’s view is that this
doesn’t represent a material estimation uncertainty.
The Group has considerable financial resources together with a
diverse range of products and customers across wide geographic
areas and industries. As a consequence, the Directors believe that
the Group is well placed to manage its business risks successfully.
Further information on the Group’s business activities,
performance and position, together with the financial position of
the Group, its capital structure and cash flow are included in the
Strategic Report from the inside front cover to page 58. In addition,
Note 28 to the Financial Statements discloses details of the
Group’s financial risk management and credit facilities.
The Consolidated Financial Statements are presented in pounds
sterling, which is the Company’s functional currency, rounded to
the nearest one hundred thousand.
The Group’s Income Statement includes an adjustment column
where certain items are included. Details of the items included and
the reasons why they are included are disclosed in Note 2.
New standards and interpretations adopted in the
current year
IFRS 16 (Leases)
The Group adopted IFRS 16 (Leases) using the cumulative
catch-up approach on 1st January 2019. IFRS 16 introduces new
requirements for lessee and lessor accounting, with the distinction
between operating lease and finance lease no longer applying for
lessees. Under IFRS 16, a lessee is required to recognise assets
and liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of a low value when new. The new
standard also requires depreciation of the asset to be recognised
separately from the interest expense on the lease liability.
As a result of adopting IFRS 16, the difference between
the asset and liability recognised on 1st January 2019 has
been shown as an adjustment to opening retained earnings
within the Consolidated Statement of Changes in Equity.
Comparative information has not been restated and is therefore
presented under IAS 17.
154
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
1 Accounting policies continued
The exemptions taken by the Group on transition are detailed
below. The weighted average incremental borrowing rate applied
to the lease liabilities at 1st January 2019 was 3.2%.
The Group has elected to use the following transition
practical expedients:
(a) The definition of a lease in accordance with IAS 17 and
IFRIC 4 will continue to be applied to leases entered or
changed before 1st January 2019, and as a result we have
not reassessed whether a contract is or contains a lease
on transition.
(b) Leases with a determined lease term of less than 12 months
remaining from 1st January 2019 have been treated as short-
term.
(c) Initial direct costs have been excluded from the measurement
of the right-of-use asset for all leases entered into or changed
before 1st January 2019.
Furthermore, the Group has also elected to make use of the
following exemptions provided by IFRS 16:
a)
b)
Leases with a determined lease term of 12 months or less
from the commencement of the lease will be treated as
short-term and therefore not included in the right-of-use asset
or lease liability. Instead, lease costs will be recognised on a
straight-line basis across the life of the lease.
Leases for which the underlying asset is of low value when
new will be exempt from the requirements to value a right-
of-use asset and lease liability. Instead, lease costs will be
recognised on a straight-line basis across the life of the lease.
To apply this exemption, a threshold of £5,000 has been
utilised to define “low value”.
c)
Lease and non-lease components will not be separated;
therefore, each lease component and any associated non-
lease component will be accounted for as a single component.
d) Where applicable, IFRS 16 will be applied to a portfolio of
leases with similar characteristics.
The impact on the Financial Statements on transitioning is
as follows:
Statement of Financial Position
a) Right-of-use assets were capitalised, totalling £41.2m.
The majority of this value (£27.2m) results from leased property
where the Group leases a number of office and warehouse
sites in a number of geographical locations. £5.1m relates
to the reclassification of long-term prepayments held at
31st December 2018 to right-of-use assets at 1st January
2019. The remaining £8.9m is largely made up of leased
motor vehicles, where the Group makes use of leasing cars
for sales and service engineers at a number of operating
company locations.
b)
Lease liabilities were recognised totalling £39.0m, split
between £9.6m relating to amounts due within 12 months
from 1st January 2019 and £29.4m relating to amounts due
after 1st January 2020.
c) Deferred tax assets were recognised at the date of transition
of £0.5m.
d) As a result of the Group using the cumulative catch-up
approach, all property lease assets were valued as if IFRS 16
had always applied since the commencement of those leases
with the cumulative effect being an adjustment to opening
retained earnings. This led to a difference between the right-
of-use assets capitalised (excluding £5.1m reclassified from
long-term prepayments held at 31st December 2018), deferred
tax assets recognised and the corresponding lease liability.
The difference between these values of £2.4m has been
recognised as an adjustment to opening retained earnings.
Income Statement
a)
The impact on the Income Statement for the year ended 31st
December 2019 is an increase in operating profit of £1.3m
compared to the operating profit had IAS 17 continued to
apply. This is made up of a reduction in operating lease
rentals of £12.6m offset by a depreciation charge of £11.3m.
Once taking into account an additional £1.3m of lease liability
interest, the overall impact on profit before tax in the year
ended 31st December 2019 is £nil.
b)
The total expense relating to exempt leases (being short-term,
low value or variable lease payments not included in the lease
liability) was £2.5m.
Statement of Cash Flows
a)
Net cash inflow from operating activities for the year ended
31st December 2019 increased by £12.5m as a result of the
payments made on lease liabilities being reclassified from cash
generated from operations to financing activities.
b)
c)
Net cash outflow from financing activities increased by £12.5m
as a result of the above.
There is no impact on the net change in cash and cash
equivalents as a result of IFRS 16.
Please see Note 14 for further disclosures given in relation to IFRS 16.
IFRIC 23 (Uncertainty Over Income
Tax Treatments)
The Group adopted the guidance set out in IFRIC 23 (Uncertainty
Over Income Tax Treatments). International Accounting Standard
(IAS) 12 specifies how to account for current and deferred tax, but
not how to reflect the effects of uncertainty.
The guidance issued by the International Financial Reporting
Interpretations Committee (IFRIC) in IFRIC 23 provides
requirements that add to the requirements in IAS 12 by specifying
how to reflect the effects of uncertainty in accounting for
income taxes.
The guidance issued by the IFRIC provides clarification on
when to recognise a liability arising from an uncertainty, how to
measure the uncertainty, the unit of account to be used, the risk of
detection of uncertainty and how to consider changes in facts and
circumstances that impact on the measurement. The impact of
adoption of the guidance in IFRIC 23 is no change in the provision
at 1st January 2019.
In addition to IFRS 16 and IFRIC 23 during the current year, the
Group has applied a number of amendments to IFRS Standards
and Interpretations issued by the International Accounting
Standards Board (IASB) that are effective for annual periods that
begin on or after 1st January 2019. Their adoption has not had a
material impact on the disclosures or on the amounts reported in
these Financial Statements:
• amendments to IFRS 9 (Financial Instruments): Prepayment
Features with Negative Compensation;
155
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
Notes to the Consolidated Financial Statements
continued
1 Accounting policies continued
• amendments to IAS 28 (Investments in Associates and Joint
Ventures): Long-term Interests in Associates and Joint Ventures;
• annual Improvements to IFRS Standards 2015–2017 (Cycle
Amendments) to IFRS 3 (Business Combinations), IFRS 11
(Joint Arrangements), IAS 12 (Income Taxes) and IAS 23
(Borrowing Costs); and
• amendments to IAS 19 (Employee Benefits): Plan Amendment,
Curtailment or Settlement.
At the date of authorisation of these Financial Statements, the
Group has not applied the following new and revised IFRS
Standards that have been issued but are not yet effective:
• IFRS 17 (Insurance Contracts);
• IFRS 10 and IAS 28 (amendments): Sale or Contribution of
Assets between an Investor and its Associate or Joint Venture;
• amendments to IFRS 3 (Business Combinations): Definition of
a business;
• amendments to IAS 1 (Presentation of Financial Statements)
and IAS 8 (Accounting Policies, Changes in Accounting
Estimates and Errors): Definition of material; and
• Conceptual Framework: Amendments to References to the
Conceptual Framework in IFRS Standards.
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the Financial
Statements of the Group in future periods.
Basis of accounting
(i) Subsidiaries
The Group Consolidated Financial Statements include the
results of the Company and all its subsidiary undertakings.
Subsidiaries are 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. In assessing control, potential
voting rights that presently are exercisable or convertible are
taken into account. The Financial Statements of subsidiaries
are included in the Consolidated Financial Statements
from the date that control commences until the date that
control ceases.
(ii) Associates
Associates are those entities for which the Group has
significant influence, but not control, over the financial and
operating policies. The Financial Statements include the
Group’s share of the total recognised income and expense of
Associates on an equity accounted basis, from the date that
significant influence commenced until the date that significant
influence ceases.
(iii) Transactions eliminated on consolidation
Intra-Group balances, and any unrealised gains and losses or
income and expenses arising from intra Group transactions,
are eliminated in preparing the Group Consolidated Financial
Statements. Unrealised gains arising from transactions with
Associates are eliminated to the extent of the Group’s interest
in the entity.
Foreign currency
(i) On consolidation
The assets and liabilities of foreign operations are translated
into sterling at exchange rates ruling at the date of the
Consolidated Statement of Financial Position (closing rate).
The revenues, expenses and cash flows of foreign operations
are translated into sterling at average rates of exchange ruling
during the year. Where the Notes to the Group Consolidated
Financial Statements include tables reconciling movements
between opening and closing balances, opening and closing
assets and liabilities are translated at closing rates and
revenue, expenses and all other movements translated at
average rates, with the exchange differences arising being
disclosed separately.
Exchange differences arising from the translation of the assets
and liabilities of foreign operations are taken to a separate
translation reserve within equity. They are recycled and
recognised in the Income Statement upon disposal of the
operation. In respect of all foreign operations, any differences
that have arisen before 1st January 2004, the date of transition
to IFRS, are not presented as a separate component of equity.
(ii) Foreign currency transactions
Transactions in foreign currencies are translated to the
respective currencies of the Group entities at the foreign
exchange rate at the date of the transaction. Monetary assets
and liabilities at the date of the Statement of Financial Position
denominated in a currency other than the functional currency
of the entity are translated at the foreign exchange rate ruling at
that date. Foreign exchange differences arising on translation
are recognised in the Income Statement. Non-monetary
assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange
rate at the date of the transaction. Non-monetary assets and
liabilities denominated in foreign currencies that are stated at
fair value are translated at foreign exchange rates ruling at the
dates fair value was determined.
Cash flow hedges
Where a derivative financial instrument is designated as a hedge
of the variability in cash flows of a highly probable forecasted
transaction, the effective part of any gain or loss on the derivative
financial instrument is recognised in other comprehensive income
and presented in the cash flow hedges reserve. The associated
gain or loss is removed from equity and recognised in the Income
Statement in the period in which the transaction to which it
relates occurs.
Net investment hedge accounting
The Group uses foreign currency denominated borrowings as a
hedge against translation exposure on the Group’s net investment
in overseas companies. Where the hedge is fully effective at
hedging, the variability in the net assets of such companies
caused by changes in exchange rates and the changes in value
of the borrowings are recognised in the Consolidated Statement
of Comprehensive Income and accumulated in the translation
reserve. The ineffective part of any changes in value caused by
changes in exchange rates is recognised in the Consolidated
Income Statement.
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.
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Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
1 Accounting policies continued
Other financial liabilities
Other financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs. Other financial
liabilities are subsequently measured at amortised cost using the
effective interest method, with interest expense recognised on
an effective yield basis. The effective interest method is a method
of calculating the amortised cost of the financial liability and of
allocating interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future
cash payments through the expected life of the financial liability, or,
where appropriate, a shorter period, to the net carrying amount on
initial recognition.
The Group has not participated in any supplier financing
arrangements during the current or prior year.
Property, plant and equipment
Items of property, plant and equipment are stated at cost or
deemed cost, less accumulated depreciation.
Certain items of property, plant and equipment that had been
revalued to fair value prior to 1st January 2004, the date of
transition to IFRS, are measured on the basis of deemed cost,
being the revalued amount at the date of that revaluation.
Depreciation is charged to the Income Statement on a straight-line
basis at rates which write down the value of assets to their residual
values over their estimated useful lives. Land is not depreciated.
The principal rates are as follows:
Freehold buildings
Leasehold buildings (short and long-term)
Plant and machinery
Office furniture and fittings
Office equipment
Motor vehicles
Tooling and patterns
1.5-3.3%
Over life of lease
10-12.5%
10%
12.5-33.3%
20%
10%
The depreciation rates are reassessed annually.
Business Combinations
Acquisitions of subsidiaries and businesses are accounted for
using the acquisition method of accounting. Identified assets
acquired and liabilities assumed are measured at their respective
acquisition date fair values. The excess of the fair value of the
consideration given over the fair value of the identifiable net assets
acquired is recorded as goodwill. Acquisition related costs are
expensed as incurred. The operating results of the acquired
business are reflected in the Group’s Consolidated Financial
Statements after the date of acquisition.
Intangible assets
(i) Goodwill
Goodwill represents the difference between the cost of the
acquisition and the fair value of the net identifiable assets
acquired. Goodwill is stated at cost less any accumulated
impairment losses. Goodwill is allocated to cash-generating
units and is not amortised but is tested annually for impairment
(see Note 15 for more detail). In respect of acquisitions prior
to 1st January 2004, goodwill is included on the basis of its
deemed cost, which represents the amount recorded under
previous UK Generally Accepted Accounting Practice (GAAP).
(ii) Research and development
Expenditure on R&D is charged to the Income Statement in
the period in which it is incurred except that development
expenditure is capitalised where the development costs
relate to new or substantially improved products that are
subsequently to be released for sale and will generate future
economic benefits. The expenditure capitalised includes
staff costs and related expenses. Capitalised development
expenditure is stated at cost less accumulated amortisation
(see below) and any impairment losses.
(iii) Other intangible assets
Intangible assets other than goodwill that are acquired by the
Group are stated at cost less accumulated amortisation (see
below) and any impairment losses. Annual impairment tests
are performed on acquired intangible assets by comparing the
carrying value with the recoverable amount, being the higher
of the fair value less cost to sell and value in use, discounted
at an appropriate discount rate, of future cash flows in respect
of intangible assets for the relevant cash-generating unit.
More detail is given in Note 15.
(iv) Amortisation
Amortisation is charged to the Income Statement on a
straight-line basis over the estimated useful lives of intangible
assets, other than goodwill, from the date they are available for
use. Goodwill is tested for impairment annually. The principal
amortisation rates are as follows:
Capitalised development costs
ERP systems and software
Brand names and trademarks
Manufacturing designs and core technology
Non-compete undertakings
Customer relationships
20%
12-33%
5-33%
6-50%
20-50%
6-33%
Inventories
Inventories are measured at the lower of cost and net realisable
value. The cost of inventories includes expenditure incurred
in acquiring the inventories, production or conversion costs
and other costs in bringing them to their existing location and
condition. In the case of manufactured inventories and work
in progress, cost includes an appropriate share of production
overheads based on normal operating capacity.
Trade receivables 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. In continuing to assess the
impact of the adoption of IFRS 9, specifically expected credit
losses, is immaterial, we have considered that there is no material
concentration or dependency on large customers, specific
industries or geographies.
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.
157
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
Notes to the Consolidated Financial Statements
continued
1 Accounting policies continued
Provisions and contingent liabilities
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. If the obligation is expected to
be settled within 12 months of the reporting date the provision is
included within current liabilities and if expected to be settled after
12 months included in non-current liabilities.
In respect of product warranties, a provision is recognised when
the underlying products or services are sold. Obligations arising
from restructuring plans are recognised when detailed formal
plans have been established and there is a valid expectation that
such a plan will be carried out.
Provisions are recognised at an amount equal to the best estimate
of the expenditure required to settle the Group’s liability.
If the likelihood of having to settle the obligation is less than
probable but more than remote, or the amount of the obligation
cannot be measured reliably then a contingent liability is disclosed.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call
deposits with an original maturity usually of three months or less,
and are held at amortised cost. 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 and cash
equivalents for the purpose of the Statement of Cash Flows.
Going concern
The statement on the going concern assumption is included within
the Governance Report on page 136.
Alternative performance measures
The Group reports under International Financial Reporting
Standards (IFRS) and also uses alternative performance measures
where the Board believe that they help to effectively monitor the
performance of the Group, users of the Financial Statements
might find them informative and an aid to comparison with our
peers. Certain alternative performance measures also form a
meaningful element of Executive Directors’ annual bonuses.
A definition of the alternative performance measures included
in the Annual Report and a reconciliation to the closest IFRS
equivalent are disclosed in Note 2.
Employee benefits
(i) Defined contribution plans
Obligations for contributions to defined contribution pension
plans are recognised as an expense in the Income Statement
as incurred.
(ii) Defined benefit plans
The costs of providing pensions under defined benefit
schemes are calculated in accordance with the advice of
qualified actuaries and spread over the period during which
benefit is expected to be derived from the employees’
services. The Group’s net obligation or surplus in respect of
defined benefit pensions is calculated separately for each plan
by estimating the amount of future benefit that employees
have earned in return for their service in the current and prior
periods. Past service costs are recognised straight away.
That benefit is discounted at rates reflecting the yields on
AA credit rated corporate bonds that have maturity dates
approximating the terms of the Group’s obligations to
determine its present value. Pension scheme assets are
measured at fair value at the Statement of Financial Position
date. Actuarial gains and losses, differences between the
expected and actual returns, and the effect of changes in
actuarial assumptions are recognised in the Statement of
Comprehensive Income in the year they arise. Any scheme
surplus (to the extent it is considered recoverable under the
provisions of IFRIC 14) or deficit is recognised in full in the
Statement of Financial Position.
The cost of other post-employment liabilities are calculated in
a similar way to defined benefit pension schemes and spread
over the period, which benefit is expected to be derived from
the employees’ services, in accordance with the advice of
qualified actuaries.
(iii) Employee share plans
Incentives in the form of shares are provided to employees
under share option and share award schemes. The fair value
of these options and awards at their date of grant is charged
to the Income Statement over the relevant vesting periods with
a corresponding increase in equity. The value of the charge is
adjusted to reflect expected and actual levels of options and
share awards vesting.
(iv) Long-term share incentive plans
The fair value of awards is measured at the date of grant
and the cost spread over the vesting period. The amount
recognised as an expense is not adjusted to reflect market
based performance conditions, but is adjusted for non-market
based performance conditions.
Revenue
The Group applies the following five step framework when
recognising revenue.
Step 1: Identify the contracts with customers.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance
obligations in the contract.
Step 5: Recognise revenue when (or as) the entity satisfies a
performance obligation.
The criteria the Group uses to identify the performance obligations
within a contract are:
• the customer must be able to benefit from the goods or
services either on its own or in combination with other resources
available to the customer; and
• the entity’s promise to transfer the good or service to the
customer is separable from other promises in the contract.
The transaction price is the value that the Group expects to be
entitled to from the customer and includes discounts, rebates,
credits, price concessions, incentives, performance bonuses,
penalties and liquidated damages, but is not reduced for bad
debts. It is net of any Value Added Tax (VAT) and other sales-
related taxes. Variable consideration that is dependent on certain
events is included in the transaction price when it is “highly
probable” that the variable consideration will occur.
158
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
1 Accounting policies continued
Revenue is recognised over time as the product is being
manufactured or a service being provided if any of the following
criteria are met:
• the Group is creating a bespoke item which doesn’t have an
alternative use to the Group (i.e. we would incur a significant
loss to re-work and/or sell to another customer) and the entity
has a right to payment for work completed to date including a
reasonable profit;
• the customer controls the asset that is being created or
enhanced during the manufacturing process i.e. the customer
has the right to significantly modify and dictate how the product
is built during construction; and
• services provided where the customer simultaneously
receives and consumes the benefits provided by the Group’s
performance as the Group performs.
Judgement is made when determining if a product is bespoke
and the value of revenue to recognise over time as products are
being manufactured. However due to the low value of orders for
bespoke items in progress at the 31st December 2019 where we
have a right to payment of costs plus a reasonable profit this is not
considered a critical judgement.
The value of revenue to be recognised over time for goods being
manufactured is calculated using a cost based input approach.
This is considered a faithful depiction of the transfer of the goods
as the costs incurred, total costs expected to be incurred and
order value are known.
The value of revenue to be recognised over time for services
being provided is calculated based on the value to the customer
transferred to date as a proportion of the total value of the service
being provided.
If the criteria to recognise revenue over time is not met then
revenue is recognised at a point in time when the customer
obtains control of the asset and the performance obligation is
satisfied. The customer obtains control of the asset when the
customer can direct the use of the asset and obtain the benefits
from the asset.
Factors the Group considers when determining the point in
time when control of the asset has passed to the customer and
revenue recognised include:
• the Group has a right to payment;
• legal title is transferred to the customer;
• physical possession of the asset has been transferred to
the customer;
• the customer has the significant risks and rewards of
ownership; and
• the customer has accepted the asset.
Control normally passes and revenue recognised when the goods
are either despatched or delivered to the customer (in accordance
with the terms and conditions of the sale) or the installation and
testing is completed.
A large proportion of the Group’s revenue qualifies for recognition
on despatch or delivery of the goods to the customer as this is
when the performance obligation is satisfied. This is normally the
trigger point for raising an invoice per the terms and conditions of
the order. Therefore invoicing for a large proportion of the Group’s
revenue occurs at the same time as when the performance
obligation is satisfied. Contract assets at 31st December 2019
were £5.8m (0.5% of total revenue).
All revenue recognised by the Group is generated through
contracts with customers.
When the unavoidable costs of fulfilling the contract exceed
the revenue to be recognised the contract is loss making and
the expected loss is recognised in the Consolidated Income
Statement immediately.
Warranties that give assurance that a product meets agreed-upon
specifications are accounted for as a cost provision and do not
impact the timing and value of revenue. The Group does not have
any material warranties that promises more than just providing
assurance that a product meets agreed-upon specifications.
Costs of obtaining a contract, that are only incurred because the
contract was obtained, are capitalised and expensed at a later
date. At 31st December 2019 no costs of obtaining a contract
were capitalised. All other assets recognised to fulfil a contract are
within the scope of other accounting standards and policies.
Leases
The Group assesses whether a contract is or contains a lease,
at inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term leases
(defined as leases with a lease term of 12 months or less) and
leases of low value assets (assets with a value of less than £5,000).
For these leases, the Group recognises the lease payments as
an operating expense on a straight-line basis over the term of the
lease unless another systematic basis is more representative of the
time pattern in which economic benefits from the leased assets
are consumed.
For any new leases entered into after 1st January 2019, the
lease liability is initially measured at the present value of the
lease payments that are not paid at the commencement date,
discounted by using the incremental borrowing rate for the related
geographical location unless the rate implicit in the lease is readily
determinable. The incremental borrowing rate is calculated at
the rate of interest at which the company would have been able
to borrow for a similar term and with a similar security the funds
necessary to obtain a similar asset in a similar market.
Lease payments included in the measurement of the lease
liability comprise:
• fixed lease payments (including in substance fixed payments),
less any lease incentives receivable;
• variable lease payments that depend on an index or rate, initially
measured using the index or rate at the commencement date;
• the amount expected to be payable by the company under
residual value guarantees;
• the exercise price of purchase options, if the company is
reasonably certain to exercise the options; and
• payments of penalties for terminating the lease, if the lease term
reflects the exercise of an option to terminate the lease.
159
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
Share capital and repurchased shares
When share capital recognised as equity is repurchased,
the amount of the consideration paid, including directly
attributable costs, is recognised as a deduction from equity.
Repurchased shares are classified as treasury shares or placed in
an Employee Benefit Trust and are presented as a deduction from
total equity.
Share-based benefits granted to subsidiary
employees
The Company grants share-based benefits over its own
Ordinary shares directly to employees of subsidiary companies.
These employees provide services to the subsidiary companies.
The cost of these shares is not recharged and therefore the fair
value of the share options granted is recognised as a capital
contribution to the subsidiary companies. This is accounted for as
an increase in investments with a corresponding increase in a non-
distributable component of equity.
2 Alternative performance measures
The Group reports under International Financial Reporting
Standards (IFRS) and also uses alternative performance measures
where the Board believes that they help to effectively monitor
the performance of the Group, users of the Financial Statements
might find them informative and an aid to comparison with our
peers. Certain alternative performance measures also form a
meaningful element of Executive Directors’ variable remuneration.
Please see the Annual Report on Remuneration 2019 on
pages 102 to 132 for further detail. A definition of the alternative
performance measures and a reconciliation to the closest IFRS
equivalent are disclosed below.
Adjusted operating profit
Adjusted operating profit excludes items that are considered to
be significant in nature and/or quantum and where treatment
as an adjusted item provides stakeholders with additional useful
information to assess the period-on-period trading performance
of the Group and an aid to comparison with our peers. The Group
excludes such items which management have defined as:
• amortisation and impairment of acquisition-related
intangible assets;
• impairment of goodwill;
• costs associated with acquisitions and disposal;
• reversal of acquisition-related fair value adjustments to inventory;
• changes in deferred consideration payable on acquisitions;
• profit or loss on disposal of subsidiary;
• significant restructuring costs;
• foreign exchange gains and losses on borrowings;
• significant profits or losses on disposal of property; and
• significant plan amendments and/or legal rulings requiring a
past service cost or credit for post-retirement benefit plans.
1 Accounting policies continued
The lease liability is subsequently measured by increasing the
carrying amount to reflect interest on the lease liability and by
reducing the carrying amount to reflect the lease payments made.
The Group remeasures the lease liability (and makes a
corresponding adjustment to the related right-of-use asset)
whenever:
• the lease term has changed or there is a significant event
or change in circumstances resulting in a change in the
assessment of exercise of a purchase option; and
• the lease payments change due to changes in an index
or rate or a change in expected payment under a residual
guarantee value.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before
the commencement date and any initial direct costs. They are
subsequently measured at cost less accumulated depreciation
and impairment losses.
Right-of-use assets are depreciated over the shorter period
of lease term and useful life of the underlying asset. If a lease
transfer’s ownership of the underlying asset or the cost of the
right-of-use asset reflects that the Group expects to exercise a
purchase option, the related right-of-use asset is depreciated over
the useful life of the underlying asset.
Variable lease payments that do not depend on an index or rate
are not included in the measurement of the lease liability and the
right-of-use asset. The related payments are recognised as an
expense in the period in which the event or condition that triggers
those payments occurs.
Judgement is required when determining whether to include
or exclude optional extension periods within the lease term,
and estimation is required when calculating the incremental
borrowing rate used to discount the future lease cash flows.
These are not considered critical judgements or a key source of
estimation uncertainty.
Taxation
The tax charge comprises current and deferred tax. Income tax
expense is recognised in the Income Statement unless it relates
to items recognised directly in equity or in other comprehensive
income, when it is also recognised in equity or other
comprehensive income respectively. Current tax is the expected
tax payable on the profit for the year and any adjustments in
respect of previous years using tax rates enacted or substantively
enacted at the reporting date. Tax positions are reviewed to
assess whether a provision should be made on prevailing
circumstances. Tax provisions are included within Current taxation
payable. Deferred tax is provided on temporary differences arising
between the tax base of assets and liabilities, and their carrying
amounts in the Financial Statements. Deferred tax assets are
recognised to the extent that it is probable that future taxable
profits will be available against which the asset can be utilised.
Deferred tax is provided using rates of tax that have been enacted
or substantively enacted at the date of the Statement of Financial
Position or the date that the temporary differences are expected to
reverse. Deferred tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the
related tax benefit will be realised.
160
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 2 Alternative performance measures continued
A reconciliation between operating profit as reported under IFRS and adjusted operating profit is given below.
Operating profit as reported under IFRS
Amortisation of acquisition-related intangible assets
Impairment of goodwill
Acquisition-related items
Reversal of acquisition-related fair value adjustments to inventory
Profit on disposal of subsidiary
Profit on disposal of property
Equalising guaranteed minimum pensions for the UK post-retirement benefit plans
Post-retirement benefit plan in the USA being frozen to future accrual
Adjusted operating profit
The related tax effects of the above are included as adjustments in taxation as disclosed in Note 9.
Adjusted earnings per share
Profit for the period attributable to equity holders as reported under IFRS (£m)
Items excluded from adjusted operating profit disclosed above (£m)
Tax effects on adjusted items (£m)
Adjusted profit for the period attributable to equity holders (£m)
Weighted average shares (million)
Basic adjusted earnings per share
Diluted weighted average shares (million)
Diluted adjusted earnings per share
2019
£m
245.0
26.8
4.2
2.6
4.1
–
–
–
–
282.7
2019
166.6
37.7
(8.5)
195.8
73.7
265.7p
73.9
264.9p
2018
£m
299.1
25.2
–
(0.2)
–
(47.4)
(6.5)
0.7
(6.0)
264.9
2018
223.1
(34.2)
(5.0)
183.9
73.6
250.0p
73.8
249.1p
Basic adjusted earnings per share is defined as adjusted profit for the period attributable to equity holders divided by the weighted
average number of shares. Diluted adjusted earnings per share is defined as adjusted profit for the period attributable to equity holders
divided by the diluted weighted average number of shares.
Basic and diluted EPS calculated on an IFRS profit basis are included in Note 10.
Adjusted cash flow
A reconciliation showing the items that bridge between net cash from operating activities as reported under IFRS to an adjusted basis is
given below. Adjusted cash from operations is used by the Board to monitor the performance of the Group, with a focus on elements of
cashflow, such as Net capital expenditure, which are subject to day to day control by the business.
Net cash from operating activities as reported under IFRS
Acquisition and disposal costs
Net capital expenditure excluding acquired intangibles from acquisitions
Tax paid
Repayments of principal under lease liabilities
Adjusted cash from operations
2019
£m
227.4
2.5
(59.0)
78.4
(11.2)
238.1
2018
£m
212.6
0.2
(31.5)
61.6
–
242.9
Adjusted cash conversion in 2019 is 84% (2018: 91%). Cash conversion is calculated as adjusted cash from operations divided by
adjusted operating profit.
The adjusted cash flow is included in the Financial Review on page 58.
161
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
2 Alternative performance measures continued
Cash generation
Cash generation is one of the Group’s key performance indicators used by the Board to monitor the performance of the Group and
measure the successful implementation of our strategy. It is one of three financial measures on which Executive Directors’ variable
remuneration is based.
Cash generation is adjusted operating profit after adding back depreciation and amortisation (excluding IFRS 16 depreciation), less cash
payments to pension schemes in excess of the charge to operating profit, equity settled share plans and working capital changes.
Adjusted operating profit
Depreciation and amortisation (excluding IFRS16 depreciation)
Cash payments to pension schemes in excess of charge to P&L
Equity settled share plans
Working capital changes
Cash generation
2019
£m
282.7
34.3
(5.2)
6.2
(21.4)
296.6
2018
£m
264.9
32.9
(4.6)
5.7
(22.5)
276.4
A reconciliation showing the items that bridge between net cash from operating activities as reported under IFRS to cash generation is
shown below.
Net cash from operating activities as reported under IFRS
Acquisition and disposal costs
Tax paid
Depreciation of right-of-use assets (IFRS 16)
(Loss)/profit on disposal of fixed assets
Cash generation
2019
£m
227.4
2.5
78.4
(11.3)
(0.4)
296.6
2018
£m
212.6
0.2
61.6
–
2.0
276.4
Return on invested capital (ROIC)
ROIC measures the after tax return on the total capital invested in the business. It is calculated as adjusted operating profit after tax
divided by average invested capital.
An analysis of the components is as follows:
Total equity
Net debt
Total invested capital
Average invested capital
Average invested capital (excluding IFRS 16)
Operating profit as reported under IFRS
Adjustments (see adjusted operating profit)
Adjusted operating profit
Taxation
Adjusted operating profit after tax
Adjusted operating profit after tax (excluding IFRS 16)
Return in invested capital
Return in invested capital (excluding IFRS 16)
162
2019
£m
826.3
334.1
1,160.4
1,081.6
1,061.2
245.0
37.7
282.7
(80.6)
202.1
201.2
18.7%
19.0%
2018
£m
766.9
235.8
1,002.7
992.9
992.9
299.1
(34.2)
264.9
(73.1)
191.8
191.8
19.3%
19.3%
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 2 Alternative performance measures continued
Return on capital employed (ROCE)
ROCE measures effective management of fixed assets and working capital relative to the profitability of the business. It is calculated as
adjusted operating profit divided by average capital employed. More information on ROCE can be found in the Capital Employed and
ROCE sections of the Financial Review on page 57.
An analysis of the components is as follows:
Property, plant and equipment
Right-of-use assets (IFRS 16)
Prepayments
Inventories
Trade receivables
Other current assets
Tax recoverable
Trade, other payables and current provisions
Current tax payable
Capital employed
Average capital employed
Average capital employed (excluding IFRS 16)
Operating profit
Adjustments (see adjusted operating profit on page 160)
Adjusted operating profit
Adjusted operating profit (excluding IFRS 16)
Return on capital employed
Return on capital employed (excluding IFRS 16)
2019
£m
251.2
40.8
0.9
185.9
240.7
35.3
8.4
(178.3)
(26.7)
558.2
521.4
501.0
245.0
37.7
282.7
281.4
54.2%
56.2%
2018
£m
230.8
–
6.2
160.6
245.1
32.9
4.6
(172.0)
(23.7)
484.5
482.2
482.2
299.1
(34.2)
264.9
264.9
54.9%
54.9%
A reconciliation of capital employed to net assets as reported under IFRS and disclosed on the Consolidated Statement of Financial
Position is given below.
Capital employed
Goodwill and other intangible assets
Investment in Associate
Post-retirement benefits
Net deferred tax
Non-current provisions and long-term payables
Lease liabilities
Net debt
Net assets as reported under IFRS
2019
£m
558.2
721.6
0.2
(71.3)
(43.1)
(5.2)
(38.9)
(295.2)
826.3
2018
£m
484.5
645.2
–
(85.1)
(35.5)
(6.4)
–
(235.8)
766.9
Net debt including IFRS 16 lease liabilities
A reconciliation between net debt and net debt including IFRS 16 lease liabilities is given below. A breakdown of the balances that are
included within net debt is given within Note 24. Net debt excludes IFRS 16 lease liabilities to enable comparability with prior years.
Net debt
IFRS 16 lease liabilities
Net debt and IFRS 16 lease liabilities
2019
£m
295.2
38.9
334.1
2018
£m
235.8
–
235.8
163
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
2 Alternative performance measures continued
Net debt to earnings before interest, tax, depreciation and amortisation (EBITDA)
To assess the size of the net debt balance relative to the size of the earnings for the Group, we analyse net debt as a proportion of
EBITDA. EBITDA is calculated by adding back depreciation and amortisation of owned property, plant and equipment, software
and development to adjusted operating profit. Net debt excludes IFRS 16 lease liabilities. The net debt to EBITDA ratio is calculated
as follows:
Adjusted operating profit
Depreciation and amortisation of property, plant and equipment, software and development
Earnings before interest, tax, depreciation and amortisation
Net debt
Net debt to EBITDA
The components of net debt are disclosed in Note 24.
2019
£m
282.7
34.3
317.0
295.2
0.9
2018
£m
264.9
32.9
297.8
235.8
0.8
Organic measures
As we are a multi-national group of companies, which trade in a large number of foreign currencies and regularly acquire and sometimes
dispose of companies, we also refer to organic performance measures throughout the Annual Report. These strip out the effects of
the movement of foreign currency exchange rates and of acquisitions and disposals. The Board believes that this allows users of the
accounts to gain a further understanding of how the Group has performed.
Exchange translation movements are assessed by re-translating prior period reported values to current period exchange rates.
Exchange transaction impacts on operating profit are assessed on the basis of transactions being at constant currency between years.
Any acquisitions and disposals that occurred in either the current period or prior period are excluded from the results of both the prior
and current period at current period exchange rates.
The organic percentage movement is calculated as the organic movement divided by the sum of the prior period and exchange.
The organic bps change in adjusted operating margin is the difference between the current period margin excluding acquisitions and
disposals and the prior period margin at current period exchange rates excluding acquisitions and disposals.
A reconciliation of the movement in revenue and adjusted operating profit compared to the prior period is given below.
Revenue
Adjusted operating profit
Adjusted operating margin
2018
£1,153.3m
£264.9m
23.0%
Exchange
–
(£2.0m)
Organic
£73.9m
£18.2m
The reconciliation for each segment is included in the Strategic Report.
Acquisitions
and disposals
2019
£15.2m £1,242.4m
£282.7m
22.8%
£1.6m
Organic
+6%
+7%
+10 bps
Reported
+8%
+7%
-20 bps
3 Segmental reporting
As required by IFRS 8 (Operating Segments), the following segmental information is presented in a consistent format with management
information considered by the Board.
Following recent material acquisitions into the Group, the composition of the Group’s Reportable Segments changed in the financial
year ended 31st December 2019 to align with both how the business is now managed alongside how information is now presented to
the Board and the Executive Committee. This change results in Steam Specialties being reported as one single consolidated operating
segment. In previous years Steam Specialties was an aggregation of three separate operating segments, EMEA, Americas and Asia
Pacific, however recent changes to the management structure resulted in the creation of a separate Steam Specialties management
team reporting to the Chief Executive and Chief Financial Officer on the consolidated Steam Specialties results. Comparative results
have not been restated, as the Steam Specialties total was previously disclosed as a subtotal to the three previous geographic
operating segments.
Following the acquisition of Thermocoax in May 2019, the Chromalox operating segment was renamed to Electric Thermal Solutions
which now includes the combination of both businesses in 2019. No other changes to the structure of operating segments have
been made.
164
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 3 Segmental reporting continued
Analysis by operating segment
2019
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total
Net finance expense
Share of profit of Associate
Profit before tax
2018
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total
Net finance expense
Share of profit of Associate
Profit before tax
Revenue
£m
755.4
186.1
300.9
1,242.4
Revenue
£m
733.5
154.6
265.2
1,153.3
Total
operating
profit
£m
172.6
7.9
82.7
(18.2)
245.0
(8.4)
0.2
236.8
Total
operating
profit
£m
222.5
12.1
77.5
(13.0)
299.1
(10.3)
–
288.8
The following table details the split of revenue by geography for the combined Group:
Europe, Middle East and Africa
Asia Pacific
Americas
Total revenue
Adjusted
operating
profit
£m
177.9
24.7
95.8
(15.7)
282.7
(8.4)
0.2
274.5
Adjusted
operating
profit
£m
170.1
22.8
84.8
(12.8)
264.9
(10.3)
–
254.6
2019
£m
518.7
296.0
427.7
1,242.4
Adjusted
operating
margin
%
23.6%
13.3%
31.8%
22.8%
Adjusted
operating
margin
%
23.2%
14.7%
32.0%
23.0%
2018
£m
487.3
269.8
396.2
1,153.3
Net revenue generated by Group companies based in the USA is £319.4m (2018: £288.8m), in China is £134.6m (2018: £118.5m), in the
UK is £103.5m (2018: £103.7m), in Germany is £105.3m (2018: £118.0m) and the rest of the world is £579.6m (2018: £524.3m).
165
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
3 Segmental reporting continued
The total operating profit for the period includes certain items, as analysed below:
2019
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total
2018
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total
Amortisation of
acquisition-related
intangible assets
£m
(5.3)
(12.7)
(8.8)
–
(26.8)
Acquisition-
related items
£m
–
–
(0.1)
(2.5)
(2.6)
Impairment of
goodwill
£m
–
–
(4.2)
–
(4.2)
Reversal of acquisition-
related fair value
adjustments to inventory
£m
–
(4.1)
–
–
(4.1)
Amortisation
of acquisition-related
intangible assets
£m
(6.7)
(10.7)
(7.8)
–
(25.2)
Profit on
disposal of
subsidiary
and property
£m
53.9
–
–
–
53.9
Acquisition
related items
£m
(0.1)
–
0.5
(0.2)
0.2
Equalising GMP for the
UK pension plans
£m
(0.7)
–
–
–
(0.7)
USA pension plan
frozen to future
accrual
£m
6.0
–
–
–
6.0
Net financing income and expense
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Corporate expenses
Total net financing expense
Net assets
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Liabilities
Net deferred tax
Net current tax payable
Net debt including lease liabilities
Net assets
2019
Income
£m
1.1
0.1
0.1
0.2
1.5
2019
Expense
£m
(3.3)
(0.3)
(0.5)
(5.8)
(9.9)
2018
Income
£m
0.9
0.1
0.1
–
1.1
2019
Liabilities
£m
(176.3)
(36.3)
(42.2)
(254.8)
2019
Net
£m
(2.2)
(0.2)
(0.4)
(5.6)
(8.4)
2019
Assets
£m
669.4
552.0
255.2
1,476.6
(254.8)
(43.1)
(18.3)
(334.1)
826.3
2018
Expense
£m
(2.8)
(0.1)
(0.2)
(8.3)
(11.4)
2018
Assets
£m
683.6
409.3
227.9
1,320.8
(263.5)
(35.5)
(19.1)
(235.8)
766.9
Total
£m
(5.3)
(16.8)
(13.1)
(2.5)
(37.7)
Total
£m
52.4
(10.7)
(7.3)
(0.2)
34.2
2018
Net
£m
(1.9)
–
(0.1)
(8.3)
(10.3)
2018
Liabilities
£m
(195.9)
(28.9)
(38.7)
(263.5)
Non-current assets in the UK were £187.1m (2018: £157.1m), in the USA were £375.8m (2018: £393.5m), in Germany were £165.0m
(2018: £169.4m) and in France were £146.5m (2018: £15.1m).
166
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 3 Segmental reporting continued
Capital additions, depreciation, amortisation and impairment
2019
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Group total
Capital
additions
£m
57.7
81.6
40.6
179.9
2019
Depreciation,
amortisation
and impairment
£m
35.8
18.4
22.4
76.6
2018
Capital
additions
£m
27.9
6.0
18.6
52.5
2018
Depreciation
and
amortisation
£m
30.1
13.6
14.4
58.1
Capital additions include property, plant and equipment of £59.0m (2018: £33.5m), of which £8.1m (2018: £0.2m) was from acquisitions
in the period, and other intangible assets of £72.0m (2018: £19.0m) of which £60.2m (2018: £9.1m) relates to acquired intangibles from
acquisitions in the period. Right-of-use asset additions of £48.9m occurred during the 12 month period to 31st December 2019, of which
£36.1m relates to additions on 1st January 2019 as a result of transition to IFRS 16, £11.7m relates to new leases entered into in 2019 and
£1.1m from acquisitions. Capital additions split between the UK and rest of the world are UK £36.8m (2018: £20.1m) and rest of the world
£143.1m (2018: £32.4m).
4 Operating costs
Cost of inventories recognised as an expense
Staff costs (Note 5)
Depreciation, amortisation and impairment
Other operating charges
Total operating costs
2019
Adjusted
£m
297.5
438.7
45.6
177.9
959.7
2019
Adjustments
£m
4.1
–
31.0
2.6
37.7
2019
Total
£m
301.6
438.7
76.6
180.5
997.4
2018
Adjusted
£m
278.0
409.2
32.9
168.3
888.4
2018
Adjustments
£m
–
(5.3)
25.2
(54.1)
(34.2)
2018
Total
£m
278.0
403.9
58.1
114.2
854.2
Total depreciation, amortisation and impairment includes amortisation of acquisition-related intangible assets of £26.8m (2018: £25.2m)
and impairment of goodwill of £4.2m (2018: £nil). Total other operating charges include acquisition-related items of £2.6m (2018: £0.2m),
profit on the sale of businesses of £nil (2018: £47.4m) and profit on disposal of property of £nil (2018: £6.5m). Total cost of inventories
recognised as an expense includes the reversal of acquisition-related fair value adjustments to inventory £4.1m (2018: £nil).
Operating costs include exchange difference benefits of £2.7m (2018: £3.9m).
5 Staff costs and numbers
The aggregate payroll costs of persons employed by the Group were as follows:
Wages and salaries
Social security costs
Pension costs
Total payroll costs
The average number of persons employed by the Group (including Directors) during the year was as follows:
United Kingdom
Overseas
Group average
2019
£m
345.6
71.6
21.5
438.7
2019
2,014
5,819
7,833
2018
£m
325.9
58.7
19.3
403.9
2018
1,875
5,528
7,403
167
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
Notes to the Consolidated Financial Statements
continued
6 Net financing income and expense
Financial expenses:
Bank and other borrowing interest payable
Interest expense on lease liabilities
Net interest on pension scheme liabilities
Financial income:
Bank interest receivable
Net financing expense
Net pension scheme financial expense
Interest expense on lease liabilities
Net bank interest
Net financing expense
7 Profit before taxation
Profit before taxation is shown after charging:
Depreciation of owned tangible fixed assets
Depreciation of right-of-use assets
Amortisation of acquired intangibles
Impairment of goodwill
Operating lease rentals
Leases exempt from IFRS 16 (short-term, low value or variable lease payments)
Exchange difference benefits
(Loss)/profit on disposal of property, plant and equipment
Research and development
Auditor’s remuneration
Audit of these Financial Statements
Amounts receivable by the Company’s auditor and its Associates in respect of:
Audit of Financial Statements of subsidiaries of the Company
Total audit fees
Audit-related assurance services – Interim review
Total non-audit fees
Total auditor's remuneration
2019
£m
(6.4)
(1.3)
(2.2)
(9.9)
1.5
(8.4)
(2.2)
(1.3)
(4.9)
(8.4)
2019
£m
(27.0)
(11.3)
(26.8)
(4.2)
–
(2.5)
2.7
(0.4)
(10.2)
2019
£m
0.2
1.7
1.9
0.1
0.1
2.0
2018
£m
(9.4)
–
(2.0)
(11.4)
1.1
(10.3)
(2.0)
–
(8.3)
(10.3)
2018
£m
(26.5)
–
(25.2)
–
(15.1)
–
3.9
8.6
(10.8)
2018
£m
0.2
1.5
1.7
0.1
0.1
1.8
8 Directors’ emoluments
Directors represent the key management personnel of the Group under the terms of IAS 24 (Related Party Disclosures).
Total remuneration is shown below.
Further details of salaries and short-term benefits, post-retirement benefits, share plans and long-term share incentive plans are shown
in the Annual Report on Remuneration 2019 on pages 102 to 132. The share-based payments charge comprises a charge in relation to
the Performance Share Plan and the Employee Share Ownership Plan (as described in Note 23).
Salaries and short-term benefits
Post-retirement benefits
Share-based payments
Total Directors' remuneration
168
2019
£m
4.1
0.5
1.7
6.3
2018
£m
3.7
0.4
1.3
5.4
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
2019
Adjusted
£m
2019
Adjustments
£m
2019
Total
£m
2018
Adjusted
£m
2018
Adjustments
£m
9 Taxation
Analysis of charge in period
UK corporation tax:
Current tax on income for the period
Adjustments in respect of prior periods
Foreign tax:
Current tax on income for the period
Adjustments in respect of prior periods
14.1
(1.1)
13.0
56.9
(0.1)
56.8
69.8
(0.1)
8.6
78.3
–
–
–
–
–
–
–
–
(8.5)
(8.5)
Total current tax charge
Deferred tax – UK
Deferred tax – Foreign
Tax on profit on ordinary activities
Reconciliation of effective tax rate
Profit before tax and share of profit
of Associate
Expected tax at blended rate
Increased withholding tax on
overseas dividends
Benefit of financing structures
Non-deductible expenditure
Over provided in prior years
Other reconciling items
Total tax in income statement
Effective tax rate
2019
Adjusted
£m
2019
Adjustments
£m
274.3
69.2
4.0
(1.2)
2.7
0.1
3.5
78.3
28.5%
(37.7)
(9.6)
–
–
–
–
1.1
(8.5)
22.6%
14.1
(1.1)
13.0
56.9
(0.1)
56.8
69.8
(0.1)
0.1
69.8
2019
Total
£m
236.6
59.6
4.0
(1.2)
2.7
0.1
4.6
69.8
29.5%
7.6
0.4
8.0
58.5
0.9
59.4
67.4
0.1
2.9
70.4
–
–
–
0.3
–
0.3
0.3
–
(5.3)
(5.0)
2018
Adjusted
£m
2018
Adjustments
£m
254.6
67.3
4.3
(3.6)
2.1
(1.0)
1.3
70.4
27.6%
34.2
6.5
–
–
–
–
(11.5)
(5.0)
(14.6%)
2018
Total
£m
7.6
0.4
8.0
58.8
0.9
59.7
67.7
0.1
(2.4)
65.4
2018
Total
£m
288.8
73.8
4.3
(3.6)
2.1
(1.0)
(10.2)
65.4
22.6%
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. The blended tax rate is calculated using each subsidiary company’s headline tax rate as a
proportion of its respective profit.
The Group’s tax charge for the year ended 31st December 2019 includes a credit of £8.5m in relation to certain items excluded from
adjusting operating profit (as disclosed in Note 2). The tax impacts of these items are:
• amortisation of acquisition-related intangible assets (£6.7m credit);
• reversal of acquisition-related fair value adjustments to inventory (£1.3m tax credit); and
• acquisition-related items (£0.5m tax credit).
Excluding these adjustments the tax on profit and the effective tax rate are £78.3m and 28.5% respectively.
The UK corporation tax rate reduced from 20% to 19% on 1st April 2017. Whilst a further reduction to 17% (effective from 1st April 2020)
was substantively enacted on 15th September 2016, which will reduce the Group’s future current tax charge, the UK Government have
announced proposals to maintain the UK corporation tax rate at 19%; however this not been enacted to date.
The UK deferred tax assets and liabilities at 31st December 2019 have been calculated based upon rates of 19% and 17% in respect of
deferred tax expected to reverse before 1st April 2020 and after this date respectively.
169
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
9 Taxation continued
In October 2017, the European Commission opened a formal State Aid investigation into an exemption within the UK’s current Controlled
Foreign Company (CFC) regime for certain finance income. On 2nd April 2019, the European Commission published its final decision
that the UK CFC Finance Company Partial Exemption (FCPE) constituted State Aid in certain circumstances. In common with a number
of other UK Groups, the Spirax-Sarco Group has benefited from the FCPE and the total benefit in the period from 1st January 2013
to 31st December 2019 is approximately £8.3m including compound interest. On 12th June 2019 the UK Government submitted an
application for annulment to the EU General Court appealing the decision of the European Commission. Similar to other UK Groups,
on 31st October 2019 the Spirax-Sarco Group submitted an application for annulment to the EU General Court in its own right,
appealing the decision of the European Commission. As a result, no provision has been recognised at the year end balance sheet date.
The Spirax-Sarco Group acknowledge a cash payment for the amount that HM Revenue & Customs seek to recover may be required
during 2020, which we would expect to be refundable in the event of a successful appeal.
No UK tax (after double tax relief for underlying tax) is expected to be payable on the future remittance of retained earnings of
overseas subsidiaries.
The effective tax rate is calculated as a percentage of profit before tax and a share of profits of Associates.
10 Earnings per share
Profit attributable to equity shareholders (£m)
Weighted average shares (million)
Dilution (million)
Diluted weighted average shares (million)
Basic earnings per share
Diluted earnings per share
Basic and diluted earnings per share calculated on an adjusted profit basis are included in Note 2.
The dilution is in respect of unexercised share options and the Performance Share Plan.
11 Dividends
Amounts paid in the year:
Final dividend for the year ended 31st December 2018 of 71.0p (2017: 62.0p) per share
Interim dividend for the year ended 31st December 2019 of 32.0p (2018: 29.0p) per share
Total dividends paid
Amounts arising in respect of the year:
Interim dividend for the year ended 31st December 2019 of 32.0p (2018: 29.0p) per share
Proposed final dividend for the year ended 31st December 2019 of 78.0p (2018: 71.0p) per share
Total dividends arising
2019
166.6
73.7
0.2
73.9
226.2p
225.5p
2018
223.1
73.6
0.2
73.8
303.1p
302.0p
2019
£m
52.3
23.6
75.9
23.6
57.5
81.1
2018
£m
45.7
21.3
67.0
21.3
52.3
73.6
The proposed dividend is subject to approval in 2020. It is therefore not included as a liability in these Financial Statements. No scrip
alternative to the cash dividend is being offered in respect of the proposed final dividend for the year ended 31st December 2019.
170
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 12 Investment in Associate
Cost of investment
Share of equity
Total investment in Associate
Summarised financial information (100% of the results of the Associate):
Revenue
Profit/(loss) for the period
Current assets
Non-current assets
Current and non-current liabilities
Associate
2019
£m
1.4
(1.2)
0.2
Associate
2018
£m
1.4
(1.4)
–
4.2
0.6
1.9
0.2
1.3
1.5
–
0.5
0.2
0.5
Details of the Group’s Associate at 31st December 2019 and 31st December 2018 is as follows:
Name of Associate
Econotherm (UK) Ltd
Country of incorporation
and operation
UK
Proportion of ownership interest and
voting power held
26.3%
Principal
activity
Manufacturing and selling
During 2018, the proportion of ownership held by the Group in Econotherm was reduced from 38.9% to 26.3%.
The Group’s share of Profit of Associate is £0.2m (2018: £nil).
13 Property, plant and equipment
2019
Cost:
At 1st January 2019
Exchange adjustments
Additions
Acquisitions
Transfers
Disposals
At 31st December 2019
Depreciation:
At 1st January 2019
Exchange adjustments
Charged in year
Transfers
Disposals
At 31st December 2019
Net book value:
At 31st December 2019
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings,
tools and
equipment
£m
134.1
(4.4)
129.7
18.3
3.8
–
(3.7)
148.1
29.9
(1.2)
28.7
3.2
–
(0.5)
31.4
39.0
(2.0)
37.0
0.9
–
0.7
(0.2)
38.4
6.9
(0.4)
6.5
1.4
0.3
(0.1 )
8.1
178.5
(6.7)
171.8
22.3
4.0
(1.7)
(9.7)
186.7
110.0
(3.9)
106.1
14.7
(1.1)
(9.9)
109.8
78.8
(3.3)
75.5
9.4
0.3
1.2
(2.9)
83.5
52.8
(2.1)
50.7
7.7
0.4
(2.6)
56.2
Total
£m
430.4
(16.4)
414.0
50.9
8.1
0.2
(16.5)
456.7
199.6
(7.6)
192.0
27.0
(0.4)
(13.1)
205.5
116.7
30.3
76.9
27.3
251.2
171
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
13 Property, plant and equipment continued
The total amount of transfers relates to property, plant and equipment transferred to other intangible assets (see Note 15).
2018
Cost:
At 1st January 2018
Exchange adjustments
Additions
Transfers
Disposals
Disposal of subsidiary
At 31st December 2018
Depreciation:
At 1st January 2018
Exchange adjustments
Charged in year
Transfers
Disposals
Disposal of subsidiary
At 31st December 2018
Net book value:
At 31st December 2018
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Plant and
machinery
£m
Fixtures, fittings,
tools and
equipment
£m
138.8
1.1
139.9
4.5
(5.3)
(3.0)
(2.0)
134.1
29.8
0.3
30.1
2.9
(0.6)
(1.3)
(1.2)
29.9
37.7
0.1
37.8
1.4
–
(0.2)
–
39.0
5.7
–
5.7
1.4
–
(0.2)
–
6.9
164.9
0.5
165.4
18.6
3.8
(8.6)
(0.7)
178.5
103.0
0.2
103.2
14.4
0.4
(7.5)
(0.5)
110.0
104.2
32.1
68.5
73.4
(0.3)
73.1
9.0
0.3
(2.2)
(1.4)
78.8
48.8
(0.1)
48.7
7.9
(1.0)
(1.7)
(1.1)
52.8
26.0
Total
£m
414.8
1.4
416.2
33.5
(1.2)
(14.0)
(4.1)
430.4
187.3
0.4
187.7
26.6
(1.2)
(10.7)
(2.8)
199.6
230.8
Included in the above are assets under construction of £24.2m (2018: £8.1m). In 2018 additions from acquisitions were £0.2m and are
shown within additions.
14 Leases
Right-of-use assets
Cost:
Transition adjustment at 1st January 2019
Reclassification from long-term prepayments
Additions
Acquisitions
Disposals
Exchange adjustments
At 31st December 2019
Depreciation:
Charged in the year
Disposals
Exchange adjustments
At 31st December 2019
Net book value:
At 31st December 2019
Leased land
and buildings
£m
Leased plant
and machinery
£m
Leased fixtures,
fittings, tools
and equipment
£m
Total right-of-use
assets
£m
27.2
5.1
7.2
0.8
(0.2)
(1.5)
38.6
7.0
(0.1)
(0.2)
6.7
31.9
7.0
–
4.2
0.3
(0.1)
(0.4)
11.0
3.7
–
(0.1)
3.6
7.4
1.9
–
0.3
–
–
(0.1)
2.1
0.6
–
–
0.6
1.5
36.1
5.1
11.7
1.1
(0.3)
(2.0)
51.7
11.3
(0.1)
(0.3)
10.9
40.8
The vast majority of the right-of-use asset value relates to leased property where the Group leases a number of office and warehouse
sites in a number of geographical locations. The remaining leases are largely made up of leased motor vehicles, where the Group makes
use of leasing cars for sales and service engineers at a number of operating company locations. The average lease term is 4.3 years.
172
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 14 Leases continued
The maturity analysis of lease liabilities is presented in Note 28.
Reconciliation of 2018 operating lease commitment to IFRS 16 transition
The below table shows a reconciliation from the operating lease commitments disclosed in the 2018 Annual Report, to the IFRS 16 lease
liability recognised on transition as at 1st January 2019:
Operating lease commitments disclosed as at 31st December 2018
Discounted using the incremental borrowing rate at the date of initial application
Add: finance lease liabilities recognised as at 31st December 2018
(Less): short-term leases not recognised as a liability
(Less): low-value leases not recognised as a liability
Add: adjustments as a result of a different treatment of extension and termination options
Lease liability recognised as at 1st January 2019
Of which are:
Short-term lease liabilities
Long-term lease liabilities
Amounts recognised in Consolidated Income Statement
Depreciation expense on right-of-use assets
Interest expense on lease liabilities
Expense relating to short-term leases
Expense relating to leases of low value assets
Expense relating to variable lease payments not included in the measurement of the lease liability
Income from subleases right-of-use assets
Gain on sale and leaseback transactions
Total impact on profit before tax
2019
£m
39.8
37.3
0.3
(1.4)
(0.2)
3.0
39.0
9.6
29.4
39.0
31st December
2019
£m
11.3
1.3
2.0
0.2
0.3
(0.2)
(0.4)
14.5
During 2019, Aflex Hose Ltd entered into a sale and leaseback transaction, selling an owned property and leasing it back for a period
of 18 months. This leaseback period covers the remaining time the company is expected to utilise the site before moving into a new
purpose built consolidated property in 2020. This sale and leaseback transaction led to a profit recognised in the Consolidated Income
Statement of £0.4m.
The total cash outflow for leases during 2019 was £15.0m.
The following cash outflows (undiscounted) are those that the Group is potentially exposed to in future periods but are currently not
reflected in the measurement of lease liabilities:
• £0.3m relating to variable lease payments not based on an index or rate;
• £1.3m relating to optional extension periods that are not reasonably certain to be exercised as at 31st December 2019; and
• £0.7m relating to leases that the Group are committed, but have not commenced as at 31st December 2019.
173
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
15 Goodwill and other intangible assets
2019
Cost:
At 1st January 2019
Exchange and other adjustments
Additions
Acquisitions
Transfers from property, plant and equipment
Disposals
At 31st December 2019
Amortisation and impairment:
At 1st January 2019
Exchange adjustments
Amortisation and impairment
Transfers from property, plant and equipment
Disposals
At 31st December 2019
Net book value:
At 31st December 2019
2018
Cost:
At 1st January 2018
Exchange and other adjustments
Acquisitions
Additions
Transfers from property, plant and equipment
Disposals
At 31st December 2018
Amortisation and impairment:
At 1st January 2018
Exchange adjustments
Amortisation and impairment
Transfers from property, plant and equipment
Disposals
At 31st December 2018
Net book value:
At 31st December 2018
Acquired
intangibles
£m
Development
costs
£m
Computer
software
£m
Total
intangibles
£m
Goodwill
£m
320.6
(13.9)
306.7
–
60.2
–
–
366.9
76.2
(3.8)
72.4
26.8
–
–
99.2
21.2
(0.2)
21.0
3.2
–
0.1
(0.7)
23.6
14.8
(0.2)
14.6
1.6
0.1
(0.6)
15.7
66.6
(1.5)
65.1
8.3
0.3
(0.3)
(1.9)
71.5
40.2
(1.2)
39.0
5.7
0.3
(1.8)
43.2
408.4
(15.6)
392.8
11.5
60.5
(0.2)
(2.6)
462.0
131.2
(5.2)
126.0
34.1
0.4
(2.4)
158.1
371.9
(16.3)
355.6
–
70.0
–
–
425.6
3.9
(0.2)
3.7
4.2
–
–
7.9
267.7
7.9
28.3
303.9
417.7
Acquired
intangibles
£m
Development
costs
£m
Computer
software
£m
Total
intangibles
£m
Goodwill
£m
300.6
10.9
311.5
9.1
–
–
–
320.6
49.8
1.2
51.0
25.2
–
–
76.2
26.6
(0.1)
26.5
–
1.6
0.2
(7.1)
21.2
20.3
(0.1)
20.2
1.2
0.2
(6.8)
14.8
56.9
0.6
57.5
–
8.3
1.0
(0.2)
66.6
34.0
0.3
34.3
5.1
1.0
(0.2)
40.2
384.1
11.4
395.5
9.1
9.9
1.2
(7.3)
408.4
104.1
1.4
105.5
31.5
1.2
(7.0)
131.2
355.3
12.4
367.7
2.0
2.2
–
–
371.9
4.0
(0.1)
3.9
–
–
–
3.9
244.4
6.4
26.4
277.2
368.0
Development
All capitalised development costs arise from internal product development.
174
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 15 Goodwill and other intangible assets continued
Acquired intangibles
The disclosure by class of acquired intangible assets is shown in the tables below.
2019
Cost:
At 1st January 2019
Exchange and other adjustments
Acquisitions
At 31st December 2019
Amortisation and impairment:
At 1st January 2019
Exchange adjustments
Amortisation and impairment
At 31st December 2019
Net book value:
At 31st December 2019
Customer
relationships
£m
Brand names
and
trademarks
£m
Manufacturing
designs and
core
technology
£m
Non-compete
undertakings
and other
£m
Total
acquired
intangibles
£m
57.1
(3.0)
54.1
34.9
89.0
25.1
(1.3)
23.8
7.1
30.9
187.3
(7.8)
179.5
14.3
193.8
21.3
(1.1)
20.2
10.4
30.6
56.0
(2.2)
53.8
7.2
61.0
14.2
(0.6)
13.6
5.6
19.2
20.2
(0.9)
19.3
3.8
23.1
15.6
(0.8)
14.8
3.7
18.5
320.6
(13.9)
306.7
60.2
366.9
76.2
(3.8)
72.4
26.8
99.2
58.1
163.2
41.8
4.6
267.7
Customer relationships are amortised over their useful economic lives in line with the accounting policies disclosed in Note 1. Within this
balance individually material balances relate to Thermocoax £32.6m. The remaining amortisation period is 14.3 years.
Brand names and trademark assets are amortised over their useful economic lives in line with the accounting policies disclosed in
Note 1. Within this balance individually material balances relate to Chromalox £114.1m (2018: £125.4m), Gestra £28.4m (2018: £32.5m)
and Thermocoax £13.6m. The remaining amortisation periods are 17.5 years, 12.3 years and 19.3 years respectively.
Manufacturing designs and core technology are amortised over their useful economic lives in line with the accounting policies disclosed
in Note 1. Within this balance individually material balances relate to Chromalox £12.9m (2018: £15.1m), Gestra £10.8m (2018: £12.3m)
and Aflex £8.5m (2018: £9.4m). The remaining amortisation period is 12.5 years for Chromalox, 12.3 years for Gestra and 10 years
for Aflex.
Non-compete undertakings are amortised over their useful economic lives in line with the accounting policies disclosed in Note 1.
There are no individually material items within this balance.
2018
Cost:
At 1st January 2018
Exchange and other adjustments
Acquisitions
At 31st December 2018
Amortisation and impairment:
At 1st January 2018
Exchange adjustments
Amortisation and impairment
At 31st December 2018
Net book value:
At 31st December 2018
Customer
relationships
£m
Brand names
and
trademarks
£m
Manufacturing
designs and
core
technology
£m
Non-compete
undertakings
and other
£m
Total
acquired
intangibles
£m
54.9
1.0
55.9
1.2
57.1
19.8
0.3
20.1
5.0
25.1
32.0
179.1
8.2
187.3
–
187.3
10.9
0.4
11.3
10.0
21.3
166.0
50.0
1.4
51.4
4.6
56.0
8.6
0.3
8.9
5.3
14.2
41.8
16.6
0.3
16.9
3.3
20.2
10.5
0.2
10.7
4.9
15.6
300.6
10.9
311.5
9.1
320.6
49.8
1.2
51.0
25.2
76.2
4.6
244.4
175
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
15 Goodwill and other intangible assets continued
Impairment
In accordance with the requirements of IAS 36 (Impairment of Assets), goodwill is allocated to the Group’s cash-generating units,
or groups of cash-generating units, that are expected to benefit from the synergies of the business combination that gave rise to
the goodwill.
During 2019, we performed a review on the basis of identification of our individual CGUs. As a result of this review, we have consolidated
a number of our current individual CGUs into groups of CGUs that represent the lowest level to which goodwill is monitored for internal
management purposes, being each operating segment as disclosed in Note 3. As a result, we performed an impairment review at an
operating segment CGU level, the breakdown of the goodwill value at 31st December across these is shown below:
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Total goodwill
2019
Goodwill
£m
113.0
244.7
60.0
417.7
2018
Goodwill
£m
119.3
183.0
65.7
368.0
In order to complete the transition to performing goodwill impairment reviews at an operating segment level, we also performed a
goodwill impairment review as at 31st December 2019 under the historical CGU basis. The result of this impairment review led to an
impairment of £4.2m being recognised in respect of Watson-Marlow FlowSmart. No other impairment was recognised.
The goodwill balance has been tested for annual impairment on the following basis:
• the carrying values of goodwill have been assessed by reference to value in use. These have been estimated using cash flows based
on forecast information for the next financial year which have been approved by the Board and then extended up to a further 9 years
based on the most recent forecasts prepared by management;
• pre-tax discount rates range from 11-12% (2018: 10-15%);
• short to medium-term growth rates vary between 3-8% depending on detailed forecasts (2018: 2-8%). The range in rates excludes the
annualised impact of owning Thermocoax for a first full year in 2020. The short to medium-term is defined as not more than 10 years;
and
• long-term growth rates are set using IMF forecasts and vary between 1.8-2.5% (2018: 0.8-3.0%).
The key assumptions on which the impairment tests are based are the discount rates, growth rates and the forecast cash flows:
The principal value in use assumptions were as follows:
Cash-generating unit
Steam Specialties
Electric Thermal Solutions
Watson-Marlow
Pre-tax
discount rate
11.8%
10.6%
11.0%
Short to
medium-term
growth rate*
3.1%-3.6%
3.5%-6.7%
5.0%-7.5%
Long-term
growth rate
2.3%
1.8%
2.5%
* The short to medium-term growth rate for Electric Thermal Solutions excludes the annualised impact of owning Thermocoax for a first full year in 2020.
The results of the Group’s impairment tests are dependent upon estimates, particularly in relation to the key assumptions described
above. Sensitivity analysis to potential changes in the key assumptions has been undertaken based on the following reasonably possible
change sensitivities in isolation:
• a 0.5 % increase in the pre-tax discount rate applied to each cash-generating unit;
• a 1.0 % reduction in the short and long-term growth rates used in the cash flow projections; and
• a range of 100 to 200 bps reduction in the EBIT margin used in the cash flow projections.
For each cash-generating unit, the Directors do not consider that there are any reasonably possible change sensitivities for the business
that could arise in the next 12 months that would result in an impairment charge being recognised.
Going forward from 2020, goodwill impairment will be assessed at an operating segment level only.
176
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 16 Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Accelerated capital allowances
Provisions
Losses
Inventory
Pensions
Other temporary differences
Tax assets/(liabilities)
2019
Assets
£m
0.5
2.3
2.9
6.4
17.7
11.0
40.8
2018
Assets
£m
0.5
2.4
3.0
6.2
19.4
9.8
41.3
2019
Liabilities
£m
(8.5)
(0.2)
–
(1.6)
(0.9)
(72.7)
(83.9)
2018
Liabilities
£m
(7.3)
–
–
(1.8)
(0.6)
(67.1)
(76.8)
2019
Net
£m
(8.0)
2.1
2.9
4.8
16.8
(61.7)
(43.1)
2018
Net
£m
(6.8)
2.4
3.0
4.4
18.8
(57.3)
(35.5)
Movement in deferred tax during the year 2019
Accelerated capital allowances
Provisions
Losses
Inventory
Pensions
Other temporary differences
Group total
1st January
2019
£m
(6.8)
2.4
3.0
4.4
18.8
(57.3)
(35.5)
Recognised in
income
£m
(1.5)
0.5
0.1
0.2
(0.5)
8.0
6.8
Recognised in
OCI
£m
0.1
0.2
(0.1)
(0.2)
(1.5)
(0.7)
(2.2)
Recognised in
equity
£m
0.2
(1.0)
(0.1)
0.4
–
4.7
4.2
Acquisitions
£m
–
–
–
–
–
(16.4)
(16.4)
31st December
2019
£m
(8.0)
2.1
2.9
4.8
16.8
(61.7)
(43.1)
Movement in deferred tax during the year 2018
Accelerated capital allowances
Provisions
Losses
Inventory
Pensions
Other temporary differences
Group total
1st January
2018
£m
(5.3)
3.1
2.7
4.4
19.0
(60.8)
(36.9)
Recognised in
income
£m
(1.5)
(0.4)
0.3
0.4
(1.9)
6.5
3.4
Recognised in
OCI
£m
(0.3)
(0.3)
–
(0.4)
1.7
(1.3)
(0.6)
Recognised in
equity
£m
0.3
–
–
–
–
0.1
0.4
Acquisitions
£m
–
–
–
–
–
(1.8)
(1.8)
31st December
2018
£m
(6.8)
2.4
3.0
4.4
18.8
(57.3)
(35.5)
At the Balance Sheet date, the Group has deductible temporary differences, unused tax losses and unused tax creditors of £12.8m
(2018: £9.9m) available for offset against future profits. A deferred tax asset has been recognised in respect of £2.9m (2018: £3.0m).
No deferred tax asset has been recognised in respect of the remaining £9.9m (2018: £6.9m) as it is not considered probable that there
will be future taxable profits available against which the relevant deduction can be offset. The losses may be carried forward indefinitely.
Deferred tax of £1.5m recognised in the Consolidated Statement of Comprehensive Income (page 151) associated with
the measurement of defined benefit obligations comprises £1.4m relating to remeasurement gain and £0.1m relating to
exchange movements.
Other temporary differences mostly consist of deferred tax liabilities recognised on acquired intangibles from acquisitions.
A £0.5m deferred tax asset was recognised on transition to IFRS 16 on 1st January 2019. This is included within other temporary
differences recognised in equity in the 2019 movement table above.
177
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
17 Inventories
Raw materials, consumables and components
Work in progress
Finished goods and goods for resale
Total inventories
2019
£m
72.2
25.5
88.2
185.9
2018
£m
53.0
25.7
81.9
160.6
The write-down of inventories recognised as an expense during the year in respect of continuing operations was £0.7m (2018: £3.5m).
This comprises a cost of £5.1m (2018: £4.8m) to write-down inventory to net realisable value reduced by £4.4m (2018: £1.3m) for reversal
of previous write-down reassessed as a result of customer demand.
The value of inventories expected to be recovered after more than 12 months is £13.4m (2018: £11.2m).
There is no material difference between the Statement of Financial Position value of inventories and their replacement cost. None of the
inventory has been pledged as security.
18 Other current assets
Other receivables
Contract assets
Prepayments
Total other current assets
Contract assets relate to revenue recognised that has not yet been invoiced to the customer.
19 Trade and other payables
Trade payables
Contract liabilities
Social security
Other payables
Accruals
Total trade and other payables
2019
£m
16.9
5.8
12.6
35.3
2019
£m
57.9
8.7
5.6
37.8
64.8
174.8
2018
£m
14.9
4.9
13.1
32.9
2018
£m
57.4
8.9
5.1
37.6
58.0
167.0
Contract liabilities relate to advance payments received from customers which have not yet been recognised as revenue.
£8.3m of the contract liabilities at 31st December 2018 was recognised as revenue during 2019 (2018: £3.0m).
178
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 20 Provisions
2019
At 1st January 2019
Additional provision in the year
Utilised or released during the year
Acquisition of subsidiary
Exchange adjustments
At 31st December 2019
2018
At 1st January 2018
Additional provision in the year
Utilised or released during the year
Exchange adjustments
At 31st December 2018
Current provisions
Non-current provisions
Total provisions
Product
warranty
£m
3.6
0.4
(2.6)
0.2
(0.1)
1.5
Product
warranty
£m
3.8
0.2
(0.5)
0.1
3.6
Legal,
contractual
and other
£m
5.1
2.0
(3.5)
–
(0.3)
3.3
Legal,
contractual
and other
£m
6.1
2.3
(3.4)
0.1
5.1
2019
£m
3.5
1.3
4.8
Total
£m
8.7
2.4
(6.1)
0.2
(0.4)
4.8
Total
£m
9.9
2.5
(3.9)
0.2
8.7
2018
£m
5.0
3.7
8.7
Product warranty
Product warranty provisions reflect commitments made to customers on the sale of goods in the ordinary course of business. These are
expected to be incurred in the next three years.
Legal, contractual and other
Legal, contractual and other provisions mainly comprise amounts provided against open legal and contractual disputes arising
from trade and employment. These costs are based on past experience of similar items and other known factors and represent
management’s best estimate of the likely outcome. The Group has taken action to enforce its rights and protect its intellectual property
rights around the world.
Reflecting the inherent uncertainty within many legal proceedings, the timing and amount of the outflows could differ significantly from
the amount provided. Management does not expect that the outcome of such proceedings, either individually or in aggregate, will have
a material adverse effect on the Group’s financial condition or results of operations. Of the total legal, contractual and other provisions at
31st December 2019 £2.7m (2018: £3.3m) has been included within current and £0.6m within non-current provisions (2018: £1.8m).
179
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
21 Called up share capital and reserves
Ordinary shares of 26 12/13p (2018: 26 12/13p) each:
Authorised 111,428,571 (2018: 111,428,571)
Allotted, called up and fully paid 73,736,888 (2018: 73,666,646)
2019
£m
30.0
19.8
2018
£m
30.0
19.8
In 2019 71,698 shares with a nominal value of £19,303 were issued in connection with the Group’s Employee Share Schemes with
external consideration of £2.1m received by the Group. An additional £1.1m was received from Group companies.
At 31st December 2019 79,489 shares were held in an Employee Benefit Trust and available for use in connection with the Group’s
Employee Share Schemes.
133 senior employees of the Group have been granted options on Ordinary shares under the Share Option Scheme and Performance
Share Plan (details in Note 23).
Other reserves in the Consolidated Statement of Changes in Equity on pages 151 to 152 are made up as follows:
Translation reserve
Net investment hedge reserve
Cash flow hedges reserve
Capital redemption reserve
Employee Benefit Trust reserve
Total other reserves
1st January
2019
£m
30.3
(7.4)
–
1.8
(2.5)
22.2
The change in translation reserve includes a £1.4m credit transferred from retained earnings.
Translation reserve
Net investment hedge reserve
Cash flow hedges reserve
Capital redemption reserve
Employee Benefit Trust reserve
Total other reserves
1st January
2018
£m
18.7
–
0.1
1.8
(1.3)
19.3
Change
in year
£m
(45.0)
12.9
3.3
–
(4.0)
(32.8)
Change
in year
£m
11.6
(7.4)
(0.1)
–
(1.2)
2.9
31st December
2019
£m
(14.7)
5.5
3.3
1.8
(6.5)
(10.6)
31st December
2018
£m
30.3
(7.4)
–
1.8
(2.5)
22.2
Translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the Financial Statements
of foreign subsidiaries. On disposal accumulated exchange differences are recycled to the Income Statement.
Net investment hedge reserve
The reserve records the cumulative gain or loss on hedging instruments designated in net investment hedges. Together with the
translation reserve, these are the foreign currency translation reserves of the Group.
Cash flow hedges reserve
The reserve records the cumulative net change in the fair value of forward exchange contracts where they are designated as effective
cash flow hedge relationships.
Capital redemption reserve
This reserve records the historical repurchase of the Group’s own shares.
Employee Benefit Trust reserve
The Group has an Employee Benefit Trust which is used to purchase, hold and issue shares in connection with the Group’s employee
share schemes. The shares held in Trust are recorded in this separate reserve.
180
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 22 Capital commitments and contingent liabilities
Capital expenditure contracted for but not provided
2019
£m
8.5
2018
£m
4.1
All capital commitments are related to property, plant and equipment and computer software. The Group has no material contingent
liabilities at 31st December 2019 (no material contingent liabilities existed at 31st December 2018), but does have a non-material
contingent liability in relation to tax estimated at approximately £8.3m (2018: £7.1m). See Note 9 for further details.
23 Employee benefits
Retirement benefit obligations
The Group operates a wide range of retirement benefit arrangements, which are established in accordance with local conditions and
practices within the countries concerned. These include funded defined contribution and funded and unfunded defined benefit schemes.
Defined contribution arrangements
The majority of the retirement benefit arrangements operated by the Group are of a defined contribution structure, where the employer
contribution and resulting Income Statement charge is fixed at a set level or is a set percentage of employees’ pay. Contributions made
to defined contribution schemes and charged to the Income Statement totalled £14.1m (2018: £14.3m). In the UK, following the closure
of the defined benefit schemes to new entrants, the main scheme for new employees is a defined contribution scheme.
Defined benefit arrangements
The Group operates several funded defined benefit retirement schemes where the benefits are based on employees’ length of service.
Whilst the Group’s primary schemes are in the UK, it also operates other material benefit schemes in the USA as well as less material
schemes elsewhere. In funded arrangements, the assets of defined benefit schemes are held in separate trustee-administered funds or
similar structures in the countries concerned.
UK defined benefit arrangements
The defined benefit schemes in the UK account for 34% (2018: 48%) of the Group’s net liability for defined retirement benefit schemes.
Spirax-Sarco operates three UK schemes: the Spirax-Sarco Employees Pension Fund, the Spirax-Sarco Executives’ Retirement
Benefits Scheme and the Watson-Marlow Pension Fund. These are all final salary pension schemes. The UK schemes are closed
to new members but are open to future accrual. There is a mix of different inflation-dependent pension increases (in payment and
deferment) which vary from member to member according to their membership history and which scheme they are a member of.
All three schemes have been set up under UK law and are governed by a Trustee committee, which is responsible for the scheme’s
investments, administration and management. A funding valuation is carried out for the Trustees of each scheme every three years by an
independent firm of actuaries. Depending on the outcome of that valuation a schedule of future contributions is negotiated with Spirax-
Sarco. Further information on the contribution commitments is shown in the Financial Review on page 57.
During 2018 an assessment of the estimated impact of equalising for the effects of unequal Guaranteed Minimum Pensions (GMP) was
performed resulting in a past service cost of £0.7m recognised in the Consolidated Income Statement.
US defined benefit schemes
The Group operates a pension scheme in the USA, which is closed to new entrants. During 2018 the pension scheme was frozen to
future accrual, which led to a reduction in the Defined Benefit Obligation (DBO) as benefits are no longer linked to salary increases.
This plan amendment was recognised as a past service credit, of £6.0m, in the Consolidated Income Statement during 2018.
The pension scheme defines the pension in terms of the highest average pensionable pay for any five consecutive years prior to
retirement. No pension increases (in payment and deferment) are offered by this scheme. It also operates a post-retirement medical plan
in the USA, which is unfunded, as is typical for these plans.
Principal risks
The pension schemes create a number of risk exposures. Annual increase in benefits are, to a varying extent from scheme to scheme,
dependent on inflation so the main uncertainties affecting the level of benefits payable are future inflation levels (including the impact of
inflation on future salary increases) and the actual longevity of the membership. Benefits payable will also be influenced by a range of other
factors including member decisions on matters such as when to retire and the possibility to draw benefits in different forms. A key risk is that
additional contributions are required if the investment returns fall short of those anticipated when setting the contributions to the pension
schemes. All pension schemes are regulated by the relevant jurisdictions. These include extensive legislation and regulatory mechanisms
that are subject to change and may impact on the Group’s pension schemes. The IAS 19 liability measurement known as Defined Benefit
Obligation (DBO) and the Service Cost are sensitive to the actuarial assumptions made on a range of demographic and financial matters
that are used to project the expected benefit payments, the most important of these assumptions being the future inflation and salary
growth levels and the assumptions made about life expectation. The DBO and Service Cost are also very sensitive to the IAS 19 discount
rate, which determines the discounted value of the projected benefit payments. The discount rate depends on market yields on high-quality
corporate bonds. Investment strategies are set with funding rather than IAS 19 considerations in mind and do not seek to provide a specific
hedge against the IAS 19 measurement of DBO. As a result the difference between the market value of the assets and the IAS 19 DBO may
be volatile. Further information on the investment strategy for the UK schemes can be found in the Financial Review on page 57.
Sensitivity analysis to changes in discount rate and inflation are included on page 185.
181
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
23 Employee benefits continued
The financial assumptions used at 31st December were:
Rate of increase in salaries
Rate of increase in pensions
Rate of price inflation
Discount rate
Medical trend rate
Assumptions weighted by value of liabilities % per annum
Overseas pensions
and medical
2019
%
2.7
1.8
1.8
2.7
5.0
UK pensions
2019
%
2.4
2.8
2.9
2.1
n/a
2018
%
2.7
2.9
3.2
2.7
n/a
2018
%
2.8
1.7
1.9
3.7
5.0
The mortality assumptions for the material defined benefit schemes at 31st December 2019 and 31st December 2018 were:
Spirax-Sarco Employees Pension
Fund
At 31st December 2019: 97% of SAPS S2 base table, with 2018 CMI Core Projection
model from 2007, with a long-term trend of 1.25% p.a.
Spirax-Sarco Executives’ Retirement
Benefits Scheme
Watson-Marlow Pension Fund
US Pension Scheme
At 31st December 2018: 97% of SAPS S2 base table, with 2017 CMI Core Projection
model from 2007, with a long-term trend of 1.25% p.a.
At 31st December 2019: 85% of SAPS S2 light base table for males and 96% of SAPS S2
base table for females, with 2018 CMI Core Projection model from 2007, with a long-term
trend of 1.25% p.a.
At 31st December 2018: 85% of SAPS S2 light base table for males and 96% of SAPS S2
base table for females, with 2017 CMI Core Projection model from 2007, with a long-term
trend of 1.25% p.a.
At 31st December 2019: 96% of SAPS S2 base table, with 2018 CMI Core Projection
model from 2007, subject to a long-term trend of 1.25% p.a.
At 31st December 2018: 96% of SAPS S2 base table, with 2017 CMI Core Projection
model from 2007, subject to a long-term trend of 1.50% p.a.
At 31st December 2019: SOA Pri-2012 Amount Weighted Blue Collar mortality tables
projected generationally with Mortality Improvement Scale MP2019.
At 31st December 2018: SOA-2014 Blue Collar Mortality adjusted back to 2006 with
Mortality Improvement Scale MP2018.
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the
timescale covered, may not necessarily be borne out in practice.
The amounts recognised in the Consolidated Statement of Financial Position are determined as follows:
Fair value of schemes’ assets
Present value of funded schemes’ liabilities
Deficit in the funded schemes
Present value of unfunded schemes’
liabilities
Retirement benefit liability recognised in
the Consolidated Statement of Financial
Position
Related deferred tax asset
Net pension liability
UK pensions
2019
£m
433.7
(458.2)
(24.5)
2018
£m
387.4
(428.3)
(40.9)
Overseas pensions
and medical
2019
£m
54.1
(77.4)
(23.3)
2018
£m
53.6
(73.6)
(20.0)
Total
2019
£m
487.8
(535.6)
(47.8)
2018
£m
441.0
(501.9)
(60.9)
–
–
(23.5)
(24.2)
(23.5)
(24.2)
(24.5)
4.3
(20.2)
(40.9)
7.0
(33.9)
(46.8)
12.5
(34.3)
(44.2)
11.8
(32.4)
(71.3)
16.8
(54.5)
(85.1)
18.8
(66.3)
182
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 23 Employee benefits continued
Fair value of scheme assets
Equities
Bonds
Other
Total market value in aggregate
UK pensions
2019
£m
107.3
297.0
29.4
433.7
2018
£m
118.2
245.8
23.4
387.4
Overseas pensions
and medical
2019
£m
31.6
16.1
6.4
54.1
2018
£m
27.8
13.9
11.9
53.6
Total
2019
£m
138.9
313.1
35.8
487.8
2018
£m
146.0
259.7
35.3
441.0
At 31st December 2019 £98.2m (2018: £91.0m) of scheme assets have a quoted market price in an active market of which £47.4m
(2018: £40.9m) relates to UK pensions and £50.8m (2018: £50.1m) relates to overseas pensions and medical.
The actual return on plan assets was an increase of £61.4 million (2018: a decrease of £15.8 million).
The movements in the defined benefit obligation recognised in the Consolidated Statement of Financial Position during the year were:
Defined benefit obligation at beginning
of year
Current service cost
Past service (cost)/credit
Interest cost
Administration costs
Contributions by members
Remeasurement (loss)/gain
Actual benefit payments
Settlement gain
Acquisitions and disposals
Experience (loss)/gain
Currency gain/(loss)
Defined benefit obligation at end
of year
UK pensions
2019
£m
(428.3)
(6.2)
–
(11.2)
–
(0.2)
(27.9)
15.6
–
–
–
–
2018
£m
(443.0)
(7.1)
(0.7)
(10.5)
–
(0.2)
20.4
14.1
–
–
(1.3)
–
Overseas pensions
and medical
2019
£m
2018
£m
Total
2019
£m
(97.8)
(0.7)
0.5
(3.4)
(0.7)
–
(12.1)
9.1
0.3
(0.3)
–
4.2
(100.0)
(3.2)
6.0
(3.0)
–
–
1.6
4.1
–
0.2
0.7
(4.2)
(526.1)
(6.9)
0.5
(14.6)
(0.7)
(0.2)
(40.0)
24.7
0.3
(0.3)
–
4.2
2018
£m
(543.0)
(10.3)
5.3
(13.5)
–
(0.2)
22.0
18.2
–
0.2
(0.6)
(4.2)
(458.2)
(428.3)
(100.9)
(97.8)
(559.1)
(526.1)
The movements in the fair value of plan assets during the year were:
Value of assets at beginning of year
Expected return on assets
Remeasurement gain/(loss)
Contributions paid by employer
Contributions paid by members
Actual benefit payments
Administration costs
Disposals
Currency (loss)/gain
Value of assets at end of year
UK pensions
2019
£m
387.4
10.3
42.3
9.7
0.2
(15.6)
(0.6)
–
–
433.7
2018
£m
403.6
9.6
(22.6)
10.7
0.2
(14.1)
–
–
–
387.4
Overseas pensions
and medical
2019
£m
53.6
2.1
6.7
2.9
–
(9.2)
–
–
(2.0)
54.1
2018
£m
53.8
1.9
(4.7)
4.4
–
(4.1)
–
(0.1)
2.4
53.6
Total
2019
£m
441.0
12.4
49.0
12.6
0.2
(24.8)
(0.6)
–
(2.0)
487.8
2018
£m
457.4
11.5
(27.3)
15.1
0.2
(18.2)
–
(0.1)
2.4
441.0
The estimated employer contributions to be made in 2020 are £12.1m.
183
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
23 Employee benefits continued
The history of experience adjustments is as follows:
Defined benefit obligation at end of year
Fair value of schemes’ assets
Retirement benefit liability recognised in the Statement
of Financial Position
Experience adjustment on schemes’ liabilities
As a percentage of schemes’ liabilities
Experience adjustment on schemes’ assets
As a percentage of schemes’ assets
2019
£m
(559.1)
487.8
(71.3)
–
0.0%
49.0
10.0%
2018
£m
(526.1)
441.0
(85.1)
(0.6)
0.1%
(27.3)
6.2%
2017
£m
(543.0)
457.4
(85.6)
(8.5)
1.6%
29.9
6.5%
2016
£m
(520.3)
426.1
(94.2)
1.6
0.3%
66.0
15.5%
The expense recognised in the Group Income Statement was as follows:
Current service cost
Administration costs
Past service (cost)/credit
Settlement gain
Net interest on schemes’ liabilities
Total expense recognised in
Income Statement
UK pensions
2019
£m
(6.2)
(0.6)
–
–
(0.9)
(7.7)
2018
£m
(7.1)
–
(0.7)
–
(0.9)
(8.7)
Overseas pensions
and medical
2019
£m
(0.7)
(0.7)
0.5
0.3
(1.3)
(1.9)
2018
£m
(3.2)
–
6.0
–
(1.1)
1.7
The expense is recognised in the following line items in the Consolidated Income Statement:
Operating costs
Net financing expense
Total expense recognised in Income Statement
The gain or loss recognised in the Statement of Comprehensive Income (OCI) was as follows:
Overseas pensions
and medical
2019
£m
2018
£m
UK pensions
2019
£m
–
4.1
(32.0)
42.3
14.4
2018
£m
(1.3)
0.9
19.5
(22.6)
(3.5)
–
0.4
(12.5)
6.7
(5.4)
(2.4)
0.6
1.0
(51.3)
(39.3)
(48.4)
(51.3)
(22.4)
(26.8)
0.7
(5.0)
6.6
(4.7)
(2.4)
0.6
(20.6)
(22.4)
Remeasurement effects recognised in OCI:
Due to experience on DBO
Due to demographic assumption changes in DBO
Due to financial assumption changes in DBO
Return on assets
Total remeasurement gain/(loss) recognised in OCI
Deferred tax on remeasurement gain/(loss) and
change in rate recognised in OCI
Cumulative loss recognised in OCI at
beginning of year
Cumulative loss recognised in OCI at end
of year
184
2015
£m
(419.6)
345.9
(73.7)
2.4
0.6%
(7.2)
2.1%
2018
£m
(10.3)
–
5.3
–
(2.0)
(7.0)
2018
£m
(5.0)
(2.0)
(7.0)
2018
£m
(0.6)
(4.1)
26.1
(27.3)
(5.9)
Total
2019
£m
(6.9)
(1.3)
0.5
0.3
(2.2)
(9.6)
2019
£m
(7.4)
(2.2)
(9.6)
Total
2019
£m
–
4.5
(44.5)
49.0
9.0
(1.4)
1.2
(73.7)
(66.1)
(69.0)
(73.7)
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 23 Employee benefits continued
Sensitivity analysis
The effect on the defined benefit obligation at 31st December 2019 of an increase or decrease in key assumptions is as follows:
Increase/(decrease) in pension deficit:
Discount rate assumption being 1.0% higher
Discount rate assumption being 1.0% lower
Inflation assumption being 0.25% higher
Inflation assumption being 0.25% lower
Mortality assumption life expectancy at age 65 being one year higher
UK pensions
£m
Overseas
pensions and
medical
£m
(74.2)
94.6
13.9
(14.4)
19.9
(13.2)
15.5
0.7
(0.7)
3.4
Total
£m
(87.4)
110.1
14.6
(15.1)
23.3
The average age of active participants in the UK schemes at 31st December 2019 was 52 years (2018: 52 years) and in the overseas
schemes 48 years (2018: 51 years).
Cash payments to the pension scheme greater or less than the expense to operating profit
Defined benefit arrangements
Defined contribution arrangements
Total expense recognised in operating costs
Defined benefit arrangements
Defined contribution arrangements
Total contributions paid by employer
Cash payments to the pension scheme greater than the expense to operating profit
Share-based payments
Disclosures of the share-based payments offered to employees are set out below. More detail on each scheme is given in the Annual
Report on Remuneration 2019 on pages 102 to 132. The charge to the Income Statement in respect of share-based payments is made
up as follows:
2019
£m
(7.4)
(14.1)
(21.5)
12.6
14.1
26.7
5.2
2018
£m
(5.0)
(14.3)
(19.3)
15.1
14.3
29.4
10.1
Performance Share Plan
Employee Share Ownership Plan
Total expense recognised in Income Statement
2019
£m
5.1
1.1
6.2
2018
£m
4.7
1.0
5.7
Share option scheme
The Group operates equity-settled share option schemes for employees, although no grants have been made since 2011 because
awards have been made using the Group’s Performance Share Plan instead. Awards were determined by the Remuneration Committee
whose objective was to align the interests of employees with those of shareholders by giving an incentive linked to added shareholder
value. Options are subject to performance conditions, which if met make the options exercisable between the third and tenth anniversary
of the date of grant. The performance condition is an increase in earnings per share (EPS) of more than 9% greater than the increase in
the UK Retail Price Index to be met over the three-year period from 1st January prior to the date of the grant. If the condition is not met at
the end of the three-year period the option will lapse.
The share options granted have been measured using the Present Economic Value (PEV) valuation methodology.
The number and weighted average exercise prices of share options are as follows:
Option (exercise price)
2009 grant (765.0p)
2010 grant (1,366.0p)
2011 grant (1,873.0p)
Weighted average exercise price
Weighted average contractual life remaining
Granted during
year
–
–
–
–
Outstanding at
start of year
4,001
20,096
54,401
78,498
£16.87
1.9
Exercised
during year
4,001
13,096
19,507
36,604
£15.70
Lapsed during
year
–
–
993
993
£18.73
Outstanding at
end of year
–
7,000
33,901
40,901
£17.86
1.0
185
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
23 Employee benefits continued
Performance conditions in respect of all exercisable shares have been met. The number of shares exercisable at 31st December 2019 is
40,901 (2018: 78,498). The average share price during the period was £75.65 (2018: £59.30).
Performance Share Plan
Awards under the Performance Share Plan are made to Executive Directors and other senior managers and take the form of contingent
rights to acquire shares, subject to the satisfaction of a performance target. To the extent that they vest, awards may be satisfied in
cash, in shares or an option over shares. The performance criteria is split into two separate parts. 40% of the award is based on a TSR
measure where the performance target is based on the Company’s total shareholder return (TSR) relative to the TSR of other companies
included in the FTSE All-Share Industrial Engineering Sector over a three-year performance period where awards will vest on a sliding
scale. All shares within an award will vest if the Company’s TSR is at or above the upper quartile. 25% will vest if the TSR is at the median
and the number of shares that will vest will be calculated pro-rata on a straight-line basis between 25% and 100% if the Company’s
TSR falls between the median and the upper quartile. No shares will vest if the Company’s TSR is below the median. The second part,
amounting to 60% of the award, is subject to achievement of a target based on aggregate EPS over a three-year performance period.
25% will vest if the compound growth in EPS is equal to the growth in global industrial production (IP) plus 2% as published by CHR
Economics, and 100% will vest if the compound growth in EPS is equal to or exceeds the growth in global IP plus 8%, there is pro-rata
vesting for actual growth between these rates.
Shares awarded under the Performance Share Plan have been valued using the Monte Carlo simulation valuation methodology.
The relevant disclosures in respect of the Performance Share Plan grants are set out below.
Grant date
Mid market share price at grant date
Number of employees
Shares under scheme
Vesting period
Probability of vesting
Fair value
2015
Grant
11th June
3,460.0p
101
140,090
3 years
71.5%
2,473.9p
2016
Grant
5th April
3,550.0p
141
152,440
3 years
70.8%
2,513.4p
2017
Grant
26th May
5,273.0p
128
137,001
3 years
73.1%
3,854.5p
2018
Grant
4th April
5,560.0p
134
145,041
3 years
73.5%
4,084.4p
2019
Grant
15th May
8,161.0p
133
112,159
3 years
74.1%
6,048.9p
Employee Share Ownership Plan
UK employees are eligible to participate in the Employee Share Ownership Plan (ESOP). The aim of the ESOP is to encourage increased
shareholding in the Company by all UK employees and so there are no performance conditions. Employees are invited to join the ESOP
when an offer is made each year. Individuals save for 12 months during the accumulation period and subscribe for shares at the lower of
the price at the beginning and the end of the accumulation period under HMRC rules. The Company provides a matching share for each
share purchased by the individual.
Shares issued under the ESOP have been measured using the Present Economic Value (PEV) valuation methodology. The relevant
disclosures in respect of the Employee Share Ownership Plans are set out below.
Grant date
Exercise price
Number of employees
Shares under scheme
Vesting period
Expected volatility
Risk free interest rate
Expected dividend yield
Fair value
2015
Grant
1st October
2,797.0p
1,038
34,449
3 years
21%
0.4%
2.5%
2,931.3p
2016
Grant
1st October
4,477.3p
1,040
22,173
3 years
21%
0.1%
2.5%
4,696.7p
2017
Grant
1st October
5,496.7p
1,229
22,411
3 years
21%
0.4%
2.3%
5,799.0p
2018
Grant
2019
Grant
1st October 1st October
7,835.0p
1,318
16,820
3 years
21%
0.5%
1.8%
8,305.1p
7,240.0p
1,294
16,687
3 years
19%
0.8%
2.0%
7,623.7p
The accumulation period for the 2019 ESOP ends in September 2020, therefore some figures are projections.
186
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 24 Analysis of changes in net debt, including changes in liabilities arising from
financing activities
2019
Current portion of long-term borrowings
Non-current portion of long-term borrowings
Short-term borrowings
Total borrowings
Comprising:
Borrowings
Finance leases
Changes in liabilities arising from financing
Cash at bank
Bank overdrafts
Net cash and cash equivalents
Net debt
Lease liabilities (including IFRS 16
transition adjustment)
Net debt and lease liabilities
At 1st
January
2019
£m
(41.5)
(365.3)
(15.7)
(422.5)
(422.2)
(0.3)
(422.5)
187.1
(0.4)
186.7
(235.8)
(39.0)
(274.8)
Cash flow
£m
Acquired
debt*
£m
Exchange
movement
£m
Reclassification
£m
(49.6)
–
(49.6)
(5.7)
0.2
(5.5)
(55.1)
11.2
(43.9)
(18.2)
–
(18.2)
–
–
–
(18.2)
(12.6)
(30.8)
26.5
–
26.5
(12.9)
–
(12.9)
13.6
1.8
15.4
–
0.3
0.3
–
–
–
0.3
(0.3)
–
At 31st
December
2019
£m
(34.3)
(429.2)
–
(463.5)
(463.5)
–
(463.5)
168.5
(0.2)
168.3
(295.2)
(38.9)
(334.1)
* Debt acquired includes both debt acquired due to acquisition, and debt recognised on the balance sheet due to entry into new leases under IFRS 16.
The cash flow for borrowings net total of £49.6m consists of £129.8m of new borrowings and £80.2m of repaid borrowings.
This includes repayments of US$51.6m (£40.3m) on the US$200.0m term loan, €96.2m (£84.2m) of new drawings against a revolving
credit facility, €50m (£43.8m) of new drawings on a euro term loan, CNY119.7m (£13.6m) of repayments on an overdraft facility and
€8.3m (£7.3m) of repayments on a euro term loan.
At 31st December 2019 total lease liabilities consist of £11.1m short-term and £27.8m long-term.
See Note 28 for further information on net debt and lease liabilities.
2018
Current portion of long-term borrowings
Non-current portion of long-term borrowings
Short-term borrowings
Total borrowings
Comprising:
Borrowings
Finance leases
Changes in liabilities arising from financing
Cash at bank
Bank overdrafts
Net cash and cash equivalents
Net debt
At 1st
January
2018
£m
(49.3)
(455.9)
(20.0)
(525.2)
(524.9)
(0.3)
(525.2)
152.1
(0.5)
151.6
(373.6)
Cash flow
£m
Acquired
debt
£m
Exchange
movement
£m
111.5
–
111.5
39.8
0.1
39.9
151.4
–
–
–
(0.3)
–
(0.3)
(0.3)
(8.8)
–
(8.8)
(4.5)
–
(4.5)
(13.3)
At 31st
December
2018
£m
(41.5)
(365.3)
(15.7)
(422.5)
(422.2)
(0.3)
(422.5)
187.1
(0.4)
186.7
(235.8)
25 Related party transactions
Transactions with Directors are disclosed separately in Note 8 and are shown in the Annual Report on Remuneration 2019 on pages 107
to 121.
There were no other related party transactions in either 2018 or 2019.
187
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
26 Purchase of businesses
2019
The provisional fair value accounting for the acquisition of Thermocoax Developpement is shown below:
Non-current assets:
Property, plant and equipment
Right-of-use assets
Acquired intangibles
Software and other intangibles
Deferred tax assets
Current assets:
Inventories
Trade receivables
Other current assets
Cash and cash equivalents
Total assets
Current liabilities:
Trade payables
Other payables and accruals
Provisions
Short-term borrowings
Short-term lease liabilities
Current tax payable
Non-current liabilities:
Long-term lease liabilities
Deferred tax liabilities
Long-term payables
Post-retirement benefit plans
Total liabilities
Total net assets
Goodwill
Total
Satisfied by:
Cash paid
Deferred consideration
Total consideration
Reconciliation to acquisition of businesses net of cash acquired in the Consolidated Statement of Cash
Flows (page 153)
Cash paid for the Thermocoax business and debt repaid on the acquisition date
Debt repaid on acquisition date
Cash paid for the Thermocoax business
Less cash acquired in the Thermocoax business
Cash paid for acquired intangibles from distributors
Acquisition of businesses net of cash acquired
188
Fair value
£m
8.1
1.1
59.3
0.3
0.5
69.3
15.6
8.5
3.6
4.6
32.3
101.6
4.2
6.5
0.2
18.2
0.3
2.0
31.4
0.8
17.2
0.5
0.3
18.8
50.2
51.4
70.0
121.4
121.4
–
121.4
139.6
(18.2)
121.4
(4.6)
1.1
117.9
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 26 Purchase of businesses continued
1.
On a debt-free, cash-free basis the cash outflow for acquisitions was £135.0m consisting of £121.4m paid to the sellers, £18.2m of
debt repaid on the acquisition date less cash acquired of £4.6m.
2. The acquisition of 100% of the equity in Thermocoax Developpement and all of its group companies (Thermocoax) was completed
on the 13th May 2019. The acquisition method of accounting has been used. Consideration of £121.4m was paid on completion.
Separately identified intangibles are recorded as part of the provisional fair value adjustment. The acquired intangibles relate to
customer relationships, brand names, trademarks, manufacturing designs and core technology. The goodwill recognised represents
the skilled workforce acquired and the opportunity to achieve synergies from being part of a larger Group. Goodwill arising is not
expected to be tax deductible.
Due to their contractual dates, the fair value of receivables acquired approximate to the gross contractual amounts receivable.
The amount of gross contractual receivables not expected to be recovered is immaterial.
The acquisition has generated £27.9m of revenue and £5.4m of adjusted pre-tax profit since acquisition. Had the acquisition been
made on the 1st January 2019, the Thermocoax revenue and adjusted pre-tax profit would have been approximately £42m and
£8m respectively.
Thermocoax is headquartered near Paris, France and has four manufacturing facilities in Normandy, France, one in Georgia, USA
and a further facility in Heidelberg, Germany. Thermocoax is a leading designer and manufacturer of highly engineered electrical
thermal solutions for critical applications in high added value industries. Thermocoax will enhance and add significantly to the
Spirax-Sarco Engineering plc electrical process heating business in delivering thermal energy solutions to customers.
3. In addition to the acquired intangibles recognised for the acquisition of Thermocoax, £0.9m of acquired intangibles were recognised
during the period for the acquisition of intangibles from distributors. Of this £0.7m was paid in the period with £0.2m deferred.
In addition deferred consideration of £0.4m was paid during 2019 for acquired intangibles recognised prior to 2019.
4. £2.5m of acquisition costs were incurred during the period.
5. During the period the deferred consideration payable for the acquisition of a small German pre-revenue company within the Watson-
Marlow Fluid Technology business was reassessed. The result of this reassessment was that deferred consideration of €5.8m
remained appropriate and that no changes were required. Deferred consideration of €5.8m (£5.2m) was paid in the first quarter
of 2020.
2018
In January 2018, we acquired 100% of the share capital of a small German pre-revenue company within the Watson-Marlow Fluid
Technology business. The acquisition method of accounting has been used. Total consideration on a cash-free, debt-free basis at the
acquisition date was expected to be £8.4m (€9.5m). This includes £0.3m to repay a bank overdraft and £0.2m which was deemed to
be contingent remuneration rather than consideration under IFRS 3. £2.7m of the total £8.4m was paid on the acquisition date, with a
further £5.7m deferred. The deferred payment is dependent on satisfactory compliance with agreed conditions. Separately identified
intangibles are recorded as part of the provisional fair value adjustment. The fair value of net assets on acquisition under IFRS 3 were
£5.9m consisting of:
• acquired intangibles, valued at £7.8m, relating to manufacturing designs, core technology and non-compete undertakings;
• a deferred tax liability of £1.8m recognised on the acquired intangibles;
• property, plant and equipment of £0.2m; and
• a bank overdraft of £0.3m.
Goodwill of £2.0m was recognised and is not expected to be tax deductible. Total consideration under IFRS 3 is therefore £7.9m. In the
12 months ended 31st December 2018 the acquisition generated £nil of revenue and a loss of £1.3m. Had the acquisition been made on
the 1st January 2018 the revenue and loss would have been the same.
During 2018 the deferred consideration we expect to pay was reassessed resulting in a reduction of £0.5m to £5.2m.
During 2018 the fair value of the assets acquired as part of the acquisition of Chromalox Inc. and associated businesses on 3rd July 2017
were finalised. The outcome was an increase to goodwill of £2.2m.
During 2018 the Group acquired several distributors creating acquired intangibles of £1.3m.
189
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
Notes to the Consolidated Financial Statements
continued
27 Disposal of subsidiary
2019
No subsidiaries were disposed of during 2019.
2018
The profit on disposal of subsidiary wholly relates to the disposal of 100% of HygroMatik GmbH on 30th November 2018.
Property, plant and equipment
Inventory
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Post retirement benefit
Net assets disposed
Consideration received, satisfied in cash
Cash disposed of
Transaction expenses
Net proceeds from disposal of subsidiary
Contingent consideration
Cash disposed of
Net assets disposed of
Currency translation differences transferred from translation reserve
Profit on disposal of subsidiary
Net proceeds from disposal of subsidiary
Amount received to settle outstanding intercompany loan
Cash inflow per Consolidated Statement of Cash Flows
2018
£m
1.3
1.7
1.6
0.5
(4.4)
(0.1)
0.6
49.7
(0.5)
(2.0)
47.2
–
0.5
(0.6)
0.3
47.4
47.2
4.3
51.5
The sale of HygroMatik did not meet the definition of a discontinued operation given in IFRS 5 (Non-Current Assets Held for Sale and
Discontinued Operations) and, therefore, no disclosures in relation to discontinued operations have been made. On a debt-free, cash-
free basis including working capital adjustments the total cash consideration was £52.3m.
28 Derivatives and other financial instruments
The Group does not enter into significant derivative transactions. The Group’s principal financial instruments comprise loans, cash and
short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has
various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. It is, and has been
throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken.
The main risks arising from the Group’s financial instruments are credit risk, interest rate risk, liquidity risk and foreign currency risk.
The Board reviews and agrees policies for managing each of these risks and they are summarised below.
Credit risk
The Group sells products and services to customers around the world and its customer base is extremely varied in size and industry
sector. The Group operates credit control policies to assess customers’ credit ratings and provides for any debt that is identified as
non-collectable.
Interest rate risk
The Group’s policy is to hold a mixture of fixed and floating rate debt, with a preference to floating rate when the Group’s interest cover
is high and leverage is low. When new debt facilities are entered into the Group assesses if this should be fixed or floating depending
on the specific circumstances at the time. In addition the Group aims to achieve a spread of maturity dates in order to avoid the
concentration of funding requirements at any one time. The ratio of fixed to floating rate debt and debt maturity profile is kept under
review by the Group CFO in conjunction with the Board.
Liquidity risk
The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts, loans, facilities
and finance leases as appropriate.
190
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 28 Derivatives and other financial instruments continued
Foreign currency risk
The Group has operations around the world and therefore its Consolidated Statement of Financial Position can be affected significantly
by movements in the rate of exchange between sterling and various other currencies particularly the US dollar and euro. The Group
seeks to mitigate the effect of this structural currency exposure by borrowing in these currencies where appropriate while maintaining a
low cost of debt. In addition the Group employs Net Investment Hedge Accounting where appropriate to mitigate these exposures, with
such hedges being designated in both 2019 and 2018. The gain on net investment hedges during 2019 included in the Consolidated
Statement of Comprehensive income was £12.9m (2018: £7.4m loss). This is included within other reserves in the Consolidated
Statement of Changes in Equity (see Note 21).
The Group also has transactional currency exposures principally as a result of trading between Group companies. Such exposures arise
from sales or purchases by an operating unit in currencies other than the unit’s functional currency. The Group operates a programme to
manage this risk on a Group-wide net basis, through the entering into of both forward contracts and non-deliverable forward contracts
with a range of bank counter-parties.
Fair values of financial assets and financial liabilities
Fair values of financial assets and liabilities at 31st December 2019 are not materially different from book values due to their size or the
fact that they were at short-term rates of interest. Fair values have been assessed as follows:
• Derivatives
Forward exchange contracts are marked to market by discounting the future contracted cash flows using readily available
market data.
• Interest-bearing loans and borrowings
Fair value is calculated based on discounted expected future principal and interest cash flows.
• Lease liabilities
The fair value is estimated as the present value of future cash flows, discounted at the incremental borrowing rate for the related
geographical location unless the rate implicit in the lease is readily determinable.
• Trade and other receivables/payables
For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
The following table compares amounts and fair values of the Group’s financial assets and liabilities:
Financial assets:
Cash and cash equivalents
Trade, other receivables and contract assets
Total financial assets
Financial liabilities:
Loans
Lease liabilities
Bank overdrafts
Trade payables
Other payables and contract liabilities
Total financial liabilities
2019
Fair
value
£m
2019
Carrying
value
£m
168.5
263.4
431.9
2019
Carrying
value
£m
463.5
38.9
0.2
57.9
46.5
607.0
168.5
263.4
431.9
2019
Fair
value
£m
463.5
38.9
0.2
57.9
46.5
607.0
2018
Carrying
value
£m
187.1
264.9
452.0
2018
Carrying
value
£m
422.2
0.3
0.4
57.4
46.5
526.8
2018
Fair
value
£m
187.1
264.9
452.0
2018
Fair
value
£m
422.2
0.3
0.4
57.4
46.5
526.8
There are no other assets or liabilities measured at fair value on a recurring or non-recurring basis for which fair value is disclosed.
Derivative financial instruments are measured at fair value. Fair value of derivative financial instruments are calculated based on
discounted cash flow analysis using appropriate market information for the duration of the instruments.
191
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
28 Derivatives and other financial instruments continued
Financial instruments fair value disclosure
Fair value measurements are classified into three levels, depending on the degree to which the fair value is observable:
• Level 1 fair value measurements are those derived from quoted prices in active markets for identical assets and liabilities;
• Level 2 fair value measurements are those derived from other observable inputs for the asset or liability; and
• Level 3 fair value measurements are those derived from valuation techniques using inputs that are not based on observable
market data.
We consider that the derivative financial instruments fall into Level 2.
Interest rate risk profile of financial liabilities
The interest rate profile of the financial liabilities of the Group as at 31st December was as follows:
2019
Euro
US dollar
Sterling
Renminbi
Other
Group total
2018
Euro
US dollar
Sterling
Renminbi
Other
Group total
Fixed rate
financial
liabilities
£m
199.6
14.6
2.5
1.5
13.6
231.8
Fixed rate
financial
liabilities
£m
202.6
–
–
13.7
0.5
216.8
Floating rate
financial
liabilities
£m
253.0
19.6
–
–
–
272.6
Floating rate
financial
liabilities
£m
145.9
60.9
2.0
–
0.2
209.0
Financial
liabilities on
which no
interest is paid
£m
33.2
16.5
13.7
17.1
22.1
102.6
Financial
liabilities on
which no
interest is paid
£m
28.2
20.5
12.0
16.4
23.9
101.0
Total
£m
485.8
50.7
16.2
18.6
35.7
607.0
Total
£m
376.7
81.4
14.0
30.1
24.6
526.8
Terms and debt repayment schedule
The terms and conditions of outstanding loans were as follows:
Unsecured private placement - €225.0m
Unsecured bank facility – €160.0m
Unsecured bank facility – £50m revolving credit facility
Unsecured bank facility – £41.7m
Unsecured bank facility – £110m revolving credit facility
Unsecured bank facility – $25.8m
Unsecured bank facility
Unsecured bank facility
Unsecured bank facility
Finance leases
Unsecured bank facility
Lease liability
Lease liability
Total outstanding loans
Currency
€
€
€
€
€
$
€
CNY
£
S$
€
CAD
YEN
Year
Nominal
of maturity
interest rate
2023
1.1%
2021
0.7%
2021
0.5%
2022
0.7%
2021
0.5%
2020
2.6%
2020
0.9%
2020
3.9%
1.6%
2020
2.8% 2018-2021
2019
4.0% 2018-2021
2023
1.4%
10.4%
2019
Carrying value
£m
191.0
135.7
48.3
35.2
33.7
19.6
0.2
–
–
–
–
–
–
463.7
2018
Carrying value
£m
202.0
143.6
–
–
–
60.9
0.3
13.7
2.0
0.1
0.1
0.1
0.1
422.9
The weighted average interest rate paid during the year was 1.4% (2018: 1.5%).
192
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 28 Derivatives and other financial instruments continued
Interest rate risk profile of financial assets
The interest rate profile of the financial assets of the Group as at 31st December was as follows:
2019
Sterling
Euro
US dollar
Renminbi
Other
Group total
2018
Sterling
Euro
US dollar
Renminbi
Other
Group total
Fixed rate
financial
assets
£m
–
1.4
0.1
–
5.3
6.8
Fixed rate
financial
assets
£m
–
1.3
8.4
1.1
14.0
24.8
Floating rate
financial
assets
£m
0.2
16.6
16.7
11.9
10.5
55.9
Floating rate
financial
assets
£m
0.2
17.1
5.1
19.2
8.9
50.5
Total
£m
29.1
115.9
98.4
42.0
146.5
431.9
Total
£m
32.9
131.8
100.1
49.5
137.7
452.0
Financial
assets on
which no
interest is
earned
£m
28.9
97.9
81.6
30.1
130.7
369.2
Financial
assets on
which no
interest is
earned
£m
32.7
113.4
86.6
29.2
114.8
376.7
Financial assets on which no interest is earned comprise trade and other receivables and cash at bank.
Floating and fixed rate financial assets comprise cash at bank or cash placed on deposit.
Currency exposures
As explained on page 191, the Group’s objectives in managing the currency exposures arising from its net investment overseas
(in other words, its structural currency exposures) are to maintain a low cost of debt while partially hedging against currency depreciation.
All gains and losses arising from these structural currency exposures are recognised in the Consolidated Statement of Comprehensive
Income. In addition the Group employs Net Investment Hedge Accounting in order to mitigate these impacts where appropriate.
Transactional (or non-structural) exposures give rise to net currency gains and losses that are recognised in the Consolidated Income
Statement. Such exposures include the monetary assets and monetary liabilities in the Consolidated Statement of Financial Position
that are not denominated in the operating (or functional) currency of the operating unit involved. At 31st December 2019 the currency
exposures in respect of the euro was a net monetary liability of £184.6m (2018: £191.1m net monetary liability) and in respect of the US
dollar a net monetary liability of £0.2m (2018: net monetary liability £40.5m).
At 31st December 2019, the percentage of debt to net assets, excluding debt was 20% (2018: 29%) for the euro, 1% (2018: 5%) for
the US dollar and nil (2018: 1%) for the Chinese renminbi.
193
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
28 Derivatives and other financial instruments continued
Maturity of financial liabilities
The Group’s financial liabilities at 31st December mature in the following periods:
2019
In six months or less, or on demand
In more than six months but no more
than twelve
In more than one year but no more than two
In more than two years but no more than three
In more than three years but no more than four
In more than four years but no more than five
In more than five years
Total contractual cash flows
Statement of Financial Position values
2018
In six months or less, or on demand
In more than six months but no more
than twelve
In more than one year but no more than two
In more than two years but no more than three
In more than three years but no more than four
In more than four years but no more than five
In more than five years
Total contractual cash flows
Statement of Financial Position values
Trade,
other payables
and contract
liabilities
£m
98.3
Overdrafts
£m
0.2
Short-term
borrowings
£m
–
Lease
liabilities
£m
6.5
Long-term
borrowings
£m
21.4
6.0
0.1
–
–
–
–
104.4
104.4
Trade and
other
payables
£m
97.7
6.1
0.1
–
–
–
–
103.9
103.9
–
–
–
–
–
–
0.2
0.2
–
–
–
–
–
–
–
–
5.7
9.6
7.0
5.1
2.4
5.7
42.0
38.9
16.0
234.1
9.0
192.8
–
–
473.3
463.5
Overdrafts
£m
0.4
Short-term
borrowings
£m
13.4
Finance
leases
£m
0.1
Long-term
borrowings
£m
24.1
–
–
–
–
–
–
0.4
0.4
2.3
–
–
–
–
–
15.7
15.7
0.1
0.1
–
–
–
–
0.3
0.3
22.8
23.8
146.1
2.1
204.1
–
423.0
406.5
Total
£m
126.4
27.7
243.8
16.0
197.9
2.4
5.7
619.9
607.0
Total
£m
135.7
31.3
23.9
146.1
2.2
204.1
–
543.3
526.8
The Group did not employ any supply chain or similar forms of financing during 2019 or 2018.
Cash flow hedges
The Group uses forward currency contracts to manage its exposure to movements in foreign exchange rates. The forward contracts are
designated as hedging instruments in a cash flow hedging relationship. At 31st December 2019 the Group had contracts outstanding
to economically hedge or to purchase £30.0m (2018: £14.1m), and €11.3m (2018: €5.7m) with US dollars, £53.8m (2018: £17.8m) with
euros, £12.1m (2018: £0.0m), and €8.2m (2018: €0.0m) with Chinese renminbi, £8.4m (2018: £1.9m) and €4.7m (2018: €0.4m) with
Korean won, £4.2m (2018: £0.0m) with Singapore dollar, £0.0m (2018: £1.1m) with Danish krone, £0.0m (2018: £0.2m) with Canadian
dollars, £0.0m, (2018: £0.5m) with Swiss franc and £0.0m (2018: £0.1m) with Japanese yen. The fair values at the end of the reporting
period were an asset of £3.4m (2018: £0.1m asset). The fair value of cash flow hedges falls into the Level 2 category of the fair value
hierarchy in accordance with IFRS 7.
The fair value of derivative financial instruments is estimated by discounting the future contracted cash flow using readily available
market data.
194
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 28 Derivatives and other financial instruments continued
The contractual cash flows on forward currency contracts at the reporting date are shown below, classified by maturity. The cash flows
shown are on a gross basis and are not discounted.
2019
Contracted cash in/(out):
Sterling
Euro
US dollar
Korean won
Other
Total contractual cash flows
2018
Contracted cash in/(out):
Sterling
Euro
US dollar
Korean won
Other
Total contractual cash flows
Less than
6 months
£m
6 to 12
months
£m
More than
12 months
£m
7.9
(1.2)
(3.1)
–
(2.4)
1.2
6.4
(1.5)
(2.9)
–
–
2.0
0.2
–
–
–
–
0.2
Less than
6 months
£m
6 to 12 months
£m
More than
12 months
£m
23.3
(7.0)
(13.1)
(2.2)
(1.0)
–
12.2
(5.3)
(6.1)
–
(0.8)
–
–
–
–
–
–
–
Total
£m
14.5
(2.7)
(6.0)
–
(2.4)
3.4
Total
£m
35.5
(12.3)
(19.2)
(2.2)
(1.8)
–
It is anticipated that the cash flows will take place at the same time as the corresponding forward contract matures. At this time the
amount deferred in equity will be reclassified to profit or loss.
All forecast transactions which have been subject to hedge accounting during the year have occurred or are still expected to occur.
A profit on derivative financial instruments of £3.3m (2018: loss of £0.1m) was recognised in other comprehensive income during
the period.
No amount (2018: £nil) was removed from equity during the period and included in the initial cost or other carrying amount of a non-
financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction.
As at 31st December 2019 no ineffectiveness has been recognised in profit or loss arising from hedging foreign currency transactions.
Borrowing facilities
The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31st December in respect of
which all conditions precedent had been met at that date were as follows:
Expiring in one year or less
Expiring in more than one year but no more than two years
Expiring in more than two years but no more than three years
Expiring in more than three years
Total Group undrawn committed facilities
2019
£m
–
78.5
–
–
78.5
2018
£m
21.5
17.7
160.0
–
199.2
At 31st December 2019, the Group had available £78.5m (2018: £160.0m) of undrawn committed borrowing facilities in respect of
its £160m pound sterling revolving credit facilities, of which all conditions precedent had been met. These facilities expire on 31st
December 2021.
195
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Consolidated Financial Statements
continued
28 Derivatives and other financial instruments continued
Sensitivity analysis
In managing interest rate and currency risks, the Group aims to reduce the impact of short-term fluctuations on the Group’s
earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on
consolidated earnings. At the year end borrowings totalled £463.7m (2018: £422.9m). At 31st December 2019, it is estimated that a
general increase of one percentage point in interest rates would decrease the Group’s profit after tax and equity by approximately £2.6m
(2018: £3.1m).
For the year ended 31st December 2019, it is estimated that a decrease of five percentage points in the value of sterling weighted
in relation to the Group’s profit and trading flows would have increased the Group’s profit before tax by approximately £13.0m
(2018: £11.5m). The effect can be very different between years due to the weighting of different currency movements. Forward exchange
contracts have been included in this calculation.
The credit risk profile of trade receivables
The ageing of trade receivables at the reporting date was:
Not past due date
0–30 days past due date
31–90 days past due date
91 days to one year past due date
More than one year
Group total
Gross
2019
£m
167.4
40.6
22.2
16.3
9.0
255.5
Impairment
2019
£m
(1.6)
(0.8)
(0.3)
(3.1)
(9.0)
(14.8)
Net
2019
£m
165.8
39.8
21.9
13.2
–
240.7
Gross
2018
£m
164.6
41.4
23.8
15.6
9.5
254.9
Impairment
2018
£m
(0.5)
(0.1)
(0.6)
(1.4)
(7.2)
(9.8)
Net
2019
£m
164.1
41.3
23.2
14.2
2.3
245.1
Other than those disclosed above no other impairment losses on receivables and contract assets arising from contracts with customers
have been recognised. Other than trade receivables there are no financial assets that are past their due date at 31st December 2019.
Payment terms across the Group vary dependent on the geographic location of each operating company. Payment is typically due
between 20 and 90 days after the invoice is issued.
All contracts with customers do not contain a significant financing component.
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
2019
£m
9.8
8.6
(1.2)
(0.6)
(1.1)
(0.7)
14.8
2018
£m
9.6
2.8
(0.7)
(0.5)
(1.4)
–
9.8
Balance at 1st January
Additional impairment
Amounts written off as uncollectable
Amounts recovered
Impairment losses reversed
Exchange differences
Balance at 31st December
196
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Financial Statements
Company Financial Statements
In this section
Company Statement of Financial Position
Company Statement of Changes in Equity
Notes to the Company Financial Statements
198
199
200
s
t
n
e
m
e
t
a
t
S
l
i
a
c
n
a
n
F
i
Spirax-Sarco Engineering plc
Annual Report 2019
197
Company Statement of Financial Position
at 31st December 2019
Assets
Non-current assets
Property, plant and equipment
Loans to subsidiaries
Investment in subsidiaries
Deferred tax assets
Post-retirement benefits
Current assets
Due from subsidiaries
Other current assets
Cash and cash equivalents
Total assets
Equity and liabilities
Current liabilities
Trade and other payables
Current portion of long-term borrowings
Short-term borrowings
Net current assets
Non-current liabilities
Long-term borrowings
Deferred tax liabilities
Due to subsidiaries
Total liabilities
Net assets
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Equity shareholders’ funds
Total equity
Total equity and liabilities
Notes
2019
£m
2018
£m
11
3, 9
2
6
7
9
4
5
10
10
6
9
8
8
6.9
210.1
662.0
0.7
5.6
885.3
154.9
6.5
1.4
162.8
1,048.1
3.6
20.2
–
23.8
139.0
190.4
0.9
4.8
196.1
219.9
828.2
19.8
81.0
11.8
715.6
828.2
828.2
1,048.1
7.5
285.6
445.8
–
3.7
742.6
135.2
2.9
0.3
138.4
881.0
3.4
41.2
2.0
46.6
91.8
221.7
0.6
13.3
235.6
282.2
598.8
19.8
77.8
13.6
487.6
598.8
598.8
881.0
The loss before dividends received was £12.7m (2018: £17.5m). Dividends from subsidiary undertakings of £322.0m (2018: £265.4m) are
excluded from this amount.
These Financial Statements of Spirax-Sarco Engineering plc, company number 00596337 were approved by the Board of Directors and
authorised for issue on 10th March 2020 and signed on its behalf by:
N.J. Anderson
K.J. Boyd Directors
198
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Company Statement of Changes in Equity
for the year ended 31st December 2019
Balance at 1st January 2019
Profit for the year
Other comprehensive income:
Remeasurement loss on post-retirement benefits
Deferred tax on remeasurement loss on post-retirement
benefits
Total other comprehensive income for the year
Total comprehensive income for the year
Contributions by and distributions to owners of
the Company:
Dividends paid
Equity settled share plans net of tax
Issue of share capital
Employee Benefit Trust shares
Investment in subsidiaries in relation to share options
granted
Balance at 31st December 2019
For the year ended 31st December 2018
Balance at 1st January 2018
Profit for the year
Other comprehensive expense:
Remeasurement loss on post-retirement benefits
Deferred tax on remeasurement loss on post-retirement
benefits
Total other comprehensive expense for the year
Total comprehensive income for the year
Contributions by and distributions to owners of
the Company:
Dividends paid
Equity settled share plans net of tax
Issue of share capital
Employee Benefit Trust shares
Investment in subsidiaries in relation to share options
granted
Balance at 31st December 2018
Share
capital
£m
19.8
–
Share
premium
account
£m
77.8
–
Other
reserves
£m
13.6
–
Retained
earnings
£m
487.6
309.3
Total
equity
£m
598.8
309.3
–
–
–
–
–
–
–
–
–
19.8
Share
capital
£m
19.8
–
–
–
–
–
–
–
–
19.8
–
–
–
–
–
–
3.2
–
–
81.0
–
–
–
–
–
–
–
(4.0)
2.2
11.8
Share
premium
account
£m
75.1
Other
reserves
£m
12.2
1.9
1.9
(0.3)
1.6
310.9
(75.9)
(7.0)
–
–
–
715.6
Retained
earnings
£m
310.2
247.9
(0.3)
1.6
310.9
(75.9)
(7.0)
3.2
(4.0)
2.2
828.2
Total
equity
£m
417.3
247.9
–
–
–
–
–
2.7
–
–
77.8
–
–
–
–
–
–
(1.2)
2.6
13.6
(0.6)
(0.6)
0.1
(0.5)
247.4
(67.0)
(3.0)
–
–
–
487.6
0.1
(0.5)
247.4
(67.0)
(3.0)
2.7
(1.2)
2.6
598.8
Other reserves represent the Company’s share-based payments, capital redemption and Employee Benefit Trust reserves (see Note 8).
The Notes on pages 200 to 206 form an integral part of the Financial Statements.
199
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Company Financial Statements
1 Accounting policies
The separate Financial Statements of the Company are presented as required by the Companies Act 2006. The Company meets the
definition of a qualifying entity under FRS 100. Accordingly the Company has adopted FRS 101 (Reduced Disclosure Framework).
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to
share-based payments, financial instruments and the presentation of a Cash Flow Statement. Where relevant, equivalent disclosures
have been given in the Consolidated Financial Statements.
Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own Income Statement.
As permitted by the audit fee disclosure regulations, disclosure of non-audit fees information is not included in respect of the Company.
The Company’s accounting policies are the same as those set out in Note 1 of the Consolidated Financial Statements, except as
noted below.
The Directors have concluded that no critical judgements or key sources of estimation uncertainty have been made in the process of
applying the Company’s accounting policies.
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
Loans to or from other Group undertakings and all other payables and receivables are initially recorded at fair value, which is generally
the proceeds received. They are then subsequently carried at amortised cost.
2 Investments in subsidiaries
Cost:
At 1st January
Share options issued to subsidiary company employees
Additions
At 31st December
2019
£m
445.8
2.2
214.0
662.0
2018
£m
269.4
2.6
173.8
445.8
Investments are stated at cost less provisions for any impairment in value.
Additions in the year relate to investments in Gestra Holdings Limited £1.6m and Spirax Sarco America Investments Limited £212.4m.
Spirax Sarco America Investments Limited was incorporated on 24th October 2018 with the purpose of holding Group US$ investments
and loans. Gestra Holdings Limited was incorporated on 9th October 2018 with the purpose of holding other Gestra Companies.
Details relating to subsidiary undertakings are given on pages 207 to 211. Except where stated all classes of shares were 100% owned
by the Group at 31st December 2019. The country of incorporation of the principal Group companies is the same as the country of
operation with the exception of companies operating in the United Kingdom which are incorporated in Great Britain. All operate in steam,
electrical thermal energy solutions, fluid path technologies or peristaltic pumping markets except those companies identified as a holding
company on pages 207 to 211.
200
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 3 Loans to subsidiaries
Cost:
At 1st January
Advances
Interest
Repayments
Exchange adjustment
At 31st December
The terms and conditions of loans to subsidiaries at 31st December 2019 were as follows:
Currency
€
$
$
Nominal
interest rate
1.10%
2.20%
2.20%
Year of
maturity
2023
2020
2020
Spirax-Sarco Overseas Limited
Spirax-Sarco Investments Limited
Spirax-Sarco America Limited
Total loans to subsidiaries
Due within one year
Due after more than one year
4 Other current assets
Prepayments and accrued income
Total other current assets
5 Trade and other payables
Accruals
Other payables
Total trade and other payables
Trade and other payables are due within one year.
6 Deferred tax assets and liabilities
Movement in deferred tax during the year 2019
2019
£m
285.6
1.6
–
(64.5)
(12.6)
210.1
2019
£m
190.6
–
19.5
210.1
19.5
190.6
2019
£m
6.5
6.5
2019
£m
3.6
–
3.6
2018
£m
321.3
–
4.2
(46.5)
6.6
285.6
2018
£m
200.6
3.7
81.3
285.6
–
285.6
2018
£m
2.9
2.9
2018
£m
3.3
0.1
3.4
Other temporary differences (asset)
Pensions (liability)
Company total
1st January
2019
£m
–
(0.6)
(0.6)
Recognised
in income
£m
0.7
–
0.7
Recognised
in OCI
£m
–
(0.3)
(0.3)
Recognised
in equity
£m
–
–
–
31st December
2019
£m
0.7
(0.9)
(0.2)
Movement in deferred tax during the year 2018
Other temporary differences (asset)
Pensions (liability)
Company total
1st January
2018
£m
1.2
(0.7)
0.5
Recognised
in income
£m
(1.2)
–
(1.2)
Recognised
in OCI
£m
–
0.1
0.1
Recognised
in equity
£m
–
–
–
31st December
2018
£m
–
(0.6)
(0.6)
201
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Company Financial Statements
continued
7 Employee benefits
Pension plans
The Company is accounting for pension costs in accordance with International Accounting Standard 19.
The disclosures shown here are in respect of the Company’s defined benefit obligations. Other plans operated by the Company were
defined contribution plans.
The total expense relating to the Company’s defined contribution pension plans in the current year was £0.7m (2018: £0.6m).
At 31st December 2019 the post-retirement mortality assumptions in respect of the Company Defined Benefit Scheme follows
85%/96% (male/female) of SAPS S2, CMI 2017 projections with a long term trend of 1.25% p.a. At 31st December 2018 the post-
retirement mortality assumptions in respect of the Company Defined Benefit Scheme follows 85% of SAPS S2 Light base table for
males and 96% of SAPS S2 base table for females with CMI Core Projection Model 2016 improvements commencing in 2007, subject
to a 1.25% p.a. long-term trend. These assumptions are regularly reviewed in light of scheme-specific experience and more widely
available statistics.
The financial assumptions used at 31st December were:
Rate of increase in salaries
Rate of increase in pensions
Rate of price inflation
Discount rate
Weighted-average
assumptions used to define the
benefit obligations
2019
%
2.4
2.8
2.9
2.1
2018
%
2.7
2.9
3.2
2.7
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions, which due to the
timescale covered, may not necessarily be borne out in practice.
Fair value of scheme assets:
Equities
Bonds
Other
Total market value in aggregate
£1.5m (2018: £1.4m) of scheme assets have a quoted market price in an active market.
The actual return on plan assets was a gain of £5.5m (2018: £1.0m loss).
The amounts recognised in the Company Statement of Financial Position are determined as follows:
Fair value of scheme’s assets
Present value of funded scheme’s liabilities
Retirement benefit asset recognised in the Statement of Financial Position
Related deferred tax
Net pension asset
2019
£m
9.2
47.9
2.4
59.5
2019
£m
59.5
(53.9)
5.6
(0.9)
4.7
2018
£m
7.8
46.8
1.8
56.4
2018
£m
56.4
(52.7)
3.7
(0.6)
3.1
202
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 7 Employee benefits continued
The movements in the Defined Benefit Obligation (DBO) recognised in the Statement of Financial Position during the year were:
Defined benefit obligation at beginning of year
Current service cost
Interest cost
Contributions from members
Remeasurement (loss)/gain
Actual benefit payments
Experience loss
Defined benefit obligation at end of year
The movements in the fair value of plan assets during the year were:
Value of assets at beginning of year
Expected return on assets
Remeasurement gain/(loss)
Contributions paid by employer
Contributions from members
Actual benefit payments
Value of assets at end of year
The estimated employer contributions to be made in 2020 are £nil.
The history of experience adjustments is as follows:
Defined benefit obligation at end of year
Fair value of scheme’s assets
Retirement benefit recognised in the Statement of
Financial Position
Experience adjustment on scheme’s liabilities
As a percentage of scheme’s liabilities
Experience adjustment on scheme’s assets
As a percentage of scheme’s assets
2019
£m
(53.9)
59.5
5.6
–
0.0%
4.1
6.9%
2018
£m
(52.7)
56.4
3.7
(0.3)
0.1%
(2.4)
4.3%
2017
£m
(55.7)
60.0
4.3
(1.2)
2.2%
2.2
3.7%
The expense recognised in the Company Income Statement was as follows:
Current service cost
Net interest on scheme’s assets and liabilities
Total expense recognised in Income Statement
2019
£m
(52.7)
–
(1.4)
–
(2.2)
2.4
–
(53.9)
2019
£m
56.4
1.4
4.1
–
–
(2.4)
59.5
2016
£m
(54.1)
58.8
4.7
0.5
0.9%
7.6
13.0%
2019
£m
–
–
–
2018
£m
(55.7)
(0.1)
(1.3)
–
2.1
2.6
(0.3)
(52.7)
2018
£m
60.0
1.4
(2.4)
–
–
(2.6)
56.4
2015
£m
(48.1)
51.7
3.6
1.0
2.0%
(1.2)
2.3%
2018
£m
(0.1)
0.1
–
203
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements
Notes to the Company Financial Statements
continued
7 Employee benefits continued
Statement of Comprehensive Income (OCI)
Remeasurement effects recognised in OCI:
Due to experience on DBO
Due to demographic assumption changes in DBO
Due to financial assumption changes in DBO
Return on assets
Total remeasurement loss recognised in OCI
Deferred tax on remeasurement amount recognised in OCI
Cumulative loss recognised in OCI at beginning of year
Cumulative loss recognised in OCI at end of year
2019
£m
–
0.5
(2.7)
4.1
1.9
(0.3)
(11.7)
(10.1)
Sensitivity analysis
The effect on the defined benefit obligation at 31st December 2019 of an increase or decrease in key assumptions is as follows:
Increase/(decrease) in pension defined benefit obligation
Discount rate assumption being 1.00% higher
Discount rate assumption being 1.00% lower
Inflation assumption being 0.25% higher
Inflation assumption being 0.25% lower
Mortality assumption life expectancy at age 65 being one year higher
2018
£m
(0.3)
0.4
1.7
(2.4)
(0.6)
0.1
(11.2)
(11.7)
£m
(5.9)
7.0
1.0
(1.1)
2.6
Share-based payments
Disclosures of the share-based payments offered to employees of the Company are set out below. The description and operation of
each scheme is the same as outlined in the Group disclosure.
Share Option Scheme
As at 31st December 2019 the number of shares outstanding were nil, due to performance conditions in respect of all exercisable shares
being met. No options have been granted since 2011.
Performance Share Plan
The relevant disclosures in respect of the Performance Share Plan grants are set out below.
Grant date
Mid market share price at grant date
Number of employees
Shares under scheme
Vesting period
Probability of vesting
Fair value
2015
Grant
11th June
3,460.0p
15
70,290
3 years
71.5%
2,473.9p
2016
Grant
5th April
3,550.0p
13
69,890
3 years
70.8%
2,513.4p
2017
Grant
26th May
5,256.0p
12
62,356
3 years
73.1%
3,842.1p
2018
Grant
4th April
5,560.0p
12
60,899
3 years
73.5%
4,084.4p
2019
Grant
15th May
8,161.0p
12
60,626
3 years
74.1%
6,048.9p
204
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements 8 Called up share capital and reserves
Ordinary shares of 26 12/13p (2018: 26 12/13p ) each
Authorised 111,428,571 (2018: 111,428,571)
Allotted, called up and fully paid 73,736,888 (2018: 73,666,646)
2019
£m
30.0
19.8
2018
£m
30.0
19.8
71,698 shares with a nominal value of £19,303 were issued in connection with the Group’s Employee Share Schemes for a consideration
of £3.2m received by the Company.
In 2019 the Parent Company purchased 111,195 shares representing 0.15% of called up share capital with a nominal value of £29,937
for a consideration of £9,071,496. The shares were placed in an Employee Benefit Trust (EBT) to be used in connection with the Group’s
Employee Share Scheme.
At 31st December 2019 79,489 shares were held in an Employee Benefit Trust and available for use in connection with the Group’s
Employee Share Schemes.
12 senior employees of the Company have been granted options on Ordinary shares under the Share Option Scheme and Performance
Share Plan (details in Note 7).
Other reserves in the Company Statement of Changes in Equity on page 199 are made up as follows:
Share-based payments reserve
Capital redemption reserve
Employee Benefit Trust reserve
Total other reserves
1st January
2019
£m
14.3
1.8
(2.5)
13.6
Change
in year
£m
2.2
–
(4.0)
(1.8)
31st December
2019
£m
16.5
1.8
(6.5)
11.8
Share-based payments reserve
This reserve records the Company’s share based payment charge that is recognised in reserves.
Capital redemption reserve
This reserve records the historical repurchase of the Company’s own shares.
Employee Benefit Trust reserve
The Company has an Employee Benefit Trust which is used to purchase, hold and issue shares in connection with the Group’s
employee share schemes. The shares held in Trust are recorded in this separate reserve.
9 Related party transactions
Dividends received from subsidiaries
Loans due from subsidiaries at 31st December
Amounts due from subsidiaries at 31st December
Amounts due to subsidiaries at 31st December
10 Financial instruments
The terms and conditions of outstanding loans at 31st December 2019 are as follows:
2019
£m
322.0
210.1
154.9
4.8
2018
£m
265.4
285.6
135.2
13.3
Unsecured private placement – €225.0m
Unsecured bank facility – $25.8m
Total outstanding loans
Current portion of long-term borrowings due before 31st December 2020
Long-term borrowings payable after 31st December 2020
Total outstanding loans
Currency
€
$
Nominal
interest rate
1.1%
2.2%
Year of
maturity
2023
2020
Carrying value
£m
191.0
19.6
210.6
20.2
190.4
210.6
205
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Notes to the Company Financial Statements
continued
11 Other information
Dividends
Dividends paid by the Company are disclosed in Note 11 of the Consolidated Financial Statements.
Property, plant and equipment
The Company holds freehold property with a cost of £9.3m (2018: £9.3m), accumulated depreciation of £2.4m (2018: £1.8m) and a net
book value of £6.9m (2018: £7.5m).
Employees
The total number of employees of the Company at 31st December 2019 was 99 (2018: 85).
Directors’ remuneration
The remuneration of the Directors of the Company is shown in the Annual Report on Remuneration 2019 on pages 107 to 132.
Auditor’s remuneration
Auditor’s remuneration in respect of the Company’s annual audit has been disclosed on a consolidated basis in the Company’s
Consolidated Financial Statements as required by Section 494(4)(a) of the Companies Act 2006.
Contingent liabilities and capital commitments
The Company has no contingent liabilities or capital commitments at 31st December 2019 (2018: £nil).
206
Spirax-Sarco Engineering plcAnnual Report 2019Financial Statements Corporate Information
Our global operations
Steam Specialties
EMEA
Country/Territory Company Name
Belgium
Spirax Sarco NV
Registered Office address
Industrielaan 5, B-9052 Zwijnaarde, Belgium
Czech Republic
Spirax Sarco spol sro
Prazska 1455, 102 00 Praha, Hostivar, Czech Republic
Egypt
Spirax Sarco Egypt
19 Farid Street, Heliopolis, Cairo, Egypt
Spirax Sarco Energy Solutions LLC (H)
19 Farid Street, Heliopolis, Cairo, Egypt
Finland
France
Spirax Oy
Spirax Sarco SAS
Niittytie 25 A 24, 01300 Vantaa, Finland
8 Avenue le Verrier, 78190 Trappes, France
Spirax-Sarco France HoldCo SAS (H)
23 Route de Château-Thierry, 02200 Noyant-et-Aconin, Soissons, France
Germany
Spirax Sarco GmbH Regelapparate
Reichenaustr. 210, 78467 Konstanz, Germany
Spirax-Sarco Germany Holdings GmbH (H)
Reichenaustr. 210, 78467, Konstanz, Germany
Gestra AG
Muenchener Str. 77, 28215, Bremen, Germany
Gestra HoldCo GmbH (H)
Muenchener Str. 77, 28215, Bremen, Germany
Spirax-Sarco Kft
1103 Budapest Koér utca 2/A, Hungary
Spirax-Sarco (Americas) Financing Unlimited (H)
Unit 1013, Gateway Business Park, New Mallow Road, Cork, T23 WK35, Ireland
Spirax-Sarco (EMEA) Financing Unlimited (H)
Unit 1013, Gateway Business Park, New Mallow Road, Cork, T23 WK35, Ireland
Hungary
Ireland
Italy
Spirax Sarco Srl
Via Per Cinisello 18, 20834 Nova Milanese, Italy
Colima Srl
Italgestra Srl
Via Mestre 11, 20063 Cernusco Sul Naviglio, Milano, Italy
Via Per Cinisello 18, 20834 Nova Milanese, Italy
Spirax Sarco East Africa Ltd
Clifton Park, Mombasa Road, Nairobi, Kenya
Spirax Sarco Maghreb
Secteur 3, Lot 146, Rue Arfoud, Bureaux 5 et 6, commerce 2-12000 Temara, Morocco
Kenya
Morocco
Netherlands
Spirax-Sarco Netherlands BV
Industrieweg 130A, 3044 AT, Rotterdam, Netherlands
Spirax-Sarco Engineering BV (H)
Industrieweg 130A, 3044 AT, Rotterdam, Netherlands
Spirax-Sarco Investments BV (H)
Industrieweg 130A, 3044 AT, Rotterdam, Netherlands
Spirax-Sarco Netherlands Holdings Coöperative
WA (H)
Sluisstraat 7, 7491 GA Delden, Delden, Netherlands
Norway
Poland
Spirax Sarco AS
Spirax Sarco Sp Zoo
Gestra Polonia Sp Zoo
Vestvollveien 14A, N-2019 Skedsmokorset, Norway
Jutrzenki 98, 02-230, Warszawa, Poland
ul Schuberta 104, PL 80-172, Gdansk, Poland
Portugal
Spirax Sarco Equipamentos Ind Lda
Rua Quinta do Pinheiro, No 8 & 8A, 2794-058 Carnaxide, Portugal
Romania
Russia
Gestra Portugal, Lda
Spirax-Sarco SRL
Spirax-Sarco Engineering LLC*
Avenida Dr Antunes Guimaraes, Numero 1159, Porto 4100-082, Portugal
2-4 Traian Street, Cluj-Napoca Municipality, Cluj County, Romania
198188, Russian Federation, St. Petersburg, Vozrozhdeniya Street, The House 20a, lit.A.
Russian Federation
South Africa
Spirax Sarco Investments (Pty) Ltd (H)
Corner Brine Avenue and Horn Street, Chloorkop Ext 23, Gauteng 1624, South Africa
Spirax Sarco South Africa (Pty) Ltd
Corner Brine Avenue and Horn Street, Chloorkop Ext 23, Gauteng 1624, South Africa
Spain
Spirax-Sarco SAU
C/ Sant Josep, 130 08980 Sant Feliu de Llobregat, Barcelona, Spain
Especialidades Hydra SLU
C/ Sant Josep, 130 08980 Sant Feliu de Llobregat, Barcelona, Spain
Spirax-Sarco Engineering SLU (H)
C/ Sant Josep, 130 08980 Sant Feliu de Llobregat, Barcelona, Spain
Gestra Espanloa SA
Calle Luis Cabrera 86-88, 28002, Madrid, Spain
Sweden
Spirax Sarco AB
Switzerland
Spirax Sarco AG
Telefonvägen 30, SE-126 37 Hagersten, Sweden
Gustav-Maurer-Strasse 9, 8702 Zollikon, Switzerland
Turkey
United Arab
Emirates
Spirax Sarco Valf Sanayi ve Ticaret A. .
Serifali Mevkii, Edep Sok No 27, 34775 Yukari Dudullu - Ümraniye, Istanbul, Turkey
Spirax-Sarco Engineering Middle East (FZC)
Saif Desk Q1-05-005/A, PO Box 514361, Sharjah, United Arab Emirates
United Kingdom
Spirax-Sarco Ltd*
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
V.C.E. Ltd
Block 2, Unit 5 Threave Court, Castlehill Industrial Estate, Carluke, ML8 5UF
Spirax-Sarco America Ltd (H)
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax-Sarco America Investments Ltd* (H)
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax-Sarco Investments Ltd* (H)
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax-Sarco Overseas Ltd* (H)
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Gestra Holdings Ltd* (H)
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Gestra UK Ltd
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
207
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Steam Specialties continued
Asia Pacific
Country/Territory Company Name
Registered Office address
Australia
China
Spirax Sarco Pty Ltd
14 Forge St., Blacktown, NSW 2148, Australia
Spirax-Sarco Engineering (China) Ltd
No 800 XinJun Ring Road, Pujiang Hi Tech Park, Shanghai, China
Spirax Sarco Trading (Shanghai) Co Ltd
No 800 XinJun Ring Road, Pujiang Hi Tech Park, Shanghai, China
Gestra (Shanghai) Fluid Control Technology Co
Ltd
Room 333 3rd Floor of 4th Area Building 1, No.2001 North Yanggao Road China (Shanghai)
Free Trade Pilot Zone, Shanghai, China
Hong Kong
Spirax Sarco Hong Kong Co Ltd
Unit 1507, 15th Floor, Prosperity Center, 25 Chin Yip Street, Kwun Tong, Kowloon, Hong Kong
India
Spirax-Sarco India Private Ltd
Indonesia
PT Spirax Sarco Indonesia
Plot No. 6, Central Avenue, Mahindra World City, Chengalpattu Taluk, Kancheepuram District
603004, India
Kawasan Infinia Park Blok C99, Jl. Dr Sahardjo No. 45, Manggarai Tebet, Jakarta Selatan
12850, Indonesia
Malaysia
Spirax Sarco Sdn Bhd
No 10, Temasya 18, Jalan Pelukis U1/46A, 40150 Shah Alam, Selangor, Malaysia
Spirax Sarco Investment Limited (H)
6th Floor, Akademi Etiqa, No23 Jalan Melaka, 50100 Kuala Lumpur, Malaysia
Myanmar
Spirax Sarco Ltd
No. 1206, 12th Floor, Sakura Tower, 339 Bogyoke Aung San Road, Kyauktada Township,
Yangon, Myanmar
New Zealand
Spirax Sarco Ltd
6 Nandina Avenue, East Tamaki, Auckland 2013, New Zealand
Philippines
Singapore
Spirax-Sarco Philippines Inc
2308 Natividad Building, Chino Roces Avenue Extension, Makati City, Philippines
Spirax Sarco Pte Ltd
Gestra Singapore Pte Ltd
21 Changi South Avenue 2, #01-01 Singapore 486630, Singapore
21 Changi South Avenue 2, #01-01 Singapore 486630, Singapore
South Korea
Spirax Sarco Korea Ltd
Steam People House, 99 Sadangro 30gil, Dongjak-gu, Seoul, Republic of Korea
Taiwan
Spirax Sarco Co Ltd
6F-3, No. 12, Lane 270, Sec. 3, Pei Shen Road, Shen Keng District, New Taipei City 22205,
Taiwan
Thailand
Vietnam
Spirax Sarco (Thailand) Ltd
38 Krungthepkreeta Road, Khlong Song Ton Nun, Lat Krabang, Bangkok 10520, Thailand
Spirax Sarco Vietnam Co Ltd
4th Floor, 180 Nguyen Van Troi Street, Ward 8, Phu Nhuan District, Ho Chi Minh City, Vietnam
Americas
Country/Territory Company Name
Registered Office address
Argentina
Brazil
Canada
Chile
Colombia
Mexico
Spirax Sarco SA
Av. del Libertador 498, 12th Floor, Buenos Aires C1001ABR, Argentina
Spirax Sarco Ind e Com Ltda
Avenida Manoel Lages do Chão, 268, Bairro Portão, Cotia, São Paulo, 06705-050, Brazil
Spirax-Sarco Servicos de Engenharia Ltda
Avenida Manoel Lages do Chão, 268, Bairro Portão, Cotia, São Paulo, 06705-050, Brazil
Hiter Controls Engenharia Ltda
Spirax Sarco Canada Ltd
Spirax-Sarco Chile Ltda
Av. Jerome Case, No 2600, Hangers B19, B20 and B21, Éden, Sorocaba, São Paulo, 18087
220, Brazil
383 Applewood Crescent, Concord, ON L4K 4J3, Canada
Las Garzas 930, Galpón E, Quilicura, Santiago de Chile, Chile
Inversiones Spirax-Sarco Chile Ltda (H)
Las Garzas 930, Galpón D, Quilicura, Santiago de Chile, Chile
Spirax Sarco Colombia SAS
Carretera Panamericana No 3-150, Jamundi, Valle del Cauca, Cali, Colombia
Spirax Sarco Mexicana, SAPI DE CV
Boulevard Alianza 30B, Parque Industrial CPA, Ciénega de Flores Nuevo León, CP 65550,
Mexico
Peru
Spirax Sarco Peru SAC
Av. Guillermo Dansey 2124, Lima, Lima, Perú
United States
Spirax Sarco Inc
1150 Northpoint Blvd., Blythewood, SC 29016, United States
Sarco International Corp (H)
2711 Centerville Road, Suite 400, Wilmington, DE 19808, United States
Spirax Sarco Investments, Inc (H)
251 Little Falls Drive, Wilmington, DE 19808-1674, United States
Gestra USA, Inc
1150 Northpoint Blvd., Blythewood, SC 29016, United States
208
Spirax-Sarco Engineering plcAnnual Report 2019Corporate Information Electric Thermal Solutions
Country/Territory
Company Name
Registered Office address
Brazil
Canada
China
Chromalox Engenharia Ltda
Avenida Manoel Lages do Chão, 268, Bairro Portão, Cotia, São Paulo, 06705-050, Brazil
Canadian Heat Acquisition Corp (H)
7051 68th Ave NW, Edmonton, Alberta, T6B 3E3, Canada
ProTrace Engineering, Inc
Suite 205, 6204-6A Street SE, Calgary, Alberta, T2H 2B7, Canada
Chromalox Precision Heat Control (Shanghai)
Co Ltd
Chromalox Precision Heat Control (Suzhou) Co
Ltd
88 Taigu Road, Suite A2, 4th Floor - Fenggu Building, Shanghai, 200131, China
T02, No 1801, Pangjin Road, Pangjin Industrial Park, Wujiang, Suzhou, 215200, China
Thermocoax (Chengdu) Co Ltd
No.11 Fujiang Road, Shuangliu Park, Jiaelong Industry Port, Chengdu, Sichuan, China
France
Etirex SAS
23 Route de Chauteau Thierry, Noyant-et-Aconin, Soissons, Cedex, F-02203, France
Thermocoax Developpement SAS
40 Boulevard Henri Sellier, 92150 Suresnes, France
Thermocoax SAS
Usine de Planquivon, Athis-de-l’Orne, 61430 Athis-Val de Rouvre, France
Germany
Thermocoax Isopad GmbH
Englerstraße 11, 69126 Heidelberg, Germany
Hong Kong
Chromalox Hong Kong Holdings Ltd (H)
33/F, Shui On Centre, Nos 6-8 Harbour Road, Wanchai, Hong Kong
India
Mexico
Singapore
Chromalox India Precision Heat & Control
Private Limited
ELW Industrial S. de R. L. de C.V.
Chromalox Precision Heat and Control
(Singapore) Pte Ltd
Thailand
Chromalox (Asia Pacific) Ltd
United Arab
Emirates
Chromalox Gulf DWC, LLC
1st Floor, 6 Unicom House, A-3 Commercial Complex, New Delhi, Janakpuri, 110058, India
Carretera Nacional, K.M. 8.5, Modulo Industrial de America, Lote #5, Nuevo Laredo, Tamaulipas,
88277, Mexico
No 11 Woodlands Close, #05-34, Singapore, 737854, Singapore
383/2, The Village Business Centre, Unit D16-A, Moo 12, Sukhumvit Road, Nongprue,
Banglamung, Chon Buri, 20151, Thailand
PO Box 390012, Office No: E-2-0226, Business Park, Dubai Aviation City, United Arab
Emirates
United Kingdom
Chromalox (UK) Ltd
AMP House, 2nd Floor, Dingwall Road, Croydon, Surrey, CR0 2LX, United Kingdom
Thermocoax UK Ltd
Tower House, Lucy Tower Street, Lincoln, LN1 1XW, United Kingdom
United States
Chromalox, Inc.
2711 Centerville Rd., Suite 400, Wilmington, DE 19808, United States
Heat Acquisition Corp (H)
2711 Centerville Rd., Suite 400, Wilmington, DE 19808, United States
Thermocoax, Inc
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware, United States
209
Spirax-Sarco Engineering plcAnnual Report 2019Corporate Information Our global operations continued
Watson-Marlow Fluid Technology Group
Country/Territory Company Name
Registered Office address
Australia
Austria
Belgium
Brazil
Canada
Chile
Colombia
Denmark
France
Germany
Hungary
India
Ireland
Italy
Japan
Malaysia
Mexico
Watson-Marlow Pty Ltd
Unit 15, 19-26 Durian Place, Wetherill Park, NSW 2164, Australia
Watson-Marlow Austria GmbH
Rathaus Viertel 3/1 OG/TOP 311, Guntramsdorf A 2353, Wien, Austria
Watson-Marlow NV
Industriepark 5, B-9052 Zwijnaarde, Belgium
Watson-Marlow Bredel Ind e Com de
Bombas Ltda
Alameda Oceania, 63, Polo Empresarial Tamboré, Santana de Parnaiba, São Paulo, CEP 06543-
308, Brazil
Watson-Marlow Canada Inc
383 Applewood Crescent, Concord, ON L4K 4J3, Canada
Watson-Marlow Bombas Chile Ltda
Las Garzas 930, Galpón E, Quilicura, Santiago de Chile, Chile
Watson-Marlow Colombia SAS
Carretera Panamericana No 3-150, Jamundi, Valle del Cauca, Cali, Colombia
Watson-Marlow Flexicon A/S
Frejasvej 2, 4100 Ringsted, Denmark
Watson-Marlow SAS
Watson-Marlow GmbH
Qonqave GmbH
Watson-Marlow Kft
9 Route De Galluis, Zi Les Croix, 78940 La Queue Lez Yvelines, France
Kurt-Alder-Str. 1, 41569 Rommerskirchen, Germany
Stadtplatz 11-13, 73249 Wernau Neckar, Germany
2/A Koer utca, Budapest 1103, Hungary
Watson-Marlow India Private Ltd
S No 81/7, Opp JSPM College, Pune-Mumbai Bypass Road, Tathawade, Pune, Maharashtra,
411 033, India
Watson-Marlow Ltd
Watson-Marlow Srl
Unit 1013, Gateway Business Park, New Mallow Rd., Cork, Ireland
Via Padana Superiore 74/D, 25080 Mazzano, Brescia, Italy
Watson-Marlow Co Ltd
4-23-21 Ukima Kita-ku, Tokyo 115-0051, Japan
Watson-Marlow SDN BHD
6th Floor, Akademi Etiqa No. 23 Jalan Melaka, 50100 Kuala Lumpur W.P., Malaysia
Watson-Marlow S de RL de CV
Boulevard Alianza 30B, Parque Industrial CPA, Ciénega de Flores Nuevo León, CP 65550, Mexico
Netherlands
Watson-Marlow BV
Oslo 9, 2993LD Barendrecht, Netherlands
Watson-Marlow Bredel BV
Sluisstraat 7, 7491 GA, Delden, Netherlands
Watson-Marlow Bredel Holdings BV (H)
Industrieweg 130A, 3044 AT, Rotterdam, Netherlands
Watson-Marlow Bredel Holdings II BV (H)
Sluisstraat 7, 7491 GA, Delden, Netherlands
New Zealand
Watson-Marlow Ltd
Unit F, 6 Polaris Place, East Tamaki, Auckland 2013, New Zealand
Philippines
Watson-Marlow Inc
10th Floor EGI Rufino Plaza, Sen. Gil Puyat Avenue, Corner Taft Avenue, Barangay, 38 Pasay City,
Fourth District, Philippines
Poland
Russia
Watson-Marlow Sp Zoo
Ul. Fosa 25, 02-768 Warszawa, Poland
Watson-Marlow LLC*
Room 19, Premises I, Shosse Entuziastov, 34, Moscow, 105118, Russian Federation
Singapore
Watson-Marlow Pte Ltd
421 Tagore Industrial Avenue, #01-13, Singapore 787805, Singapore
South Africa
Watson-Marlow Bredel SA (Pty) Ltd
Unit 6 Cradleview Industrial Park, Cnr Beyers Naude Drive & Johan Street, Laser Park, South Africa
Sweden
Spain
Taiwan
United Arab
Emirates
W-M Alitea AB
Watson-Marlow SLU
Watson-Marlow Co Ltd
Watson Marlow FZCO
Hammarby Fabriksväg 29-31, SE-120 30 Stockholm, Sweden
Tuset, 20 3 - 08006, Barcelona, Spain
No.9 Lane 270 Sec. Beishen Road, Shenkeng District, New Taipei City 222, Taiwan
Office Number FZJOA2005, Jafza One, Jebel Ali Free Zone, Dubai, United Arab Emirates
United Kingdom
Aflex Hose Ltd
Spring Bank Industrial Estate, Watson Mill Lane, Sowerby Bridge, HX6 3BW, United Kingdom
BioPure Technology Ltd
Bickland Water Road, Falmouth, Cornwall, TR11 4RU, United Kingdom
Watson-Marlow Ltd*
Bickland Water Road, Falmouth, Cornwall, TR11 4RU, United Kingdom
United States
Aflex Hose USA LLC
32 Appletree Lane, Pipersville, PA 18947, United States
ASEPCO
1161 Cadillac Ct, Milpitas, CA 95035, United States
Watson Marlow Inc
37 Upton Technology Park, Wilmington, MA 01887, United States
Watson-Marlow Flow Smart Inc
1675 South State St., Suite B, Dover, DE 19901 United States
210
Spirax-Sarco Engineering plcAnnual Report 2019Corporate Information Dormant companies
Country/Territory Company Name
Registered Office address
Canada
France
Canadian Heat Holding Corp
6600-100 King Street W., 1 First Canadian Place, Toronto, Ontario, M5X 1B6, Canada
Heat Holding France SAS
23 Route de Château-Thierry, 02200 Noyant-et-Aconin, Soissons, France
United Kingdom
Gervase Instruments Ltd*
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Heat Holding (UK) Limited
AMP House, 2nd Floor, Dingwall Road, Croydon, Surrey, CR0 2LX, United Kingdom
SARCO Ltd*
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Sarco Thermostats Ltd
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax Manufacturing Co Ltd
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax-Sarco Europe Ltd*
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
Spirax-Sarco International Ltd*
Charlton House, Cirencester Road, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom
United States
Electronic Control Systems, Inc.
103 Gamma Drive, Pittsburgh, PA 15238, United States
Heat Asset Acquisition Corp.
2711 Centerville Rd., Suite 400, Wilmington, DE19808, United States
Mexican Heat Holding Corp.
c/o RA PO Box 20380, Carson City, Nevada, 89706, United States
Mexican Heat Holding, LLC
160 Greentree Dr., Suite 101, Dover, Delaware, 19904, United States
Ogden Manufacturing Co.
2711 Centerville Rd., Suite 400, Wilmington, DE19808, United States
The global operations listed on pages 207 to 211 are registered companies.
In addition to these operations we have a number of other operating units, including an Associate company; a company that is part
owned with a third-party trust; branches of Spirax Sarco steam or Watson-Marlow companies; and several Watson-Marlow businesses
that operate via Spirax Sarco steam business companies.
Notes
1.
All subsidiaries in the tables on pages 207 to 211 are indirect subsidiaries of
Spirax-Sarco Engineering plc, unless indicated*. All subsidiaries listed are
100% owned by the Group, except as follows:
Company
% owned by the Group
Spirax Sarco Egypt
Spirax Sarco Energy Solutions LLC, Egypt
Spirax Sarco Korea Ltd
Spirax-Sarco Philippines Inc
Spirax Sarco Services South Africa (Pty) Ltd
Spirax Sarco (Thailand) Ltd
98.867%
98.992%
97.5%
99.998%
48.51%. (51.49% is owned by a
third-party trust, The Tomorrow
Trust). The Group has control of the
company and exposure, or rights, to
variable returns from its investment
in the investee.
99.995%
2.
In addition to the subsidiaries in the tables on pages 207 to 211, we have the
following operations:
Steam Specialties (Spirax Sarco):
Country
Cambodia
Denmark
Ghana
Ireland
Japan
Sri Lanka
United Arab Emirates
Operating as a branch of
Spirax Sarco Pte Ltd, Singapore
Spirax-Sarco Limited, UK
Spirax-Sarco Limited, UK
Spirax-Sarco Limited, UK
Spirax-Sarco Limited, UK
Spirax-Sarco India Private Ltd, India
Spirax-Sarco Limited, UK
Watson-Marlow Fluid Technology Group:
Country
Switzerland
Argentina
China
South Korea
Indonesia
Thailand
Vietnam
Operating as a branch of
Watson-Marlow Limited, UK
Operating via
Spirax Sarco SA, Argentina
Spirax-Sarco Engineering (China) Ltd
Spirax Sarco Korea Ltd
PT Spirax-Sarco Indonesia
Spirax Sarco (Thailand) Ltd
Spirax Sarco Vietnam Co Ltd
This complete list of our global operations, including subsidiaries, forms part of the
audited Financial Statements. For more information see Note 2 in the Company
Financial Statements.
3. UK registered subsidiaries exempt from audit:
Gestra UK Ltd (company no. 10639879), Spirax-Sarco America Ltd (company no.
07829847), Spirax-Sarco Investments Ltd (company no. 00100995), Spirax-Sarco
Overseas Ltd (company no. 01472201), V.C.E Ltd (company no. SC126116), Gestra
Holdings Ltd (company no. 11612492), Spirax-Sarco America Investments Ltd
(company no. 11639451) and Heat Holding (UK) Limited (company no. 04325456)
qualify to take the statutory audit exemption as set out within section 479A of the
Companies Act 2006 for the period ended 31st December 2019. Spirax-Sarco
Engineering plc will guarantee the debts and liabilities of the companies claiming
the statutory audit exemption at the balance sheet date in accordance with section
479C of the Companies Act 2006.
Key
*
Direct subsidiary owned by
Spirax-Sarco Engineering plc
(H) Holding company
211
Spirax-Sarco Engineering plcAnnual Report 2019Corporate Information
Officers and advisers
Secretary and registered office
A.J. Robson
General Counsel and Company Secretary
Spirax-Sarco Engineering plc
Charlton House
Cirencester Road
Cheltenham
Gloucestershire GL53 8ER
01242 521361
01242 581470
company.secretary@uk.spiraxsarco.com
www.spiraxsarcoengineering.com
Telephone:
Facsimile:
Email:
Website:
Auditor
Deloitte LLP
Financial advisers
Rothschild
J.P. Morgan Securities plc (J.P. Morgan Cazenove)
Financial PR
Citigate Dewe Rogerson
Bankers
Barclays Bank PLC
HSBC Bank PLC
Wells Fargo Bank, N.A.
Corporate brokers
J.P. Morgan Securities plc (J.P. Morgan Cazenove)
Morgan Stanley & Co International plc
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone: 0371 384 2349* (UK)
or +44 (0)121 415 7047 (overseas)
* Lines open 8.30 am to 5.30 pm, Monday to Friday, excluding public holidays in England and Wales
Website:
www.shareview.co.uk
Solicitors
Baker & McKenzie LLP
Important dates
Annual General Meeting
Final dividend**
Ordinary shares quoted ex-dividend
Record date for final dividend
Final dividend payable
** Subject to shareholder approval at the AGM.
13th May 2020
23rd April 2020
24th April 2020
22nd May 2020
212
Spirax-Sarco Engineering plcAnnual Report 2019Corporate Information
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