Malvern Panalytical

	2019	2018	Change	LFL change
Sales (£m)	448.2	436.7	3%	1%
Adjusted operating profit1 (£m)	76.2	73.0	4%	5%
Adjusted operating margin1 (%)	17.0%	16.7%	30bps	60bps

1.  This is an alternative performance measure ('APM'). APMs are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.

Financial performance

Sales increased 3% to £448.2 million, reflecting a 1% increase in LFL sales, a 1% positive impact from foreign currency exchange movements and 1% from acquisitions, net of disposals.

Sales growth for the year was driven by strong demand in Asia, particularly in China, Japan and
South Korea. LFL sales were lower in both North America and Europe, continuing a similar trend to the first half of the year.

On a LFL basis, adjusted operating profit increased 5% and adjusted operating margins increased 60bps, with the positive impact from higher LFL sales, reflecting favourable pricing, and good overhead cost control partly offset by the dilutive impact of Concept Life Sciences ('CLS'). Following the weak first half performance at CLS, new senior management were brought in and a detailed strategic review was undertaken. As a result, the environmental analytical laboratories business was exited, with four sites being closed, and an impairment of goodwill and other intangible assets was recognised at the half year. In addition, CLS sold its environmental consultancy business in October. CLS' focus is now solely on the pharmaceutical, life sciences and food markets where it can collaborate with Malvern Panalytical.

Product launches

New product launches during the year included the latest generation of Epsilon 1 X-ray fluorescence spectrometers which provide fast and reproducible elemental analysis with greater flexibility and precision than before. Also, the newest member of the laser particle size analyser family, Topsizer Plus, was launched for the Chinese market. Topsizer Plus retains the main optical structure, consistent with the original product, but with enhanced functionality and capability.

We have seen strong growth in the academic research sector during the year, particularly in
North America and Asia, with funding benefiting from a number of government initiatives across both geographies. Partnerships and collaborations with academia were also an area of significant activity in 2019. For example, a formal partnership was agreed with the University of Bristol, focusing on areas of mutual interest, including data analytics, machine learning and artificial intelligence ('AI'). The partnership follows the opening of Malvern Panalytical's new Data Science Hub at the University-run innovation space. These types of collaboration are key in the move from providing diagnostic solutions into more predictive and prescriptive offerings as we combine our best-in-class sensors with increased domain knowledge and newly developed AI application capabilities.

Market trends and outlook

Pharma and food

Partly reflecting a tough year-on-year comparison, sales to the pharmaceutical and food industries were lower on a LFL basis. 2019 saw uncertainty within the innovator pharmaceutical space, as governments and other healthcare providers introduced tighter pricing controls in order to manage rapidly increasing costs. In response, a significant number of customer restructuring and portfolio optimisation programmes were initiated. However, the drive to reduce healthcare costs has prompted increased generic drug product development, with global regulators expanding the support they provide to companies to ensure new generics can be rapidly brought to market. This has led to investment within generic manufacturing hubs in India, China and south-east Asia, offsetting the decline within the innovator segment. Additionally, innovator portfolio developments have targeted more complex biologic and novel gene-based therapies. This, coupled with increased application of advanced analytics and modelling to improve development pipeline efficiency and manage lifecycle costs, is generating increased demand for our solutions. The outlook for the sector therefore remains positive.

Food is, traditionally, a lower growth market, being driven by consumer spending. However, there are higher growth niches, such as confectionery products and beverages, where we have realised opportunities in 2019. A continued focus on food safety, and the need for sustainable sourcing and manufacture, represent further opportunities relevant to our solution portfolio moving forward.

Primary materials

LFL sales to primary materials customers were lower year-on-year. This primarily reflected lower levels of activity in the metals market during the year, although we expect this to stabilise in the coming months, with leading mining companies expecting an uplift in demand and supply in 2020 (particularly in iron ore, nickel, zinc).

This recovery, combined with our online and automation solutions, as well as enhanced cross selling within the segment, should help drive a resumption in growth in 2020. With customers focusing on delivering improved yields, productivity, product quality and lowering costs in the extraction and processing of raw materials, Malvern Panalytical instruments are well placed to help them to deliver these improvements.

Advanced materials

Sales into the advanced materials industries have been strong, particularly in North America and Asia, driven by China, with a strong growth in aftermarket sales across all territories. From an industry standpoint, the main growth drivers have been in academia and the electronics, batteries, additive layer manufacturing and catalysts markets. Demand is being driven by new product development. For example, innovations in mobile devices, electric cars and intelligent power management solutions are driving significant growth in the research and development of batteries. This includes Li-ion batteries as well as new emerging battery technologies, such as Na-ion, Li-sulphur and zinc-air. Malvern Panalytical instruments help customers control the quality and function of battery materials, to enhance battery performance and improve the cycle life. For example, a partnership was established with the Next-Generation Energy Conversion and Storage Technologies Lab at the University of Pittsburgh's Energy Innovation Center to monitor the chemistry of what is happening inside a battery while it is in use, which could provide opportunities for identifying new materials as well as improving the battery itself.

We expect growth in this sector to continue, resulting from new emerging applications, particularly in batteries and additive layer manufacturing. Our focus is on customers involved in the research, development and manufacturing of these novel materials and complex systems and devices. Asia will be a key region driving this growth.

 

HBK

	2019	2018	Change	LFL change
Sales (£m)	429.0	426.5	1%	(1%)
Adjusted operating profit1 (£m)	60.4	56.6	7%	8%
Adjusted operating margin1 (%)	14.1%	13.3%	80bps	130bps

1.  This is an alternative performance measure ('APM'). APMs are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.

Financial performance

Sales increased 1%, including a 1% positive impact from foreign currency exchange movements and a 1% contribution from acquisitions, net of disposals, and a 1% LFL sales decline, partly reflecting some high one-off orders in 2018.

By region, North America posted an increase in LFL sales, while Europe and Asia both saw a decline in LFL sales growth, with Germany and China being the most challenging, reflecting the downturn in automotive and the industrial markets in both regions.

On a LFL basis, adjusted operating profit increased 8% and operating margins rose by 130bps. The year-on-year improvement reflected favourable pricing and lower overheads, as operational improvements came through from the merger and execution of the profit improvement programme, as well as some one-off costs in 2018.

HBK merger

During the year, work continued on the merger. The new senior leadership team is now established and the strategy execution plan is being implemented. Combining the sales and marketing teams led to some disruption to sales activities earlier in the year, but the integrated, global, go-to-market model is now in place and delivering improved order flow, despite a more challenging market environment. VI-grade is now part of the HBK platform and will lead the development of an expanded simulation offering for customers. Restructuring associated with the merger will continue into 2020, to further bring down overhead costs, through additional headcount reductions, site consolidations and closures. Further restructuring costs will be incurred in 2020. These projects, will further harmonise processes and systems across the business, bringing additional benefits from the merger.

Product launches

HBK released a number of new products during 2019. These included the next version of its BK Connect product, a highly innovative sound and vibration software analytics platform, which seamlessly integrates data acquisition, monitoring, analysis, data viewing and reporting in the same system.

A new sound level meter, B&K 2245, was launched in April. It is a reliable stand-alone noise measurement device, which works seamlessly with specially-created apps, to undertake accurate noise measurement, analysis and documentation. The meter can be tailored for specific jobs across a wide range of industries and users; from simple noise complaint investigations to more specialised tasks, such as exhaust noise testing.

A new miniature pressure transducer series was also launched. Being smaller, more lightweight and compact, it allows engineers to carry out reliable pressure tests within confined areas, such as gearboxes or coolant systems. Again, it can be deployed in a wide variety of industries, for instance in automotive, aerospace and shipping.

2019 also saw HBK significantly updating and standardising its range of optical sensors, which are ideal for carrying out strain, tilt, temperature and acceleration tests. The newLight sensors are suitable for structural health monitoring used for highly stressed structures (e.g. composite materials in wind turbines) and are insensitive to electromagnetic fields and other harsh environmental conditions.

Market trends and outlook

Automotive

Within the automotive sector, LFL sales declined in both Europe and Asia, but grew in North America. The overall slowdown reflected a tough comparator in 2018 and some impact from the downturn in automotive.

With the HBK platform being mostly exposed to R&D within the automotive sector, we still see robust demand for the development of electric, hybrid and connected and autonomous vehicles ('CAV') globally, as well as continued developments to internal combustion engines, driven by the growing need to reduce carbon and GHG emissions. This is underpinned by tightening emissions regulations and policies, such as tax exemptions and subsidies, to encourage the uptake of electric vehicles. Asia in particular, is anticipated to lead the electric vehicle ('EV') market, owing to the increasingly stringent regulations in the region and the availability of nickel-metal/lithium-ion batteries at competitive prices.

These technologies are also requiring new tests. For example, the lack of engine noise from EVs is driving demand for new, minimum sound level testing and driving demand for our simulators and eDrive products, both of which are focus growth areas for HBK into 2020 and beyond.

Our driving simulators allow customers to change vehicle parameters and test hundreds of different configurations, as if they were physically on a proving ground, with minimal effort, time and cost, significantly reducing development time. For example, Maserati has deployed our dynamic simulator, featuring the latest generation driver-in-motion technology, that makes it possible to achieve a 50% reduction in time-to-market for new cars, by carrying out 90% of all development virtually on the simulator, and to reduce the use of physical prototypes by 40%.

HBK's eDrive Testing is a revolutionary system for testing electrical inverters and electrical machines.
It provides an all-in-one solution for simultaneous and continuous acquisition of electric (voltage, power) and mechanical (torque, speed) signals in order to understand the electric drive and its losses in minutes. This is important for the optimisation of the electric drive, as well as increasing efficiency.

Machine manufacturing

A significant portion of our sales in machine manufacturing are for the automotive supply chain, where LFL sales rose year-on-year in our two key regions, Europe and Asia. LFL sales were lower in North America. While activity is expected to remain soft into 2020, machine building fundamentals continue to make this an attractive market for HBK.

Aerospace and defence

LFL sales grew in Europe but declined in North America and Asia, although commercial business was good in all regions. We continue to see notable R&D investment in the industry and good opportunities, particularly for software products. For example, the proven Catman Enterprise DAQ software is ideal for aerospace testing applications, such as static and fatigue testing, and its applications range from testing of sub-systems, such as landing gear, up to a full-scale 'iron bird' test, where all major flight controls, hydraulics and electrics are functionally tested. Demand will be primarily driven by new development programmes and we expect increasing demands of aircraft and space testing in 2020 and beyond.

Consumer electronics and telecoms

LFL sales were lower in 2019, primarily reflecting fewer new product launches by customers. The underlying trends in the consumer electronics and telecoms market remain healthy, in our view. Noise and sound have become critical marketing factors and are often key differentiators in such products as smartphones and voice-activated, smart home products. In addition, manufacturers must comply with increasingly stringent noise legislation which also drives the demand for testing. This is underpinning demand for our electro-acoustic products where we expect to see moderate growth in 2020.

Omega

	2019	2018	Change	LFL change
Sales (£m)	138.3	147.2	(6%)	(9%)
Adjusted operating profit1 (£m)	16.9	26.8	(37%)	(39%)
Adjusted operating margin1 (%)	12.2%	18.2%	(600bps)	(600bps)

1.  This is an alternative performance measure ('APM'). APMs are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.

Financial performance

LFL sales decreased 9%. There was a 3% positive impact from foreign currency exchange movements, resulting in reported sales being 6% lower year-on-year. Omega has a high exposure to North America (71%), where it recorded a decline in LFL sales, reflecting slowing US industrial production, as well as some initial disruption with the outsourcing of a product line to a third-party supplier, a temporary disruption to order flows from the launch of the new digital platform and some high one-off government orders in 2018. In Asia, LFL sales were also lower as a result of the USA-China tariff situation and lower semiconductor demand, after a strong year in 2018. LFL sales growth in Europe was lower, led by Germany and the UK.

LFL adjusted operating profit declined 39% and LFL operating margins fell 600bps. This resulted from the lower LFL sales and an increase in overheads, due to extra licence costs and higher depreciation in relation to the new digital platform.

New e-commerce platform

During 2019, Omega launched its new digital e-commerce platform in its primary North American markets in order to strengthen its market presence and position as a digital leader in the process engineering distribution space. After experiencing some initial customer adoption issues, as customers learned to navigate the new website, key operating metrics have improved notably. Continuing to drive volume though the website to deliver sales growth will be a key objective through 2020 and beyond.

Product launches

Omega launched the first phase of its Industrial Internet of things ('IIoT') platform during 2019. This included adding non-contact, infra-red temperature smart sensors, as well as extending the capabilities, and ease of use, of its wireless transmitters for the core temperature sensing offer. Both series are part of a broader Omega IIoT cloud platform launch planned for early 2020.

Omega continues to innovate its temperature sensing offering, by introducing a new patented, surface mount technology connector, bringing temperature readings directly to the printed circuit board in an automated, efficient way. The product results in superior accuracy and reduced labour costs for customers.

As well as introducing new technologies, Omega continues to strengthen key categories in growth areas. In total 133 new product lines were launched in 2019, including a new line of differentiated, price competitive thermal imaging devices. The series stands out for its user-friendly software interface and smartphone interface.

Finally, a new cross-platform strategy saw an HBK signal conditioner introduced via Omega's digital channel, resulting in the best performing product of this category for Omega − the ClipX signal conditioner, which is setting new standards within industrial control. The ClipX can help reduce the likelihood of machine downtime because it is self-monitoring and able to detect faults early on, with smart functions including health monitoring, remote diagnosis, and pre-calculated channels.

Omega's core pressure-sensing expertise was recognised with large orders for load pins and load cells (assists in the measurement of force) in multiple applications, including testing of cable integrity and lift operations in helicopter rescue hoists and applications in life science research and clinical diagnostics. Omega also secured a significant order for temperature transmitters in medical imaging and scanning machines and remained as a key supplier to one of the leading manufacturers in the offshore wind turbine industry.

Market trends

LFL sales growth was down in North America, Omega's main market, reflecting slowing US industrial production. Growth is expected to be modest in 2020, with recovery starting in the second half.
In Asia, LFL sales decreased, particularly in China and South Korea, reflecting a tough comparator, weaker macroeconomic conditions in China and lower semiconductor demand globally. The semiconductor market improved in the second half, with stronger growth projected in 2020. Omega also felt the impact of tariffs in its Chinese market as many of the components Omega sells there are incorporated into OEM products destined for the USA. This impact is expected to continue into 2020.

We continue to see an increasing trend of bringing intelligence closer to or into the sensor, and a demand for features that allow for connected applications that bypass manual configuration and reduce installation labour. The expansion of our smart IIoT range of sensors and control systems, and our ability to provide rapid, custom-configuration places us in a strong position to grow in line with these trends. Across all product segments, Omega is actively working on addressing the increasing intersection of connectivity, flexibility and ease-of-use demanded by its customers to drive growth.

Industrial Solutions

	2019	2018	Change	LFL change
Sales (£m)	616.5	593.8	4%	3%
Adjusted operating profit1 (£m)	104.6	91.9	14%	13%
Adjusted operating margin1 (%)	17.0%	15.5%	150bps	150bps

1.  This is an alternative performance measure ('APM'). APMs are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.

Financial performance

Sales rose 3% to £616.5 million, reflecting a LFL sales increase of 3%. There was a 21% positive impact from foreign currency exchange movements and a 1% negative impact from acquisitions, net of disposals, reflecting the sale of BTG. On a regional basis, LFL sales rose strongly in Asia and were up in Europe, but this was partly offset by lower LFL sales in North America.

LFL adjusted operating profit increased 13% and LFL adjusted operating margins increased 150bps.This resulted from the increase in LFL sales, particularly at PMS and Servomex, plus a higher gross margin reflecting favourable pricing at all operating companies. In addition, growth in overheads was constrained at a lower level than the increase in sales, as a consequence of the successful implementation of the profit improvement programme across the operating companies.

Divisional strategy

The Industrial Solutions division ('ISD') comprises a portfolio of high-value, niche businesses that compete globally. A new divisional leadership team was established in 2019, with good progress being made on improving the operational and financial performance of these businesses while also executing on the divestment strategy.

In December, the divestment of BTG was completed, in line with the strategy to simplify and focus the portfolio on high-growth end markets. Given BTG's presence in the pulp and paper industry, Spectris believed its next stage of development would be better fulfilled under different ownership. In January 2020, the sale of the EMS Brüel & Kjær joint venture was announced. During 2020, the ISD operating companies will be assessed continually for either investment or potential disposal in line with Spectris' strategy.

Market trends and outlook

Semiconductor and electronics

The semiconductor industry posted good LFL sales growth with particularly strong growth in Asia (outside China), more than offsetting a slowdown in North America. This growth was underpinned by a strong order backlog at the start of 2019, supported by notable sales of gas analysers and particle counters to major chip manufacturing facilities in Asia. The backlog reduced through the year, however, as the sector saw a decline in capital equipment orders. Growth is expected to resume in 2020 and we are well positioned with key customers and channel partners to benefit as it does.

In addition, the roll-out of 5G networks is expected to support growth, for example in the manufacture of chips and in manufacturing applications and supporting solutions. This enhanced mobile broadband network with improved reliability and uptime will enable manufacturers to utilise wireless communications in applications previously only attainable with wired communications, reducing installation costs and enabling real-time connectivity to stranded assets. Red Lion's next generation automation platform will be 5G-ready and is expected to benefit from this market opportunity.

The current softness in the electronics sector is expected through the first quarter and potentially first half of 2020, although recovery in the second half is anticipated based on industry and customer forecasts.

Pharmaceutical and life sciences

The pharmaceutical and life sciences industries saw good LFL sales growth in 2019, particularly in Asia, driven by China. LFL sales were also higher in North America, although the pharmaceutical pricing legislation in the USA could impact the level of future investment. However, the continued increase in regulatory scrutiny with emphasis on data and process integrity should support demand for PMS' contamination monitoring hardware, and high-level consulting services, to meet the latest environmental monitoring needs. These requirements support PMS' move to increase the number of partnerships with adjacent life sciences businesses to expand the scope of its offering. For example, PMS is working with Becton Dickinson and Company to provide customers with a complete portfolio of active air monitoring systems and high-quality prepared plated media, to meet their environmental monitoring needs and regulatory requirements.

Energy and utilities

In energy and utilities, environmental monitoring is also becoming more stringent and this is where Servomex's gas analysers play a critical role. This position underpinned strong sales into the hydrocarbon processing and petrochemicals sectors across all regions. Servomex has been realigning its organisational structure around its core customer markets and expanding its sales and customer service infrastructure into under-represented markets. In addition, it is simplifying and expanding its product portfolio to develop modular sensor and analyser products. These initiatives should help underpin further growth in 2020 and beyond.

Similarly, B&K Vibro saw strong growth in sales in this sector, particularly in North America and Asia. Two product releases during the year will help underpin future growth. The flagship machinery protection system, VC-8000, received certification such that it can now be used in functional safety applications. A new, fully integrated displacement transmitter was also launched, which is simple to install and can halve the cost of the installation. This sensor offers a unique streamlined solution for both shaft displacement and vibration monitoring across a wide range of industrial rotating machinery.

At ESG, sales were lower primarily reflecting financial pressure and consolidation amongst its customers, as a result of the downward pressure on oil pricing and lower cost, alternative competition. A number of counter-measures were implemented which has led to an enhanced pipeline coming into 2020, which should underpin an improved performance.

Automotive

LFL sales into automotive increased, reflecting the investment in new test facilities at Millbrook which added capacity for electrified powertrain testing in Leyland, in Detroit and in a new facility in California, serving the emerging technology cluster in this region. In September, Millbrook formally opened its battery test facility, a leading facility for testing large battery packs for performance and durability, and also opened its CAV Village, part of the UK government-backed TestBed UK. It includes a VI-grade simulator, complete with virtual representation of Millbrook proving ground, allowing CAV developers to operate in the virtual and real environments, simultaneously. The development and validation of CAVs is further supported by the installation of a 5G-enabled network at Millbrook. In Finland, the extended indoor winter test facility was opened adding much-needed capacity for snow and ice testing of tyres and vehicles, ahead of the introduction of new European ice labelling regulations. Millbrook has benefited from significant capital investment aligned with priority testing for automotive OEMs and tier one suppliers and is well positioned to serve customers into 2020 and beyond. The peak year of capex investment is now behind us.

Other

In our other end markets, which are primarily served by NDCT, the converting and film extrusion industries saw sales increase due to stronger performance in the Americas. Cable and tubing saw a decline due to the impact of tariff prices in China. A healthy backlog entering 2019 drove very strong LFL sales to the food, drink and tobacco sector in all regions and good growth into metals, minerals and mining. In the latter, as part of the profit improvement programme, a decision was taken to exit certain product lines serving this industry and so the focus into 2020 will be on its other key end markets.

 

Derek Harding

Chief Financial Officer

 

Consolidated Income Statement

For the year ended 31 December 2019

			2019	2018
	Continuing operations	Note	£m	£m
	Revenue	3	1,632.0	1,604.2
	Cost of sales		(717.8)	(696.8)
	Gross profit		914.2	907.4
	Indirect production and engineering expenses		(108.2)	(106.8)
	Sales and marketing expenses		(345.7)	(352.1)
	Administrative expenses		(376.0)	(272.1)
	Adjusted operating profit	2	258.1	248.3
	Restructuring costs	2	(52.2)	(15.6)
	Net transaction-related costs and fair value adjustments	2	(6.1)	(12.2)
	Depreciation of acquisition-related fair value adjustments to property, plant and equipment	2	(1.0)	(0.8)
	Profit on disposal of property	2	5.2	-
	Impairment of goodwill	2	(35.1)	-
	Amortisation and impairment of acquisition-related intangible assets	2	(84.6)	(43.3)
	Operating profit	2,3	84.3	176.4
	Share of post-tax results of joint venture	2, 9	(4.9)	(1.2)
	Impairment of non-current receivable from joint venture	2, 9	(21.3)	-
	Profit on disposal of businesses	13	204.7	56.3
	Financial income	4	7.9	2.5
	Finance costs	4	(11.4)	(16.0)
	Profit before tax		259.3	218.0
	Taxation charge	5	(25.2)	(32.8)
	Profit for the year from continuing operations attributable to owners of the Company		234.1	185.2
	Basic earnings per share	7	202.2p	157.6p
	Diluted earnings per share	7	201.6p	156.9p
	Interim dividend paid and final dividend proposed for the year (per share)	6	65.1p	61.0p
	Special dividend proposed (per share)	6	150.0p	-
	Dividends paid during the year (per share)	6	62.4p	58.0p

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2019

		2019	2018
		£m	£m
Profit for the year attributable to owners of the Company		234.1	185.2
Other comprehensive income:
Items that will not be reclassified to the Consolidated Income Statement:
Re-measurement of net defined benefit obligation, net of foreign exchange		(10.6)	5.4
Tax credit/(charge) on items above		1.7	(1.4)
		(8.9)	4.0
Items that are or may be reclassified subsequently to the Consolidated Income Statement:
Net gain/(loss) on effective portion of changes in fair value of forward exchange contracts on cash flow hedges		3.1	(2.4)
Foreign exchange movements on translation of overseas operations		(32.7)	27.9
Currency translation differences transferred to profit on disposal of business		(35.8)	(5.1)
Tax (charge)/credit on items above		(0.6)	0.5
		(66.0)	20.9
Total other comprehensive income		(74.9)	24.9
Total comprehensive income for the year attributable to owners of the Company		159.2	210.1

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019

	Share capital	Share premium	Retained earnings	Translation reserve	Hedging reserve	Merger reserve	Capital redemption reserve	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2019	6.0	231.4	828.7	167.1	(3.9)	3.1	0.5	1,232.9
Adoption of IFRS 16 and IFRIC 23	-	-	(2.9)	-	-	-	-	(2.9)
At 1 January 2019 (restated)	6.0	231.4	825.8	167.1	(3.9)	3.1	0.5	1,230.0
Profit for the year	-	-	234.1	-	-	-	-	234.1
Other comprehensive income	-	-	(8.9)	(68.5)	2.5	-	-	(74.9)
Total comprehensive income for the year	-	-	225.2	(68.5)	2.5	-	-	159.2
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company	-	-	(72.3)	-	-	-	-	(72.3)
Share-based payments, net of tax	-	-	3.6	-	-	-	-	3.6
Proceeds from exercise of equity-settled share options	-	-	1.0	-	-	-	-	1.0
At 31 December 2019	6.0	231.4	983.3	98.6	(1.4)	3.1	0.5	1,321.5

 

	Share capital	Share premium	Retained earnings	Translation reserve	Hedging reserve	Merger reserve	Capital redemption reserve	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2018	6.2	231.4	820.8	144.3	(2.0)	3.1	0.3	1,204.1
Adoption of IFRS 9 and IFRS 15	-	-	(18.6)	-	-	-	-	(18.6)
At 1 January 2018 (restated)	6.2	231.4	802.2	144.3	(2.0)	3.1	0.3	1,185.5
Profit for the year	-	-	185.2	-	-	-	-	185.2
Other comprehensive income	-	-	4.0	22.8	(1.9)	-	-	24.9
Total comprehensive income for the year	-	-	189.2	22.8	(1.9)	-	-	210.1
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company	-	-	(68.2)	-	-	-	-	(68.2)
Own shares acquired for share buyback programme	(0.2)	-	(100.5)	-	-	-	0.2	(100.5)
Share-based payments, net of tax	-	-	5.1	-	-	-	-	5.1
Proceeds from exercise of equity-settled options	-	-	0.9	-	-	-	-	0.9
At 31 December 2018	6.0	231.4	828.7	167.1	(3.9)	3.1	0.5	1,232.9

 

Consolidated Statement of Financial Position

As at 31 December 2019

			2019	2018
		Note	£m	£m
	ASSETS
	Non-current assets
	Intangible assets:
	Goodwill	8	646.8	766.3
	Other intangible assets	8	178.5	263.3
			825.3	1,029.6
	Property, plant and equipment		369.0	331.5
	Investment in joint venture	9	-	5.0
	Other receivable - joint venture	9	-	38.9
	Deferred tax assets		9.0	11.3
			1,203.3	1,416.3
	Current assets
	Inventories		197.2	216.4
	Current tax assets		4.1	1.6
	Trade and other receivables		335.7	381.5
	Derivative financial instruments		1.5	0.4
	Cash and cash equivalents		213.1	73.1
	Assets held for sale	9	18.9	3.9
			770.5	676.9
	Total assets		1,973.8	2,093.2
	LIABILITIES
	Current liabilities
	Borrowings		(80.7)	(23.7)
	Derivative financial instruments		(0.1)	(2.2)
	Trade and other payables		(296.8)	(344.1)
	Lease liabilities		(15.1)	-
	Current tax liabilities		(20.8)	(22.5)
	Provisions		(27.3)	(31.6)
			(440.8)	(424.1)
	Net current assets		329.7	252.8
	Non-current liabilities
	Borrowings		(98.9)	(346.5)
	Other payables		(21.3)	(27.4)
	Lease liabilities		(45.4)	-
	Provisions		(5.6)	-
	Retirement benefit obligations		(27.5)	(32.1)
	Deferred tax liabilities		(12.8)	(30.2)
			(211.5)	(436.2)
	Total liabilities		(652.3)	(860.3)
	Net assets		1,321.5	1,232.9
	EQUITY
	Share capital		6.0	6.0
	Share premium		231.4	231.4
	Retained earnings		983.3	828.7
	Translation reserve		98.6	167.1
	Hedging reserve		(1.4)	(3.9)
	Merger reserve		3.1	3.1
	Capital redemption reserve		0.5	0.5
	Total equity attributable to owners of the Company		1,321.5	1,232.9

 

Consolidated Statement of Cash Flows

For the year ended 31 December 2019

		2019	2018
	Note	£m	£m
Cash generated from operations	10	277.8	215.8
Net income taxes paid		(37.0)	(37.7)
Net cash inflow from operating activities		240.8	178.1
Cash flows used from/(used in) investing activities
Purchase of property, plant and equipment and intangible assets		(86.6)	(97.0)
Proceeds from disposal of property, plant and equipment and software		11.2	5.6
Acquisition of businesses, net of cash acquired	12	(9.7)	(196.4)
Proceeds from disposal of businesses, net of tax paid of £1.2m (2018: £0.6m)		260.1	43.8
Proceeds from government grants		5.0	2.9
Interest received		0.7	0.6
Net cash flows from/(used in) investing activities		180.7	(240.5)
Cash flows used in financing activities
Interest paid on borrowings		(7.0)	(9.4)
Interest paid on lease liabilities		(2.9)	-
Dividends paid	6	(72.3)	(68.2)
Share buyback purchase of shares		-	(100.5)
Net proceeds from exercise of share options		1.0	0.7
Payments on principal portion of lease liabilities		(17.6)	-
Loan to joint venture		(2.2)	(0.9)
Proceeds from borrowings		193.2	175.5
Repayment of borrowings		(363.5)	-
Net cash flows used in financing activities		(271.3)	(2.8)
Net increase/(decrease) in cash and cash equivalents		150.2	(65.2)
Cash and cash equivalents at beginning of year		67.3	136.7
Effect of foreign exchange rate changes		(4.4)	(4.2)
Cash and cash equivalents at end of year		213.1	67.3

 

		2019	2018
	Note	£m	£m
Reconciliation of changes in cash and cash equivalents to movements in net cash/(debt)
Net increase/(decrease) in cash and cash equivalents		150.2	(65.2)
Proceeds from borrowings		(193.2)	(175.5)
Repayment of borrowings		363.5	-
Effect of foreign exchange rate changes		10.1	(5.9)
Movement in net cash/(debt)		330.6	(246.6)
Net debt at beginning of year		(297.1)	(50.5)
Net cash/(debt) at end of year	2	33.5	(297.1)

 

Notes to the accounts

1. Basis of preparation and accounting policies

The Consolidated Financial Statements have been prepared on a historical cost basis except for items that are required by IFRS to be measured at fair value, principally certain financial instruments. The Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board ('IASB') and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, as adopted by the European Union ('adopted IFRS'), and in accordance with the provisions of the Companies Act 2006. The Consolidated Financial Statements have been prepared on a going concern basis. The full year results announcement is presented in millions of pounds Sterling rounded to the nearest one decimal place, which is the Group's presentational currency.

The Consolidated Financial Statements have been prepared using consistent accounting policies with those of the previous financial year. The Group has adopted IFRS 16 and IFRIC 23 in 2019 and details of the impact on adoption are presented in the Consolidated Statement of Changes in Equity.

The financial information included in the full year results announcement does not constitute statutory accounts of the Company for the years ended 31 December 2019 and 2018. Statutory accounts for the year ended 31 December 2018 have been reported on by the Company's auditor and delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2019 have been audited and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The report of the auditors for both years was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

These results were approved by the Board of Directors on 19 February 2020.

2. Alternative performance measures

 

Policy

Spectris uses adjusted figures as key performance measures in addition to those reported under IFRS, as management believe these measures enable management and stakeholders to better assess the underlying trading performance of the businesses as they exclude certain items that are considered to be significant in nature and/or quantum, foreign exchange movements and the impact of acquisitions and disposals.

The alternative performance measures ('APMs') are consistent with how the businesses' performance is planned and reported within the internal management reporting to the Board and Operating Committees. Some of these measures are used for the purpose of setting remuneration targets. The key APMs that the Group uses include like-for-like ('LFL') organic performance measures and adjusted measures for the income statement together with adjusted financial position and cash flow measures. Explanations of how they are calculated and how they are reconciled to an IFRS statutory measure are set out below.

 

Adjusted measures

The Group's policy is to exclude items that are considered to be significant in nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the period-on-period trading performance of the Group. The Group excludes such items which management have defined as:

• restructuring costs from significant programmes;

• amortisation and impairment of acquisition-related goodwill and other intangible assets;

• bargain purchase on acquisition;

• depreciation of acquisition-related fair value adjustments to property, plant and equipment;

• transaction-related costs, deferred and contingent consideration fair value adjustments;

• profits or losses on termination or disposal of businesses;

• impairment of non-current receivable from joint venture and share of impairment of investment in joint venture;

• unwinding of the discount factor on deferred and contingent consideration;

• unrealised changes in the fair value of financial instruments;

• gains or losses on retranslation of short-term inter-company loan balances; and

• related tax effects on the above and other tax items which do not form part of the underlying tax rate (see Note 5).

During 2019, a profit on disposal of property of £5.2m in Omega was treated as an adjusting item since it was significant in quantum and would distort the underlying trading performance if included.

In November 2018, the Group announced the implementation of a Group-wide profit improvement programme. The total costs of implementation of this programme are considered to be significant in both nature and amount. On this basis the costs of the implementation of this programme are excluded from adjusted operating profit. Adjusted operating profit (including on a LFL basis) is therefore presented before the impact of the Group profit improvement programme costs.
The ongoing benefits arising from this programme are considered to be part of underlying trading.

LFL measures

The Board reviews and compares current and prior year segmental sales and adjusted operating profit at constant exchange rates and excludes the impact of acquisitions and disposals during the year.

The constant exchange rate comparison uses the current year segmental information, stated in each entity's functional currency, and translates the results into its presentation currency using the prior year's monthly exchange rates, irrespective of the underlying transactional currency.

The incremental impact of business acquisitions is excluded for the first twelve months of ownership from the month of purchase. For business disposals, comparative figures for segmental sales and adjusted operating profit are adjusted to reflect the comparable periods of ownership. Due to the change in ownership structure the EMS B&K business was deconsolidated on 31 May 2018 and the segmental LFL adjusted sales and adjusted operating profit for HBK for 2018 exclude the trading results of EMS B&K for the first five months of 2018. BTG was disposed of on 1 December 2019 and the segmental LFL adjusted sales and adjusted operating profit for Industrial Solutions for 2018 exclude BTG for the month of December 2018.

The LFL measure is presented as a means of eliminating the effects of exchange rate fluctuations on the period-on-period statutory results as well as allowing the Board to assess the underlying trading performance of the businesses on a LFL basis for both sales and operating profit.

Based on the above policy, the adjusted performance measures are derived from the statutory figures as follows:

Income statement measures

a) LFL adjusted sales by segment

	Malvern  Panalytical	HBK	Omega	Industrial Solutions	2019 Total
2019 sales by segment	£m	£m	£m	£m	£m
Sales	448.2	429.0	138.3	616.5	1,632.0
Constant exchange rate adjustment	(3.5)	(2.8)	(4.5)	(12.9)	(23.7)
Acquisitions	(3.8)	(13.3)	-	(3.4)	(20.5)
LFL adjusted sales	440.9	412.9	133.8	600.2	1,587.8
	Malvern  Panalytical	HBK	Omega	Industrial Solutions	2018 Total
2018 sales by segment	£m	£m	£m	£m	£m
Sales	436.7	426.5	147.2	593.8	1,604.2
Disposal of businesses	(1.9)	(8.8)	-	(12.4)	(23.1)
LFL adjusted sales	434.8	417.7	147.2	581.4	1,581.1

 

b) Adjusted operating profit, operating margin and adjusted EBITDA

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2019 Total
2019 adjusted operating profit
	£m	£m	£m	£m	£m
Statutory operating (loss)/profit	(17.7)	18.1	12.0	71.9	84.3
Restructuring costs	16.4	17.7	2.2	15.9	52.2
Net transaction-related costs and fair value adjustments	(0.3)	3.1	-	3.3	6.1
Depreciation of acquisition-related fair value adjustments to property, plant and equipment	0.4	-	-	0.6	1.0
Profit on disposal of property	-	-	(5.2)	-	(5.2)
Impairment of goodwill	35.1	-	-	-	35.1
Amortisation and impairment of acquisition-related intangible assets	42.3	21.5	7.9	12.9	84.6
Adjusted operating profit	76.2	60.4	16.9	104.6	258.1
Constant exchange rate adjustment	0.3	0.6	(0.6)	(3.3)	(3.0)
Acquisitions	0.5	0.4	-	(0.9)	-
LFL adjusted operating profit	77.0	61.4	16.3	100.4	255.1

 

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2018 Total
2018 adjusted operating profit
	£m	£m	£m	£m	£m
Statutory operating profit	52.9	43.1	18.0	62.4	176.4
Restructuring costs	3.6	4.3	1.6	6.1	15.6
Net transaction-related costs and fair value adjustments	1.3	1.4	-	9.5	12.2
Depreciation of acquisition-related fair value adjustments to property, plant and equipment	0.2	-	-	0.6	0.8
Amortisation of acquisition-related intangible assets	15.0	7.8	7.2	13.3	43.3
Adjusted operating profit	73.0	56.6	26.8	91.9	248.3
Disposals	0.4	0.4	-	(3.2)	(2.4)
LFL adjusted operating profit	73.4	57.0	26.8	88.7	245.9

 

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2019 Total
2019 operating margin	%	%	%	%	%
Statutory operating margin	(3.9)	4.2	8.7	11.7	5.2
Adjusted operating margin	17.0	14.1	12.2	17.0	15.8
LFL adjusted operating margin	17.5	14.9	12.2	16.7	16.1

 

	Malvern  Panalytical	HBK	Omega	Industrial Solutions	2018 Total
2018 operating margin	%	%	%	%	%
Statutory operating margin	12.1	10.1	12.2	10.5	11.0
Adjusted operating margin	16.7	13.3	18.2	15.5	15.5
LFL adjusted operating margin	16.9	13.6	18.2	15.3	15.6

 

	2019	2018
Restructuring costs	£m	£m
Profit improvement programme	52.2	4.8
Project Uplift costs	-	10.8
Restructuring costs	52.2	15.6

 

		2019	2018
Adjusted EBITDA		£m	£m
Statutory operating profit		84.3	176.4
Depreciation and impairment of owned assets		35.5	30.3
Depreciation and impairment of right-of-use assets		22.1	-
Amortisation and impairment of intangible assets		95.2	49.1
Impairment of goodwill		35.1	-
EBITDA		272.2	255.8
Restructuring costs excluding impairment of owned and right-of-use property, plant and equipment and intangible assets		43.4	15.6
Profit on disposal of property classified as an adjusting item		(5.2)	-
Net transaction-related costs and fair value adjustments		6.1	12.2
Adjusted EBITDA		316.5	283.6

EBITDA is calculated as statutory operating profit before depreciation, amortisation and impairment of property, plant and equipment, intangible assets and goodwill. Adjusted EBITDA is calculated as EBITDA excluding other adjusting items as defined previously. This measure is used for the purpose of assessing capital management and covenant compliance and is reported to the Group Executive Committee.

c) Adjusted net finance costs

			2019	2018
			£m	£m
Statutory net finance costs			(3.5)	(13.5)
Net (gain)/loss on retranslation of short-term inter-company loan balances			(4.0)	7.2
Unwinding of discount factor on deferred and contingent consideration			0.7	0.6
Adjusted net finance costs			(6.8)	(5.7)

 

d) Adjusted profit before taxation

			2019	2018
			£m	£m
Adjusted operating profit			258.1	248.3
Adjusted share of post-tax results of joint venture			(3.9)	(1.2)
Adjusted net finance costs			(6.8)	(5.7)
Adjusted profit before taxation			247.4	241.4

Share of post-tax results of the joint venture has been adjusted to exclude £1.0m of impairment of acquisition-related intangible assets consistent with the Group's treatment of adjusted operating profit measures.

e) Adjusted earnings per share

		2019	2018
Adjusted earnings		£m	£m
Statutory profit after tax		234.1	185.2
Adjusted for:
Restructuring costs		52.2	15.6
Net transaction-related costs and fair value adjustments		6.1	12.2
Depreciation of acquisition-related fair value adjustments to property, plant and equipment		1.0	0.8
Profit on disposal of property		(5.2)	-
Impairment of goodwill		35.1	-
Amortisation and impairment of acquisition-related intangible assets		84.6	43.3
Profit on disposal of businesses		(204.7)	(56.3)
Impairment of non-current receivable from joint venture		21.3	-
Share of impairment of acquisition-related intangible in joint venture		1.0	-
Net (gain)/loss on retranslation of short-term inter-company loan balances		(4.0)	7.2
Unwinding of discount factor on deferred and contingent consideration		0.7	0.6
Tax effect of the above and other non-recurring items		(27.7)	(14.8)
Adjusted earnings		194.5	193.8

 

Adjusted earnings per share			2019	2018
Weighted average number of shares outstanding (millions)			115.8	117.5
Adjusted earnings per share (pence)			168.0	164.9

Basic earnings per share in accordance with IAS 33 'Earnings Per Share' are disclosed in Note 7.

Financial position measures

f) Net cash/(debt)

			2019	2018
			£m	£m
Bank overdrafts			-	(5.8)
Bank loans unsecured			(179.6)	(364.4)
Total borrowings			(179.6)	(370.2)
Cash and cash equivalents			213.1	73.1
Net cash/(debt)			33.5	(297.1)

Net cash/(debt) excludes lease liabilities arising under IFRS 16 as this aligns with the definition of net debt under the Group's bank covenants.

 

Cash flow measures

g) Adjusted cash flow

	2019	2018
	£m	£m
Net cash inflow from operating activities	240.8	178.1
Transaction-related costs paid	1.6	10.8
Restructuring cash outflow	34.3	8.6
Net income taxes paid	37.0	37.7
Purchase of property, plant and equipment and intangible assets	(86.6)	(97.0)
Proceeds from government grants	5.0	2.9
Proceeds from disposal of property, plant and equipment and software2	2.1	5.6
Adjusted cash flow	234.2	146.7
Adjusted cash flow conversion1	91%	59%

1.  Adjusted cash flow conversion is calculated as adjusted cash flow as a proportion of adjusted operating profit.

2.  Excludes the proceeds from disposal of property of £9.1m in 2019 classified as an adjusting item.

The net cash inflow from operating activities in 2019 excludes cash flows of £20.5m arising from lease and associated interest payments as a result of the implementation of IFRS 16 from 1 January 2019 which requires these cash flows to be treated as a financing cash flow. Prior to 1 January 2019, these cash flows were included in the net cash inflow from operating activities.

Other measures

h) Return on gross capital employed (ROGCE)

The return on gross capital employed is calculated as adjusted operating profit for the last 12 months divided by the average of opening and closing gross capital employed. Gross capital employed is calculated as net assets excluding net debt and excluding accumulated amortisation and impairment of acquisition-related intangible assets including goodwill.

	31 December 2019	31 December 2018	31 December 2017
	£m	£m	£m
Net (cash)/debt (see note 2f)	(33.5)	297.1	50.5
Accumulated impairment losses on goodwill (see note 8)	179.4	148.8	144.4
Accumulated amortisation and impairment of acquisition-related intangible assets	366.3	306.1	253.0
Shareholders' equity	1,321.5	1,232.9	1,204.1
Gross capital employed	1,833.7	1,984.9	1,652.0
Average gross capital employed (current and prior year)	1,909.4	1,818.5
Adjusted operating profit for year  (see note 2b)	258.1	248.3
Return on gross capital employed	13.5%	13.7%

 

i) Net transaction-related costs and fair value adjustments

Net transaction-related costs and fair value adjustments comprise transaction costs of £2.1m (2018: £7.4m) that have been recognised in the Consolidated Income Statement under IFRS 3 (Revised) 'Business Combinations' and other fair value adjustments relating to deferred and contingent consideration comprising a charge of £4.0m (2018: £4.8m). Net transaction-related costs and fair value adjustments are included within administrative expenses. Transaction-related costs have been excluded from the adjusted operating profit and transaction costs paid of £1.6m (2018: £10.8m) have been excluded from the adjusted cash flow.

3. Operating segments

 

The Group has four reportable segments, as described below. From 1 July 2019, the Group's operating segments have changed following the strategic review which commenced in November 2018. The new segmental platform structure reflects the internal reporting provided to the Chief Operating Decision Maker (considered to be the Board) on a regular basis to assist in making decisions on capital allocated to each segment and to assess performance. The tables below show restated comparative figures for the operating segments for the year ended 31 December 2018, reflecting the impact of changes the Group made to its operating segments during the year ended 31 December 2019. The operating segment results include an allocation of head office costs. The following summarises the operations in each of the Group's reportable segments:

• The Malvern Panalytical platform provides products and services that enable customers to determine structure, composition, quantity and quality of particles and materials during their research and product development processes, when assessing materials before production, or during the manufacturing process. The operating companies in this segment are Malvern Panalytical and Concept Life Sciences (acquired January 2018). Concept Life Sciences was merged into Malvern Panalytical as of 1 July 2019.

• The HBK platform supplies test, measurement and analysis equipment, software and services for product design optimisation, and manufacturing control. The operating companies in this segment are Hottinger, Brüel & Kjær and VI-grade (acquired August 2018). VI-grade was merged into HBK as of 1 July 2019.

The Omega platform is a global leader in the technical marketplace, offering products for measurement and control of temperature, humidity, pressure, strain, force, flow, level, pH and conductivity. Omega also provides a complete line of data acquisition, electric heating and custom-engineered products. The operating company in this segment is Omega Engineering.

• The Industrial Solutions division ('ISD') comprises a portfolio of high-value, niche businesses. A number of ISD companies have platform potential, with strong market positions, growth prospects and margins. The operating companies in this segment are Brüel & Kjær Vibro, ESG Solutions, Millbrook, NDC Technologies, Particle Measuring Systems, Red Lion Controls, Servomex and BTG (disposed on 1 December 2019).

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2019 Total
Information about reportable segments	£m	£m	£m	£m	£m
Segment revenues	448.4	430.7	138.5	616.7	1,634.3
Inter-segment revenue	(0.2)	(1.7)	(0.2)	(0.2)	(2.3)
External revenue	448.2	429.0	138.3	616.5	1,632.0
Operating (loss)/profit	(17.7)	18.1	12.0	71.9	84.3
Share of post-tax results of joint venture1					(4.9)
Impairment of non-current receivable from joint venture1					(21.3)
Profit on disposal of businesses1					204.7
Financial income1					7.9
Finance costs1					(11.4)
Profit before tax1					259.3
Taxation charge1					(25.2)
Profit after tax1					234.1

1.  Not allocated to reportable segments

 

 

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2018 Total
	£m	£m	£m	£m	£m
Segment revenues	436.7	428.1	147.3	594.3	1,606.4
Inter-segment revenue	-	(1.6)	(0.1)	(0.5)	(2.2)
External revenue	436.7	426.5	147.2	593.8	1,604.2
Operating profit	52.9	43.1	18.0	62.4	176.4
Share of post-tax results of joint venture1					(1.2)
Profit on disposal of businesses1					56.3
Financial income1					2.5
Finance costs1					(16.0)
Profit before tax1					218.0
Taxation charge1					(32.8)
Profit after tax1					185.2

1.  Not allocated to reportable segments

Geographical segments

The Group's operating segments are each located in several geographical locations and sell to external customers in all parts of the world. No individual country amounts to more than 3% of revenue by location of customer, other than those noted below. The following is an analysis of revenue by geographical destination.

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2019 Total
	£m	£m	£m	£m	£m
UK	42.7	13.4	4.0	64.7	124.8
Germany	25.9	80.4	5.4	30.8	142.5
France	16.0	25.4	1.1	10.9	53.4
Rest of Europe	60.9	79.1	5.3	76.2	221.5
USA	84.9	88.3	89.9	195.3	458.4
Rest of North America	14.7	5.6	7.7	20.9	48.9
Japan	31.2	32.3	2.5	23.3	89.3
China	70.9	60.8	9.9	76.5	218.1
South Korea	12.4	10.1	4.1	27.4	54.0
Rest of Asia	50.9	20.1	6.0	60.6	137.6
Rest of the world	37.7	13.5	2.4	29.9	83.5
	448.2	429.0	138.3	616.5	1,632.0

 

	Malvern Panalytical	HBK	Omega	Industrial Solutions	2018 Total
	£m	£m	£m	£m	£m
UK	50.4	13.0	4.1	65.7	133.2
Germany	26.5	88.7	6.1	30.1	151.4
France	16.1	22.5	1.2	11.4	51.2
Rest of Europe	57.3	72.4	5.8	76.4	211.9
USA	84.1	81.4	94.2	188.0	447.7
Rest of North America	15.9	6.1	8.3	22.1	52.4
Japan	26.6	31.6	3.1	21.1	82.4
China	65.7	68.5	11.5	75.8	221.5
South Korea	11.3	10.7	4.6	24.6	51.2
Rest of Asia	48.6	19.3	6.0	53.4	127.3
Rest of the world	34.2	12.3	2.3	25.2	74.0
	436.7	426.5	147.2	593.8	1,604.2

 

4. Financial income and finance costs

 

			2019	2018
Financial income			£m	£m
Interest receivable			(0.7)	(0.5)
Income on receivable from joint venture			(3.2)	(2.0)
Net gain on retranslation of short-term inter-company loan balances			(4.0)	-
			(7.9)	(2.5)

 

			2019	2018
Finance costs			£m	£m
Interest payable on loans and overdrafts			7.1	7.3
Net loss on retranslation of short-term inter-company loan balances			-	7.2
Unwinding of discount factor on lease liabilities			2.9	-
Unwinding of discount factor on deferred and contingent consideration			0.7	0.6
Net interest cost on pension plan obligations			0.6	0.6
Other finance costs			0.1	0.3
			11.4	16.0
Net finance costs			3.5	13.5

 

5. Taxation

			2019				2018
	UK	Overseas	Total		UK	Overseas	Total
	£m	£m	£m		£m	£m	£m
Current tax charge	2.1	36.7	38.8		3.9	37.1	41.0
Adjustments in respect of current tax of prior years	-	(1.7)	(1.7)		(0.1)	(2.0)	(2.1)
Deferred tax - origination and reversal of temporary differences	(7.4)	(4.5)	(11.9)		(3.3)	(1.9)	(5.2)
Deferred tax - changes in US tax rate	-	-	-		-	(0.9)	(0.9)
Taxation charge	(5.3)	30.5	25.2		0.5	32.3	32.8

The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the Group's profits, is 18.6% (2018: 26.0%). The tax charge for the year is lower (2018: lower) than the standard rate of corporation tax for the reasons set out in the following reconciliation.

	2019	2018
	£m	£m
Profit before taxation	259.3	218.0
Corporation tax charge at standard rate of 18.6% (2018: 26.0%)	48.2	56.7
Profit on disposal of business taxed at lower rate	(29.8)	(16.0)
Non-deductible impairments	9.9	-
Net impact of US tax reform measures	-	(0.9)
Effect of intra-group financing	-	(4.9)
Other non-deductible expenditure	3.3	3.8
Movements on unrecognised deferred tax assets	0.5	0.4
Tax credits and incentives	(5.1)	(4.1)
Change in tax rates (excluding US)	-	0.3
Adjustments to prior year current and deferred tax charges	(1.8)	(2.5)
Taxation charge	25.2	32.8

The Group's standard rate of corporation tax of 18.6% is lower than the prior year rate (26%), principally due to the profit on disposal of BTG arising in countries with lower tax rates. The standard rate of corporation tax applying to the profit on disposal of BTG has been calculated by using a weighted average of the rates in the main countries in which BTG operates.

'Profit on disposal of business taxed at a lower rate' above, in the current year principally refers to the benefit of tax exemptions for the sale of shares in certain countries.

'Tax credits and incentives' above refers principally to research and development tax credits and other reliefs for innovation such as the UK Patent Box regime and Dutch Innovation Box regime, as well as tax reliefs available for Foreign Derived Intangible Income in the US.

'Net impact of US tax reform measures' above refers to the impact of the US Tax Cuts and Jobs Act of 2017. In 2018, this comprises a credit of £0.9m arising as a prior year adjustment in respect of remeasuring the prior year net deferred tax liabilities.

The following tax (credits)/charges relate to items of income and expense that are excluded from the Group's adjusted performance measures.

	2019	2018
	£m	£m
Tax credit on amortisation and impairment of acquisition-related intangible assets	(16.9)	(9.6)
Tax credit on depreciation of acquisition-related fair value adjustments to property, plant and equipment	(0.2)	(0.1)
Tax credit arising from net impact of US tax reform measures	-	(0.9)
Tax credit on net transaction-related costs and fair value adjustments	(0.8)	(0.6)
Tax charge on profit on disposal of property	1.2	-
Tax credit on retranslation of short-term inter-company loan balances	(0.1)	(0.5)
Tax charge on profit on disposal of businesses	3.2	0.4
Tax credit relating to prior year adjustments	(2.2)	-
Tax credit on restructuring costs	(11.9)	(3.5)
Total tax credit	(27.7)	(14.8)

The effective adjusted tax rate for the year was 21.4% (2018: 19.7%) as set out in the reconciliation below:

	2019	2018
Reconciliation of the statutory taxation charge to the adjusted taxation charge	£m	£m
Statutory taxation charge	25.2	32.8
Tax credit on items of income and expense that are excluded from the Group's adjusted profit before tax	27.7	14.8
Adjusted taxation charge	52.9	47.6

The UK's dividend taxation regime prior to July 2009 is the subject of long-running litigation between HMRC and other taxpayers in relation to the tax charge on dividends received from EU-based companies. The outcome of this dispute is likely to be relevant to the Group in respect of certain dividends received by UK Group companies before that date. Pending resolution in the courts, an amount of £8.8m (2018: £8.8m) continues to be held as a tax creditor for the potential tax liabilities arising if the final decision is in HMRC's favour. An amount of £5.5m (2018: £5.4m) relating to accrued interest on the potential tax liabilities is also held as a tax-related provision and an amount of £0.9m (2018: £1.4m) has been booked as a deferred tax asset in respect of future tax relief on the accrued interest.

In October 2017, the EU Commission opened a formal State Aid investigation into an exemption within the UK's Controlled Foreign Company regime for certain finance income. A final decision was published by the Commission during 2019, concluding that certain aspects of the exemption (as it was implemented in UK law for the years 2013-2018) constituted State Aid and requiring the UK to recover such aid from affected parties. Spectris is impacted by this decision since we have claimed the benefit of the group finance exemption during the period in question.

The Group, along with the UK government and a number of other affected taxpayers, has sought annulment of the EU Commission's decision through the EU Courts. No provision has been made in respect of this matter since we believe that it is more likely than not that the decision will subsequently be annulled and no additional tax will be due. In the event that the Commission's decision is upheld then, as at 31 December 2019, the Group's maximum estimated exposure is £19.0m (2018: £18.0m) in respect of tax and £1.0m (2018: £0.5m) in respect of interest. However, quantification of the liability in accordance with the Commission's judgement is complex and depends on the facts of each individual case, and therefore the Group's liability may ultimately be determined to be less than this amount.

6. Dividends

	2019	2018
Amounts recognised and paid as distributions to owners of the Company in the year	£m	£m
Final dividend for the year ended 31 December 2018 of 40.5p (2017: 37.5p) per share	46.9	44.5
Interim dividend for the year ended 31 December 2019 of 21.9p (2018: 20.5p) per share	25.4	23.7
	72.3	68.2

 

	2019	2018
Amounts arising in respect of the year	£m	£m
Interim dividend for the year ended 31 December 2018 of 21.9p (2018: 20.5p) per share	25.4	23.7
Proposed final dividend for the year ended 31 December 2019 of 43.2p (2018: 40.5p) per share	50.1	46.8
	75.5	70.5

In addition, subject to shareholder approval, a special dividend of 150.0 pence per existing ordinary share is proposed, totalling £175 million. In order to maintain the comparability of the Group's share price and per-share metrics before and after the special dividend, the Group plans to undertake a share consolidation, which will be subject to shareholder approval.

The proposed final and special dividends are subject to approval by shareholders at the AGM on 22 May 2020 and have not been included as a liability in these Financial Statements.  

7. Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (excluding treasury shares).

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year but adjusted for the effects of dilutive options.

Basic earnings per share		2019	2018
Profit after tax (£m)		234.1	185.2
Weighted average number of shares outstanding (millions)		115.8	117.5
Basic earnings per share (pence)		202.2	157.6

 

Diluted earnings per share		2019	2018
Profit after tax (£m)		234.1	185.2
Basic weighted average number of shares outstanding (millions)		115.8	117.5
Weighted average number of dilutive 5p ordinary shares under option (millions)		0.4	0.6
Weighted average number of 5p ordinary shares that would have been issued at average market value from proceeds of dilutive share options (millions)		(0.1)	(0.1)
Diluted weighted average number of shares outstanding (millions)		116.1	118.0
Diluted earnings per share (pence)		201.6	156.9

 

8. Goodwill and other intangible assets

 

	Goodwill	Other intangible assets	Total
Cost	£m	£m	£m
At 1 January 2019	915.1	619.7	1,534.8
Additions	2.4	21.8	24.2
Disposals	(66.7)	(29.7)	(96.4)
Foreign exchange difference	(24.6)	(14.0)	(38.6)
At 31 December 2019	826.2	597.8	1,424.0
Accumulated amortisation and impairment
At 1 January 2019	148.8	356.4	505.2
Charge for the period	-	48.1	48.1
Impairment	35.1	47.1	82.2
Disposals	(0.2)	(22.8)	(23.0)
Foreign exchange difference	(4.3)	(9.5)	(13.8)
At 31 December 2019	179.4	419.3	598.7
Carrying amount
At 31 December 2019	646.8	178.5	825.3
At 1 January 2019	766.3	263.3	1,029.6

Millbrook

Since its acquisition in 2016, Spectris has made significant capital investment in Millbrook alongside two bolt-on acquisitions in Leyland and Millbrook Revolutionary Engineering. Given the early programme life cycle stage, the headroom between the recoverable amount (determined based on a value-in-use model) and the carrying value of the Millbrook CGU is modest at £17m. We expect the headroom to increase in future periods as the recent capital investments depreciate and the expected returns on these assets are realised. We have considered reasonably possible changes in key assumptions that could cause an impairment at

31 December 2019, and have identified two key assumptions as follows:

• Discount rate applied to future cashflows - our assessment of impairment assumes a pre-tax discount rate of 12.1% based on our determination of Group WACC and risks specific to the Millbrook CGU cashflows. An increase to 12.8% would see the headroom reduced to nil.

• Years 1 to 5 cashflows - our assessment of impairment assumes a CAGR of 14% after year 1. A decrease in the CAGR by 2%, equivalent to a 7% reduction in years 2 to 5 cashflows, would see the headroom reduced to nil.

Impairment of goodwill

Results at Concept Life Sciences ('CLS'), which was acquired in January 2018, were below expectations during the initial period of ownership to 31 December 2018. Performance was impacted by a reduction in project work from two major customers, delays in gaining accreditations and sub-optimal performance at the environmental laboratories. This was partly attributable to internal issues reflecting the state of the business on acquisition by the Group, which was in the process of integrating previous acquisitions into two divisions, as well as distraction and disruption caused by the acquisition. In February 2019, management considered that remedial action was having a positive impact, progress was being made and that the end markets for CLS were still strong as customers look to outsource analytical services and pharmaceutical development.

During the first six months of 2019, performance had not improved as anticipated, with sales declining by 9% on a LFL basis and resulting gross margin lower than 2018. This under-performance was attributable to the exit of its major customer in the pharmaceutical development/integrated drug development services business as well as continued sub-optimal performance in the environmental analytical services division. The analytical services division, where continued focus on on-time delivery was impacted by high staff attrition rates and a deterioration in customer relationships. New senior management for CLS were in place by June and a detailed strategic review of the CLS businesses was undertaken. In agreement with the Spectris Group Executive, it was proposed, subject to consultation and legal requirements, that the environmental analytical laboratories be closed. New management believed that in their current state, these laboratories would not be able to recapture share in this market. The environmental consultancy and testing business was subsequently sold in October 2019 (see note 13) and the four environmental laboratories were closed. Management believe that the market for pharmaceutical development/integrated drug development services remains strong and attractive and existing activities here will be strengthened.

As a result of this, an impairment of CLS goodwill of £35.1m was charged to the income statement during the year. This impairment reflects the loss of value from the acquired workforce particularly in the analytical service division, the loss of expected future customer relationships across both divisions and reduced synergies from cross-selling instruments and services. The estimated recoverable amount of the CLS cash generating unit at 30 June 2019 was £105.3m which was determined on a value in use basis using a pre-tax discount rate of 10.0% (31 December 2018: 13.4%).

Impairment of other intangible assets

Impairment of other intangible assets includes £32.4m relating to customer relationships and technology acquired as part of the CLS acquisition. The remaining £14.7m impairment of other intangible assets relates to items impaired as a result of restructuring activities undertaken following the strategic review.

9. Investment in joint venture (EMS B&K) and assets held for sale

The movement in the investment in the joint venture during the year is shown below:

	£m
As at 1 January 2019	5.0
Share of post-tax results of joint venture (including £1.0m impairment of acquired Intangible assets)	(4.9)
Foreign exchange	(0.1)
Transfer to held for sale	-
As at 31 December 2019	-

The Group also has a long-term receivable from EMS B&K which arose on the formation of the joint venture. The recoverable amount is based on the future value which is expected to be achieved upon an ultimate exit of the joint venture.

During December 2019, as part of the plan to simplify the Group's portfolio, the Group entered into preliminary discussions in conjunction with its joint venture partner with a third party for the acquisition of the joint venture. On 17 January 2020, an announcement was made that agreement had been reached for the sale of our interest in the joint venture for consideration of £17.9m in cash and approximately £1.2m in shares in Envirosuite Limited. The closing of the deal is subject to approval by Envirosuite's shareholders at a meeting to be held on 24 February 2020 and the conditional placement of shares by Envirosuite required to fund the consideration for the transaction, with completion expected to take place shortly thereafter.

As a result, the receivable from the joint venture has been impaired by £21.3m to the £18.9m expected recoverable amount. This remaining balance, which represents fair value less costs to sell, has been included within assets held for sale at 31 December 2019. The investment in the joint venture (nil value) has also been transferred to assets held for sale. In 2018, the £3.9m of assets classified as held for sale related to the disposal of a property in Omega.

10. Cash generated from operations

 

	2019	2018
	£m	£m
Cash flows from operating activities
Profit after tax	234.1	185.2
Adjustments for:
Taxation charge	25.2	32.8
Profit on disposal of businesses	(204.7)	(56.3)
Share of post-tax results of joint venture	4.9	1.2
Finance costs	11.4	16.0
Financial income	(7.9)	(2.5)
Depreciation and impairment of property, plant and equipment	57.6	30.3
Amortisation and impairment of intangible assets	95.2	49.1
Impairment of non-current receivable from joint venture	21.3	-
Impairment of goodwill	35.1	-
Transaction-related fair value adjustments	4.0	4.8
Profit on disposal of property, plant and equipment	(4.9)	(1.9)
Equity-settled share-based payment expense	3.0	5.1
Operating cash flow before changes in working capital and provisions	274.3	263.8
Decrease/(Increase) in trade and other receivables	13.9	(30.4)
Increase in inventories	(3.3)	(17.4)
Decrease in trade and other payables	(10.0)	(3.6)
Increase in provisions and retirement benefits	2.9	3.4
Cash generated from operations	277.8	215.8

11. Share capital, treasury shares and employee benefit trust shares

At 31 December 2019, the Group held 5,182,366 treasury shares (2018: 5,636,153). During the year,
453,787 (2018: 111,207) of these shares were issued to satisfy options exercised by, and SIP Matching Shares awarded to, employees which were granted under the Group's share schemes. Nil ordinary shares were repurchased and cancelled by the Group during the year (2018: 3,825,802 ordinary shares were repurchased and cancelled as part of the share buyback programme announced on 5 March 2018, which concluded on 13 August 2018).

12. Acquisitions

The Group completed the acquisition of 100% of RightHook Inc. on 25 February 2019 for a gross consideration of £3.8m. RightHook Inc. is an engineering software provider based in the USA. The provisional fair value of net assets acquired was £1.4m, including £1.8m of intangible assets and £0.4m of deferred tax liabilities, which generated goodwill of £2.4m. The acquisition is included in the HBK segment and cash generating unit.

	2019	2018
Analysis of cash outflow in Consolidated Statement of Cash Flows	£m	£m
Net consideration in respect of acquisitions during the year	3.8	195.7
Deferred and contingent consideration on acquisitions during the year to be paid in future years	-	(6.0)
Cash paid during the year in respect of acquisitions during the year	3.8	189.7
Cash paid in respect of prior years' acquisitions	5.9	6.7
Net cash outflow relating to acquisitions	9.7	196.4

 

13. Profit on disposal of businesses

 

The Group completed the disposal of 100% of its pulp and paper business, BTG on 1 December 2019 in exchange for gross consideration of £274.5m. This generated a profit on disposal of £206.1m which included transaction expenses of £7.9m, of which £7.1m were paid during 2019.

The profit on disposal of BTG is calculated as follows:

	2019
	£m
Goodwill and other intangible assets	73.4
Property, plant and equipment	26.1
Inventories	14.1
Trade and other receivables	23.1
Cash and cash equivalents	3.0
Trade and other payables	(21.0)
Lease liabilities	(3.4)
Provisions	(0.3)
Net deferred and current tax liabilities	(2.8)
Retirement benefit obligations	(15.8)
Net assets disposed	96.4
Consideration received, satisfied in cash	272.8
Deferred consideration	1.7
Transaction costs	(7.9)
Net consideration from disposal of business	266.6
Net assets disposed of (including £3.0m of cash and cash equivalents held by BTG)	(96.4)
Currency translation differences transferred from translation reserve	35.9
Profit on disposal of business	206.1

On 10 October 2019, the Group completed the disposal of its environment consultancy and testing business for nil purchase price. The net assets disposed were £2.3m, generating a loss on disposal of £2.3m. Profit on disposal of businesses in the Consolidated Income Statement also includes a £0.9m credit from other disposals.

The disposals in the year did not meet the definition of discontinued operations given in IFRS 5

'Non-Current Assets Held for Sale and Discontinued Operations' and, therefore, no disclosures in relation to discontinued operations were made.

The Consolidated Statement of Cash Flows includes £262.7m of net proceeds from the sale of BTG, which consists of £272.8m of consideration received in cash less £7.1m of transaction fees paid and £3.0m of cash and cash equivalents held by BTG units that were disposed of. The Consolidated Statement of Cash Flows also includes £2.3m paid in respect of deferred consideration and tax payments on the disposal of EMS B&K and £0.3m of payments from other business disposals.

14. Subsequent events

On 17 January 2020, an announcement was made that agreement had been reached for the sale of the Group's interest in the EMS B&K joint venture for consideration of £17.9m in cash and approximately £1.2m in shares in Envirosuite Limited. The closing of the deal is subject to approval by Envirosuite's shareholders at a meeting to be held on 24 February 2020 and the conditional placement of shares by Envirosuite required to fund the consideration for the transaction, with completion expected to take place shortly thereafter. As a result, the receivable from the joint venture has been impaired by £21.3m to the expected recoverable amount and the remaining balance of £18.9m has been included within assets held for sale at 31 December 2019 (see note 9).

On 31 January 2020, the Group sold its interest in the rheology range of products to Netzsch Group for consideration of £8.8m in cash. This product range, part of the Malvern Panalytical segment, generated approximately £12m of revenue and £1m of operating profit in 2019.

 

Dividend timetable

 

Event	Date - 2020
Annual General Meeting	12 Noon on Friday 22 May
Share Consolidation Record Date	6.00pm on Friday 22 May
Final and Special Dividend Record Date (Combined Dividend)	6.00pm on Friday 22 May
Record Date for participation in the Dividend Reinvestment Plan for the Combined Special Dividend	6.00pm on Friday 22 May
Listing and Admission and commencement of dealings in New Ordinary Shares (Post Consolidation)	8.00am on Tues, 26 May
New Ordinary Share trade Ex-entitlement for the combined Final and Special dividend	From 8.00am on Tues, 26 May
CREST accounts credited with New Ordinary Shares	From 8.00am on Tues, 26 May
Payment of the Combined Final and Special Dividend to Shareholders	Monday, 22 June
Purchase of New Ordinary Shares for participants in the Dividend Reinvestment Plan	Monday, 22 June

 

Cautionary statement

This press release may contain forward-looking statements. These statements can be identified by the fact that they do not relate only to historical or current facts. Without limitation, forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning. These statements may (without limitation) relate to the Company's financial position, business strategy, plans for future operations or market trends. No assurance can be given that any particular expectation will be met or proved accurate and shareholders are cautioned not to place undue reliance on such statements because, by their very nature, they may be affected by a number of known and unknown risks, uncertainties and other important factors which could cause actual results to differ materially from those currently anticipated. Any forward-looking statement is made on the basis of information available to Spectris plc as of the date of the preparation of this press release. All forward-looking statements contained in this press release are qualified by the cautionary statements contained in this section. Other than in accordance with its legal and regulatory obligations, Spectris plc disclaims any obligation to update or revise any forward-looking statement contained in this press release to reflect any change in circumstances or its expectations.