Spectris plc

2020 full year results

25 February 2021 - Spectris plc (SXS: LSE), the expert in providing insight through precision measurement, announces full year results for the twelve months ended 31 December 2020.

Balanced and socially responsible approach to 2020

• Safeguarding the welfare of our employees and supporting our customers remains our top priority

• Balanced, socially responsible approach, consistent with our values, delivered resilient and sustainable financial performance ahead of expectations

• LFL sales declined 10.7% to £1,336.2 million; fourth quarter order intake provides momentum coming into 2021

• Drop-through¹ impact limited to 38%, with resilient adjusted operating margin of 13.0%

• Adjusted cashflow generation of £244.5 million, ahead of 2019; balance sheet further strengthened

• Continued to execute strategy − profit improvement programme completion and further cost actions in 2020, combined with sale of Millbrook and B&K Vibro, will enhance margins in 2021

• Statutory operating loss of £23.3 million is impacted by impairments at Millbrook, including a goodwill charge of £58.4 million and a £67.5 million charge of acquisition-related intangible assets and other property, plant and equipment.

• Dividend increase of 5% for the full year and £200 million share buyback programme announced

• Group positioned well as markets recover - cost base reduced, capability retained, strong operating leverage opportunity, balance sheet optionality

1.  Profit drop-through is defined as the year-on-year differential in adjusted operating profit as a percentage of the differential in sales, on a
like-for-like basis.

2.  Alternative performance measures ('APMs') are used consistently throughout this press release and are referred to as 'adjusted' or 'like-for-like' ('LFL'). These are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.

3.  The main adjusting item to statutory profit before tax in 2019 was profit on disposal of businesses of £204.7 million.

4.  The 2019 dividend of 65.1p includes the 43.2p 2019 final dividend that was declared on 20 February 2020 and subsequently postponed in response to COVID-19. An additional interim dividend of 43.2p was paid in October 2020.

Commenting on the results, Andrew Heath, Chief Executive, said: "2020 delivered challenges on many fronts as a result of COVID-19. I would again like to acknowledge and thank all our people for their outstanding commitment and for their patience, understanding and self-sacrifice as we pulled together, supported one another and delivered for our customers. I would also like to thank our shareholders for their support during this time.

Throughout 2020, we consciously and purposefully took a balanced, socially responsible approach to managing our business, consistent with our culture and values, ensuring we addressed the needs of all our stakeholders. I believe we have been successful on that front and as a result, the Group delivered a highly resilient performance, reflecting both the quality of our businesses and our people. Although sales were down notably, I am pleased with our underlying margin performance in the circumstances, which was helped by the swift actions taken and the continued execution of our profit improvement programme. At the same time, we were able to protect jobs and the core capabilities of our businesses, while also continuing to execute our strategy, with the divestment of Brüel & Kjær Vibro and Millbrook being notable achievements.

Cash generation was extremely strong and the balance sheet was further strengthened. This enabled us to reverse the temporary cost measures, returning staff to full pay, reinstating full-time working for the majority of employees and repaying the salary sacrifice. It also meant we were able to increase the final dividend and today announce a £200 million share buyback programme.

The stronger order intake in the last three months of 2020 provides momentum for the first quarter of 2021 although, clearly, much uncertainty remains and we expect the immediate economic backdrop to remain challenging. However, the actions taken last year position the Group well for any market recovery in 2021. The cost base has been reduced and capability retained, creating a strong operating leverage opportunity and balance sheet optionality. We will maintain our approach, acting with purpose, and being values-led, to deliver long-term, sustainable financial health."

Contacts:

Spectris plc

Siobhán Andrews

Head of Corporate Affairs
+44 1784 485325

FTI Consulting

Richard Mountain/Susanne Yule

+44 203 727 1340

A webcast and conference call for analysts and investors will be hosted by Andrew Heath, Chief Executive, and Derek Harding, Chief Financial Officer, at 08.30 today to discuss this statement. This will be available as a live webcast on the company's website at www.spectris.com and a recording will be posted on the website after the meeting. To access the call to ask questions, please dial 0800 640 6441 (UK) or +44 (0) 20 3936 2999 and use pin code: 747571#. Questions will also be taken via the webcast at www.spectris.com.

Copies of this press release are available to the public from the registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD and on the Company's website at www.spectris.com.

About Spectris

Spectris' global group of businesses are focused on delivering value beyond measure for all our stakeholders. We target global, attractive and sustainable markets, where growth and high returns are supported by long-term drivers. Precision is at the heart of what we do. We provide customers with expert insight through our advanced instruments and test equipment, augmented by the power of our software and services. This equips customers with the ability to reduce time to market, improve processes, quality and yield. In this way, Spectris know-how creates value for our wider society, as our customers design, develop, test and manufacture their products to make the world a cleaner, healthier and more productive place. Headquartered in Egham, Surrey, United Kingdom, the Company employs approximately 7,850 people located in more than 30 countries. For more information, visit www.spectris.com.

Chief Executive's review

Balanced and socially responsible approach to 2020

With the onset of the COVID-19 pandemic, we consciously and purposefully took a balanced, socially responsible approach to managing our business, relying on the strengths of our culture and values, to ensure that we emerged from the crisis a stronger and even more resilient business. The approach is working. We delivered a resilient and sustainable financial performance in 2020, despite the drop in market demand. We were able to protect jobs and the core capabilities of our businesses, as we continued to execute our strategy.

Whilst we worked to deliver as strong a financial performance as possible, we also acted to address the needs of all our stakeholders; safeguarding and supporting our people, working more closely and in new ways with customers and suppliers, whilst helping the communities in which we operate, as the way to deliver long-term sustainable value to our shareholders. One example of this is the establishment of the Spectris Foundation, a benevolent fund that will be used for community and charitable projects such as the promotion of STEM education. By taking these steps, we have built stronger relationships with our employees, customers and suppliers, better positioning us to respond positively to the new business environment that has emerged.

Against a challenging market backdrop, we delivered highly resilient results, ahead of our revised expectations, reflecting the quality of our businesses, and the tremendous support and engagement of our employees. Although sales were down notably, I am pleased with our underlying margin performance in the circumstances, which was helped by the swift actions taken and the continued execution of our profit improvement programme. We acted quickly to conserve cash and contain costs, by implementing a number of temporary mitigating actions, including salary cuts and part-time working. This enabled us to protect jobs and core capabilities while continuing to maintain investment in R&D, key capex projects and deploying the Spectris Business System ('SBS'). Cash generation was extremely strong, exceeding 2019, and the balance sheet was further strengthened. This meant we were able to reverse the temporary cost measures, returning staff to full pay and reinstating full-time working for the majority of employees in the third quarter. Additionally, we were able to repay the salary sacrifice in December. This also enabled us to increase the dividend, and today announce a £200 million share buyback programme.

Although uncertainty remains as we enter 2021, the sales decline slowed in the fourth quarter and strong order intake in the last three months of 2020 provides momentum coming into the new year. The actions taken last year position the Group well for the expected market recovery in 2021. The cost base has been reduced and capability retained, creating a strong operating leverage opportunity and balance sheet optionality. We will maintain our approach, acting with purpose, being values led, to deliver long-term, sustainable financial health.

Trading performance

On an organic, constant currency (like-for-like, 'LFL') basis, sales decreased 11%. There was an 8% impact from disposals, primarily related to BTG, and a limited impact from foreign currency exchange movements, resulting in reported sales decreasing by 18% to £1,336.2 million (2019: £1,632.0 million). Order intake was impacted to a lesser degree, with a 7% LFL decline in the year, and slight growth in the fourth quarter providing momentum as we entered 2021.

LFL sales and orders by business

LFL sales by geography

LFL sales declined across all businesses, albeit with different profiles, with recovery starting progressively from the third quarter.

Malvern Panalytical was experiencing weakness in a number of its end markets coming into 2020 and was subsequently further impacted by a reduction in demand, in particular from metals, minerals and mining and from universities and research institutes being closed during the first lockdown. However, they were able to deliver a much-improved performance in the second half, with a strong recovery in pharmaceuticals, in particular.

Being later cycle, the market impact to HBK was delayed and, consequently, has been more muted, with the decline easing in the fourth quarter. A buoyant machine manufacturing sector saw strong growth in the second half, along with strong sales in North America. 

Omega saw a similar performance in both halves of the year, impacted by lower US industrial production. However, sales started to recover in the fourth quarter.

The Industrial Solutions division ('ISD') posted 9% lower LFL sales, with a stronger second half performance, particularly in the pharmaceutical and electronics markets.

LFL sales decreased in all regions, with North America down less markedly, and all territories improved in the second half. By end market, the fall in LFL sales was highest in academic research, automotive, energy and utilities. In contrast, the pharmaceutical and machine manufacturing sectors both posted LFL sales growth for the year.

Financial performance

In reaction to the sales decline, we took immediate and decisive action on costs, alongside the activities already underway through the profit improvement programme. Consequently, LFL overheads declined 8%, resulting in a highly resilient operating margin of 13.0% (2019: 15.8%), 270bps lower on a LFL basis. This limited the full year drop-through to only 38% on a LFL basis, ahead of the guidance of 40-50%. Group adjusted operating profit decreased by 33% to £173.6 million (2019: £258.1 million). On a LFL basis, the decrease was 26%, after adjusting for the impact of disposals of 9% and a 0.4% positive foreign currency impact.

The Group incurred restructuring costs of £19.5 million (2019: £52.2 million), and £19.4 million of transaction-related costs in relation to the divestments and the pursuit of acquisition opportunities. £58.4 million was recognised as an impairment of goodwill (2019: £35.1 million) and £98.9 million was recognised as impairments and amortisation of acquisition-related intangible assets and property, plant and equipment (2019: £84.6 million), with impairments primarily in relation to Millbrook. As a result, the Group booked a statutory operating loss of £23.3 million (2019 £84.3 million profit).

The Group recorded a return on gross capital employed of 9.8% (2019: 13.5%), primarily reflecting the decrease in adjusted operating profit.

Cash flow and capital allocation

Our adjusted cashflow generation of £244.5 million was very strong, and ahead of 2019 (£234.2 million). Adjusted cash flow conversion was 141% (2019: 91%).

We have continued to invest to support our core businesses, spending £92.0 million (6.9% of sales) in R&D (2019: £100.9 million, 6.2% of sales) and £42.9 million in capex, net of grants (2019: £81.6 million). In line with the strategy, we reduced capex at Millbrook to a total of £11.2 million in the year (2019: £37.1 million).

Our balance sheet has been strengthened further. The Group ended the year with net cash of £106.1 million (2019: £33.5 million). During the year, there was a net cash inflow from proceeds of disposals of £20.6 million and a further £223 million is expected from the divestments of Millbrook and B&K Vibro in the first quarter of 2021. Our leverage is outside the target range of our long-term policy. Reflecting this, and in order to make the balance sheet more efficient, the Board has approved a share buyback programme of £200 million to take place during 2021 and this will commence as soon as possible. This is in alignment with our capital allocation policy. The Group still has considerable financial flexibility and will continue to target acquisitions in support of its strategy.

The Board is proposing to pay a final dividend of 46.5 pence per share. This would represent a 7.6% increase on the declared 2019 final dividend, which was postponed. The Group paid an additional interim dividend of 43.2 pence in October and the 2020 interim dividend of 21.9 pence in November. Although the Group took a short-term decision to defer the 2019 final dividend in response to the uncertainty caused by COVID-19, there is no change to our underlying policy of making progressive dividend payments based upon affordability and sustainability. The dividend will be paid on 30 June to shareholders on the register at the close of business on 14 May. The ex-dividend date is 13 May.

Taking a balanced approach to managing the business

2020 delivered challenges on many fronts as a result of COVID-19. However, the Group delivered a highly resilient performance. I would again like to acknowledge and thank all our people for their outstanding commitment and for their patience, understanding and personal sacrifice as we pulled together, supported one another and delivered for our customers. I would also like to thank our shareholders for their support during this time.

Throughout, we have endeavoured to address the needs of all our stakeholders. I believe we have been successful on that front and as a result, the Company is well positioned for the recovery in 2021, and beyond.

In response to COVID-19, we managed the crisis in three phases: React; Respond; Reset.

React - supporting employees, customers and suppliers

The health, safety and wellbeing of our people has been and remains our key priority. We moved quickly to enable working from home arrangements where possible, and implemented revised working practices and heightened safety standards in our facilities to ensure they remained safe and operational. We worked more closely with our suppliers to mitigate any potential supply chain impacts and innovated how we engaged with customers to help keep them operational. As a result, disruption to our manufacturing activities and supply chains has been very limited, enabling us to support our customers, with customer satisfaction scores improving through the year.

Respond - reducing costs and preserving cash to protect the business

As the extent of the impact of COVID-19 started to become apparent, we enacted our business continuity plans and took swift action to protect the Company, while retaining capabilities and protecting jobs for as long as possible.

We prioritised short-term costs savings over structural long-term cost reduction; for example reducing discretionary spend, withdrawing the annual pay award and asking employees to take a salary reduction or working reduced hours, to support our financial performance and mitigate the impact on our capability. These were difficult but necessary actions to protect the Company, and as many jobs as possible, in the face of an unprecedented, emerging crisis.

We also withdrew the special dividend and deferred the 2019 final dividend, in order to conserve cash.

The reduction in discretionary expenditure undertaken through 2020 helped underpin our profit generation and the strong cash flow performance, further strengthening our already robust balance sheet and liquidity position. This also supported continued investment in the business with R&D expenditure similar to prior year levels and capex on key projects upheld.

Reset - preparing for the recovery

As we progressed through the year, it became evident that we were facing an extended recovery. While we continue to believe in the long-term growth prospects for our end markets, it was clear that there would be continued disruptions in the short term.

Consequently, in anticipation that a recovery would extend through 2021, we took the decision to transition away from temporary measures to implementing sustainable reductions in our cost base. In the third quarter, we extended our restructuring programme to further reduce our cost base such that we entered 2021 sized for an extended recovery and able to deliver strong operating leverage. As a result, the permanent cost benefits achieved in 2020 were ahead of expectations at £30 million.

Many of the cost actions being taken revolve around lessons learned from the new ways of working under COVID-19. For example, our people wish to work more flexibly and consequently, a number of physical facilities will be closed or reduced in size. We have also expanded the use of virtual engagement with our customers and this will continue, reducing the need to physically meet and therefore we do not expect to fully reinstate our travel and entertainment spend in 2021. In addition, we have been implementing a targeted headcount reduction programme by business. Headcount reduced by 4% of which the majority was through natural attrition and voluntary means. Of the £20 million of temporary costs saves achieved in 2020, £10 million will be sustained by these actions. We no longer expect additional material restructuring costs to achieve this, given the achievements in 2020.

I am delighted that, due to our financial performance and cash generation, we were able to reverse most of the temporary measures. During the third quarter, we reinstated dividend payments, returned employees to full salary and, wherever possible, full-time working. Executive Director salaries and Board fees were only reinstated in October, after this was completed. And in the December payroll, it was equally pleasing that we were able to recompense our people for the salary sacrifice they had foregone earlier in the year.

We continue to execute our Strategy for Profitable Growth

We have reviewed both our strategy and business model in light of the events of 2020 and are confident that they remain appropriate and highly relevant. Although our financial performance has been impacted by COVID-19 in 2020, we have continued to be successful in executing our strategy since it was launched in 2019. With significant achievements in terms of improving the Group's cost structure, maintaining investment in R&D and carrying out divestments, the Group is now much better positioned in terms of end market focus, operating leverage and portfolio structure.

We made further progress in successfully implementing our portfolio optimisation strategy in 2020. We will continue to optimise our assets and review the portfolio at both the Group and business level. Further businesses are expected to be sold, along with lower profitability business activities; for example, we sold the CLS food testing business early in 2021.

As markets recover, we turn again to a focus on driving growth and further improving our operating leverage to enhance margins and deliver long-term value to our shareholders. Although we have participated in several buy-side M&A processes last year, we did not consummate any acquisitions, while remaining disciplined to our capital allocation framework. Compounding growth through M&A remains a core part of the strategy.

Delivering value beyond measure for our customers, to drive growth

Driving organic growth remains a key priority. Being close to our customers in 2020 was often difficult to achieve physically. Consequently, we quickly innovated our sales and marketing approach to meet our customers 'where they are', virtually. Order intake held up well in the circumstances, being only 7% down on a LFL basis, underlining the strength of the online support we were able to offer, and the importance and relevance of our products and services.

Our purpose is to harness the power of precision measurement to equip our customers to make the world cleaner, healthier and more productive. In a number of our end markets, the significance of our purpose was heightened in 2020; not more so than in pharmaceuticals and life sciences. Last year, our Servomex business rose to the challenge of supporting the rapid rise in ventilator demand to treat COVID-19 with a significant increase in the production of its Paracube oxygen sensors, supporting six of the world's ten largest ventilator manufacturers. Malvern Panalytical's systems and applications expertise also helped with the rapid development and production of the COVID-19 antigen test and the vital research and development of vaccines.

We maintained our level of spend on R&D in 2020 to ensure we are developing the next generation of products and services that our customers demand and in order to drive growth. As technologies and customers' needs evolve, we are innovating and extending our offering to continue to meet their requirements and provide the valuable insights they need to develop and manufacture their own products and services.

For example, Malvern Panalytical launched OmniTrust and Amplify Analytics, which in combination provide a powerful partnership of instrumentation and analytics know-how, enabling pharmaceutical customers to accelerate successful drug development.

In automotive, to support the proliferation of electric propulsion and simulation, HBK extended its eDrive offering to provide more complete e-powertrain testing and optimisation, including eGrid testing; launched the DiM®400, the first of its new line of high-performance, scalable, cable-driven simulators and expanded its capability with the acquisition of IMTEC Engineering, which provides vehicle driving simulators and machine automation systems.

Omega launched 94 new product lines during 2020, including broadening its temperature offering in response to greater COVID-19-related demand in this segment. And PMS released the IsoAir® Pro-E Remote Particle Counter, the next generation remote particle counter used to streamline cleanroom monitoring while meeting global manufacturing practice regulations.

These are examples, from a wide range of initiatives, designed to enhance our product proposition for customers, ensuring they get the insights and analysis they need to meet their own challenges. Being positioned in attractive end markets and with products our customers highly value means we are better placed to drive future growth and profitability for our shareholders.

Driving operating leverage with restructuring and deploying the Spectris Business System

Improving operating leverage also remains a key focus, with the aim of returning our margin to at least previous highs. The performance on this front at HBK, resulting from the merger, has been particularly pleasing. Although overheads benefited from £20 million of short-term cost measures in 2020, we remain focused on turning £10 million of these savings into sustainable benefits in 2021 through footprint rationalisation, a reduction in discretionary costs, including more productive ways of working digitally, as well as the headcount reduction in 2020.

In addition, we continued to invest in strengthening and deploying our SBS. While it was more challenging to deliver improvements with remote working and social distancing in our facilities, good progress continued to be made last year. Cross functional teams delivered virtual or socially distanced kaizens, training and improvements in health and safety. As ever, improvements addressed a broad-range of activities, including enhancing productivity, working capital efficiency, sales forecasting, order accuracy, inventory and production planning, lead time reductions and removal of waste. For example, notable improvements were made in inventory management at Malvern Panalytical and on-time delivery at HBK. We further deepened our focus on use of the Hoshin Kanri strategic planning system for effective strategy deployment entering 2021 with clear alignment to our business strategy and competitive process capability.

Portfolio optimisation

In December, in line with our strategy to simplify and focus the portfolio, we announced the divestment of Brüel & Kjær Vibro ('B&K Vibro') and Millbrook for headline values of €180 million (£163 million) and £133 million, respectively. The Millbrook transaction completed in February with B&K Vibro expected to complete in March. Although both are good businesses, they did not have the attributes of a 'Spectris' company and we were pleased to find highly-complementary owners for both businesses. Further portfolio management is planned in 2021.

On the acquisition side, the Group participated in a number of processes during 2020. Of particular note, the Group made an approach to acquire a US publicly-listed company. Following our approach, they conducted a competitive process for the potential sale of the business. Although the Group believes it would have been a value creating opportunity for shareholders, ultimately, we maintained our capital discipline and were unsuccessful in the transaction. If successful, the transaction would have been in line with the Group's strategy to make synergistic acquisitions focused on its existing and potential platforms.

To support the approach and demonstrate our intent, we acquired a minority holding in the company for a total consideration of $19.8 million. At the year end, our holding was valued at $52.3 million (£38.3 million), resulting in a mark-to-market gain of $32.5 million (£23.2 million). It is proposed that £15 million of this gain is used to establish the Spectris Foundation, a benevolent fund that will be used for community and charitable projects.

Our balance sheet gives us good optionality, and during 2021, we will continue to review and renew our opportunity pipeline in order to seek suitable acquisition targets. Delivering long-term, sustainable value creation for shareholders, in a capitally-disciplined manner, will remain the priority.

Our Values and Code of Business Ethics underpin how we behave

Each of our businesses has unique traits and company cultures, yet certain characteristics connect all of us that work at Spectris. How we conduct our business matters to all of us and to our many stakeholders. During 2020, we refreshed the Group's Values and Code of Business Ethics.

Our Values - Be true, Own it, Aim high - underpin our behaviour. They represent Spectris at its best and reflect what we want to see every day: integrity, accountability and ambition.

Our Code of Business Ethics was also revised, in line with our new Values, and rolled out to help us perform and do business the right way. Doing this during the pandemic was seen by employees as a testament to our commitment in conducting business ethically.

New sustainability strategy being implemented

In October, the Board approved a Group-wide sustainability strategy to ensure that we remain a sustainable employer, partner, supplier and investment proposition. The strategy emanates from the Group's business model and builds on our wider purpose ‒ supporting our customers to make the world cleaner, healthier and more productive. The strategy focuses on further embedding sustainable thinking in our operations and business aims. It also works on mitigating the risks arising from changing regulation and evolving stakeholder expectations, while also capturing opportunities from an increasing focus on sustainability across many of our customers, suppliers, communities and our employees.

Following a detailed and externally facilitated materiality assessment process, we identified three areas of focus which form the basis of our strategy over the next two years: environment, people and operations. In line with these focus areas, three UN Sustainability Development Goals (Goal 7 − Affordable and clean energy; Goal 8 − Decent work and economic growth and Goal 9 − Industry, innovation and infrastructure) were identified to inform our strategy, enable prioritisation and planning. During the year, initiatives to support these goals were undertaken. These included: work on diversity and inclusion and the provision of wellbeing and resilience support for our people; the development of Group-wide health and safety reporting in line with OSHA standards; the approval of a five-point plan to accelerate the Group's management of the environmental impact of our operations, including the setting of our Group Net Zero target; and compliance with the Task Force on Climate-related Financial Disclosures recommendations during 2021. On our environmental performance, we were pleased to see an improved CDP B rating during the year.

Our sustainability strategy is deliberately set over the short term to agree a base position. During 2021, we will set stretching and meaningful targets that are relevant to our business for the long term. It will provide a clear line of sight to the key commitments around our people, the environment and our operations to ensure that we are true to our purpose.

We are also committed to creating a positive legacy in the communities in which we live and work and we aim to be industry leading in our approach to social responsibility. To add focus and momentum to our aims, we are launching the Spectris Foundation. The Foundation will receive a one-off investment of £15 million from Spectris and the ongoing costs of the Foundation will be met by Spectris. The Foundation will adopt a general charitable purpose, which means that it is able to donate to a wide variety of charities within the UK and overseas. The intention is to focus on making donations that promote STEM education. The Foundation will enhance and improve our charitable giving at a global level and will also support our operating companies and individual employees in their fundraising efforts. We recognise that the economic impact of COVID-19 may lead to barriers being raised for some young people to enter the field of science. To tackle this challenge, a key aim of the Foundation will be to improve access to a quality STEM education, to enable a cleaner, healthier and more productive world.

Executive Committee changes

There were a number of changes during the year that have further strengthened both the calibre and the diversity of the Executive leadership team. Mark Fleiner, Business Group Director, ISD, was appointed to succeed Paolo Carmassi as President of Malvern Panalytical. Andy Cowan took over as interim Business Group Director, ISD. Rebecca Dunn was appointed to the new role of Head of Sustainability to promote our commitment to environmental, social and governance matters. Judith Wettach joined Spectris as Group Head of Corporate Development and Amit Agarwal joined Omega in October as its President following the departure of Greg Wright. In February 2021, Mary Beth Siddons joined Spectris as the Business Group Director, ISD, replacing Andy Cowan who returned to his role as Finance Director, ISD.

Summary and outlook

2020 delivered challenges on many fronts as a result of COVID-19. I would again like to acknowledge and thank all our people for their outstanding commitment and for their patience, understanding and self-sacrifice as we pulled together, supported one another and delivered for our customers. I would also like to thank our shareholders for their support during this time.

Throughout 2020, we consciously and purposefully took a balanced, socially responsible approach to managing our business, consistent with our culture and values, ensuring we addressed the needs of all our stakeholders. I believe we have been successful on that front and as a result, the Group delivered a highly resilient performance, reflecting both the quality of our businesses and our people. Although sales were down notably, I am pleased with our underlying margin performance in the circumstances, which was helped by the swift actions taken and the continued execution of our profit improvement programme. At the same time, we were able to protect jobs and the core capabilities of our businesses, while also continuing to execute our strategy, with the divestment of Brüel & Kjær Vibro and Millbrook being notable achievements.

Cash generation was extremely strong and the balance sheet was further strengthened. This enabled us to reverse the temporary cost measures, returning staff to full pay, reinstating full-time working for the majority of employees and repaying the salary sacrifice. It also meant we were able to increase the final dividend and today announce a £200 million share buyback programme.

The stronger order intake in the last three months of 2020 provides momentum for the first quarter of 2021 although, clearly, much uncertainty remains and we expect the immediate economic backdrop to remain challenging. However, the actions taken last year position the Group well for any market recovery in 2021. The cost base has been reduced and capability retained, creating a strong operating leverage opportunity and balance sheet optionality. We will maintain our approach, acting with purpose, and being values-led, to deliver long-term, sustainable financial health.

Andrew Heath

Chief Executive

Financial review

Financial performance

Sales decreased by 18% or £295.8 million to £1,336.2 million on a reported basis (2019: £1,632.0 million). LFL sales decreased by £159.2 million (-11%) and the impact of disposals, net of acquisitions, reduced sales by £136.5 million (-8%), whilst favourable foreign exchange movements contributed £0.1 million.

Adjusted operating profit decreased by 33% or £84.5 million to £173.6 million on a reported basis (2019: £258.1 million). LFL adjusted operating profit decreased by £61.0 million (-26%) and the impact of disposals, net of acquisitions was £24.3 million (-9%), whilst favourable foreign exchange movements contributed £0.8 million.

Adjusted operating margins reduced by 280bps, with LFL adjusted operating margins down 270bps compared to 2019. The reduction in the LFL operating margin was due to a 160bps decrease in LFL gross margin to 55.0% (2019: 56.6%), reflecting the high drop-through on the adverse sales volume partially offset by favourable pricing, procurement and production overhead cost savings. This was partially offset by an 8% reduction in LFL overheads. Savings were generated from the cost reduction initiatives put in place across the Group, including hiring freezes, furloughs, part-time working, lower incentive-related accruals and restructuring. These initiatives, as well as significantly lower travel costs,  more than offset overhead cost inflation and an increase in depreciation and bad debt provisions.

Investment in our R&D programmes amounted to £92.0 million or 6.9% of sales (including £7.3 million of capitalised development costs) (2019: £100.9 million or 6.2% of sales, including £7.3 million of capitalised cost). R&D investment costs decreased by 1.1% on a like-for-like basis in the year to 31 December 2020.

The statutory operating loss was £23.3 million, a decrease in profit of £107.6 million compared to the 2019 statutory operating profit of £84.3 million. This decrease results from a £177.8 million volume-driven gross profit reduction, offset by a £70.2 million reduction in SG&A expenses. Restructuring costs in the period were £19.5 million. Net transaction costs of £19.4 million were incurred relating to the disposals of Millbrook and B&K Vibro and a number of potential acquisition opportunities, including the costs associated with the pursuit of a US-listed business, which resulted in the £23.2 million investment gain discussed below. Impairment of goodwill in 2020 relates entirely to the Millbrook business, as does £67.5 million of the amortisation and impairment of intangible assets and other property, plant and equipment, with the remaining £31.4 million mainly due to the amortisation and impairment of ongoing activities. Statutory operating margins of -1.7% were 690bps lower than 2019 (5.2%).

Statutory loss before tax of £4.1 million (2019: £259.3 million profit before tax) is calculated after charging net finance costs of £8.4 million (2019: £3.5 million), lower predominantly as a result of foreign exchange gains in 2019, and benefits from a £23.2 million gain on fair value on equity investments, and £4.4 million predominantly in relation to a net profit on disposal from the sale of the Malvern Panalytical rheology range and the EMS B&K joint venture. Adjusted profit before tax decreased by 33% to £166.4 million
(2019: £247.4 million).

The effective tax rate on adjusted profit before tax was 21.8% (2019: 21.4%), an increase of 40bps. On a statutory basis, there is a tax charge on the loss before tax (effective tax rate: -314.6%, 2019: 9.7%), primarily resulting from impairment charges which do not give rise to tax relief. In 2021, the Group expects its effective tax rate on adjusted profit before tax to be broadly in line with the rate in 2020. The Group's approach to tax matters is set out in its tax strategy which, in compliance with the Finance Act 2017, has been made available on our website at www.spectris.com/sustainability/tax-strategy.

Restructuring costs

The Group has incurred costs of £19.5 million relating to restructuring in 2020 (2019: £52.2 million). These restructuring costs include £8.2 million related to impairments and disposal of owned and right of use property, plant and equipment, £7.8 million of staff-related costs including redundancy and related costs and £3.5 million of other costs.

Acquisitions, disposals and other investments

The Group completed one acquisition during the year with a net cash cost of £2.6 million. £8.3 million was paid in respect of prior year acquisitions, making the net cash outflow in the year £10.9 million. Furthermore, the Group incurred a £19.4 million expense on transaction-related costs, of which £13.6 million was a cash outflow during the year, which makes the total transaction-related cash outflow for the year £24.5 million.

In support of a potential acquisition opportunity, the Group acquired a minority holding in a US-listed entity for a total consideration of £15.2 million. At the year end, our holding was valued at £38.3 million, resulting in a mark-to-market gain of £23.2 million.

On 31 January 2020, the Group sold its interest in the Malvern Panalytical rheology product range to Netzsch Group for consideration of £8.8 million in cash, generating a profit on disposal of £5.9 million. The net assets disposed were £2.1 million, and transaction costs were £0.8 million. The Consolidated Statement of Cash Flows includes £6.9 million of net proceeds from this disposal, which consists of £8.8 million of sales proceeds offset by £1.1 million of tax payments on the disposal and £0.8 million of transaction cost-related payments. 

On 28 February 2020, the Group sold its interest in the EMS B&K joint venture for total consideration of £17.7 million, consisting of £16.8 million in cash received in 2020 and £0.9 million in shares in Envirosuite Limited. The net assets disposed were £18.1 million and transaction costs incurred in 2020 were £0.1 million, resulting in a loss on disposal of £0.5 million. The Consolidated Statement of Cash Flows includes £14.0 million of net proceeds related to the EMS B&K joint venture, consisting of £16.8 million in cash proceeds from the sale of the interest offset by £2.6 million payment of deferred consideration relating to the 2018 disposal and £0.2 million of transaction cost related payments.

Also included in profit on disposal of business, is £1.0 million of transactions costs on the sale of BTG. The Consolidated Statement of Cash Flows includes £0.3 million of net payments from the sale of BTG. This consists of £1.2 million of tax payments on the disposals and £0.9 million of transaction fees, offset by £1.8 million of deferred consideration received in cash.

On 10 December 2020, the Group announced that agreement had been reached for the sale of the Group's B&K Vibro and Millbrook businesses, which form part of the Industrial Solutions division. The transactions were subject to customary completion conditions and regulatory approvals. The Millbrook sale completed on 1 February 2021. Completion of the sale of B&K Vibro is expected to take place on 1 March 2021.

During 2020, the Group entered into preliminary discussions for the disposal of Concept Life Sciences' legacy food testing business based in Cambridge, and the sale was completed on 5 January 2021 for sales proceeds of approximately £6 million. This business forms part of the Malvern Panalytical Platform operating segment.

The above operations have been classified as disposal groups held for sale and presented separately in the Consolidated Statement of Financial Position.

The proceeds from the B&K Vibro and the Concept Life Sciences' food testing businesses are expected to exceed the book value of the related net assets and accordingly no impairment losses have been recognised on the classification of these operations as held for sale.

Details of the impairment recognised on classification of the Millbrook business as held for sale are provided below.

Impairment of goodwill, acquisition-related intangible assets and other property, plant and equipment

During the year, £58.4 million was recognised as an impairment of goodwill (2019: £35.1 million) and £70.9 million impairment recognised in the amortisation and impairment of acquisition-related intangible assets and other property, plant and equipment line of the Consolidated Income Statement (2019: £47.1 million).  

An impairment of the whole of Millbrook's goodwill balance of £58.4 million, £11.0 million of other intangibles and £6.4 million of other property, plant and equipment was charged to the Consolidated Income Statement during the first half of 2020, reflecting the recoverable amount at that time.

During the second half of 2020, a comprehensive sale process relating to Millbrook was concluded resulting in the announcement on 10 December 2020, that agreement had been reached for the sale of the Millbrook business. The structure of the transaction provided an immediate cash inflow plus the chance to participate in the future performance of the combined group, which will now be able to provide a more extensive and comprehensive range of services to its clients. The commercial valuation achieved resulted in a further impairment of £44.8 million of property, plant and equipment and £5.3 million of other intangible assets.

Cash flow

1. Adjusted depreciation and software amortisation represent depreciation of property, plant and equipment, software and internal development amortisation, adjusted for depreciation of acquisition-related fair value adjustments to property, plant and equipment.

Adjusted cash flow improved by £10.3 million to £244.5 million during the year, resulting in an adjusted cash flow conversion rate of 141% (2019: 91%). The improvement was driven by proactive working capital management resulting in a reduction in inventories and trade receivables. Capital expenditure was lower throughout the Group as a result of prudency in spending commitments earlier in the year. Given the momentum in the fourth quarter, we expect capital expenditure to be higher in 2021 at circa £50 million.

Capital expenditure (net of grants related to capital expenditure) on property, plant and equipment and intangible assets during the year of £42.9 million (2019: £81.6 million) equated to 3.2% of sales (2019: 5.0%) and was 71% of adjusted depreciation and software amortisation (2019: 140%).

Financing, treasury and going concern

The Group finances its operations from both retained earnings and third-party borrowings. The 31 December 2020 gross debt balance consists of fixed rate borrowings of £104.5 million plus bank overdrafts of £15.3 million.

In determining the basis of preparation for the Consolidated Financial Statements, the Directors have considered the Group's available resources, current business activities and factors likely to impact on its future development and performance, including the impact of COVID-19 on the Group, which are described in the Chief Executive's Review, Financial Review and Operating Review.

As at 31 December 2020, the Group had £690.5 million of committed facilities denominated in different currencies, consisting of an $800.0 million (£586.0 million) revolving credit facility maturing in July 2025 and a seven-year €116.2 million (£104.5 million) term loan maturing in September 2022. From these facilities, the Group had total gross borrowings of £104.5 million at 31 December 2020. The revolving credit facility ('RCF') was undrawn at 31 December 2020. During the year, the Group requested a further one-year extension of its $800 million RCF, as permitted under the agreement. The extension was approved by all ten banks in the syndicate, ensuring the Group continues to have access to the full amount under the facility until July 2025.

These facilities have a leverage (net debt/EBITDA) covenant of up to 3x for the term loan and up to 3.5x for the RCF. The Group regularly monitors its financial position to ensure that it remains within the terms of its banking covenants. At 31 December 2020, interest cover (defined as adjusted earnings before interest, tax and amortisation divided by net finance charges) was more than 40 times, against a minimum requirement of 3.75 times, and leverage (defined as adjusted earnings before interest, tax, depreciation and amortisation divided by net cash/(debt)) was less than zero due to the Group's net cash position, against a maximum permitted leverage of 3 times.

In addition to the above, after adjusting for £3.7 million of cash and cash equivalents reported under Assets held for sale, at 31 December 2020, the Group had a cash and cash equivalents balance of £225.9 million and various uncommitted facilities and bank overdraft facilities available, resulting in a net cash position of £106.1 million, an increase of £72.6 million from £33.5 million at 31 December 2019.

In April 2020, Spectris successfully applied for access to the Bank of England's Covid Corporate Financing Facility ('CCFF'), resulting in the ability to raise up to £600 million of additional short-term funding, if required, before 23 March 2021 by issuing commercial paper for purchase by the Bank under the programme. The Group is under no obligation to utilise the facility and, in view of the Group's other undrawn facilities and current financial position, we do not anticipate accessing the programme before its expiry.

The Group has prepared and reviewed cash flow forecasts, which reflect forecasted changes in revenue across its business as set out and compared these to a reverse stress test of the forecasts to determine the extent of downturn which would result in a breach of covenants. Assuming similar levels of cash conversion as experienced in recent months since the outbreak of COVID-19 occurred, a monthly decline of revenue well in excess of that experienced in any month during 2020 would need to persist throughout the entire going concern period for a covenant breach to occur, which is considered very unlikely. In addition, the reverse stress test does not take in account any mitigating actions which the Group would implement in the event of a severe and extended revenue decline, which would increase the headroom further. This assessment indicates that the Group can operate within the level of its current facilities, as set out above, without the need to obtain any new facilities for a period of not less than 12 months from the date of this report.

Following this assessment, the Board of Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in relation to this conclusion and preparing the Consolidated Financial Statements.

Net bank interest costs for the last 12 months were covered by adjusted operating profit 42 times (2019: 35 times).

Currency

The Group has both translational and transactional currency exposures. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase invoices differs from the functional currency in which each company prepares its local accounts. The transactional exposures include situations where foreign currency denominated trade receivables, trade payables and cash balances are held.

After matching the currency of revenue with the currency of costs wherever practical, forward exchange contracts are used to hedge a proportion of the remaining forecast net transaction flows where there is reasonable certainty of an exposure. At 31 December 2020, approximately 66% of the estimated transactional exposures for 2021 were hedged using forward exchange contracts, mainly against Sterling, the Euro, the US Dollar and the Danish Krone.

The largest translational exposures during the period were to the US Dollar, Euro and Chinese Yuan Renminbi. Translational exposures are not hedged. The table below shows the average and closing key exchange rates compared to Sterling.

During the year, currency translation effects resulted in operating profit being £0.8 million higher (2019: £3.0 million higher) than it would have been if calculated using prior year exchange rates. Transactional foreign exchange losses of £1.1 million (2019: £3.5 million loss) were included in administrative expenses, whilst sales include a gain of £0.2 million (2019: £2.9 million loss) arising on forward exchange contracts taken out to hedge transactional exposures in respect of sales.

Brexit

The Group operates in a range of end markets that remain exposed to Brexit developments. Mitigating actions have been put in place following enhanced analysis, including stress testing to determine severe but plausible potential scenarios, and the Group is continuously monitoring events. As part of this analysis, management have considered the measurement impact on the Group's balance sheet. Now that the UK has officially left the EU, close attention is being paid to potential trade deals and their associated impact, both positive and negative, on the Group. Although the longer term outcome of Brexit remains difficult to quantify, we do not expect the direct consequences of Brexit to have a material impact to the Group.

Dividends and share buyback

The Board is proposing to pay a final dividend of 46.5 pence per share (2019: 43.2 pence) which, combined with the interim dividend of 21.9 pence per share (2019: 21.9 pence) paid in November, gives a total dividend of 68.4 pence per share for the year (2019: 65.1 pence), an increase of 5%.

The Board has reviewed the balance sheet in light of the better than expected performance at the end of the year and the outlook for 2021. Given the net cash position and highly cash generative nature of the business, it has approved a £200 million share buyback programme. This still allows adequate bandwidth for M&A opportunities whilst maintaining the Group's leverage discipline.

Annual Report

The Annual Report will be made available to shareholders in March 2021, either by post or online, and will be available to the general public on the Company's website at www.spectris.com or on written request to the registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD.