2022 full year results

23 February 2023 - Spectris plc (SXS: LSE), a leader in premium, precision measurement, announces full year results for the year ended 31 December 2022.

Strong performance, positioned for sustainable, compound growth

• Strong 2022 financial performance driven by continued strategy execution

•  Sales growth of 14% (like-for-like 'LFL': 14%) from market share gains, volume growth and pricing

•  Adjusted operating margin increased 50bps to 16.8%

•  Profit for the year up 16% to £401.5 million

•  Adjusted earnings per share increased by 26% to 159.9p

•  Record order book, up 36% year-on-year, provides confidence into 2023

• A simplified Group focused on two great businesses aligned to structural growth markets  

•  Spectris Scientific: sales growth of 24% (LFL: 18%); adjusted operating margins of 21.3% (2021: 21.1%)

•  Spectris Dynamics: sales growth of 16% (LFL: 7%); adjusted operating margins of 15.0% (2021: 16.5%)

• Investing for growth and attractive shareholder returns supported by a strong balance sheet

• Increased investment in our R&D programmes to 7.8% of sales to £103.8 million (2021: 7.2%, £83.8 million). Improved vitality index to 25% (23% in 2021)

•  Bolt-on acquisitions across both Divisions with capacity for further value-enhancing M&A

•  Sale of Omega completed for £418 million ($529 million) in July

•  £190 million of £300 million share buyback programme completed

•  Dividend per share increase of 5%, 33 years of continuous dividend growth

•  Return on Gross Capital Employed ('ROGCE') increased to 16.0% (2021: 13.2%)

• Confident of delivering organic growth in 2023, consistent with our medium-term objective of 6-7% alongside continued margin expansion

1.   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 the appendix.

2.   The Omega business has been classified as a discontinued operation. Accordingly, the financial statements for the current and comparative years have been amended to show continuing operations.

3.   Includes profit from discontinued operatons and is represented after tax to allow a more meaningful comparison to prior year due to the differerent accounting classifications of the continuing and discontinued profit on disposal of businesesses.

Commenting on the results, Andrew Heath, Chief Executive, said:

"I am delighted by our financial performance and strategic progress in 2022. We continue to grow strongly, reflecting the extraordinary efforts of our people across the Group to deliver for our customers.  We are compounding our growth by taking share and opening up new opportunities, through increased investment in R&D driving new innovations, and M&A, supported by a strong balance sheet.

At our Capital Markets Day in October we presented our Strategy for Sustainable Growth. Spectris is now focused on two great premium precision measurement businesses in Spectris Scientific and Spectris Dynamics, aligned with attractive, sustainable, structural growth markets with high barriers to entry. With leading technologies and deep technical expertise, our teams are solving some of our customers' toughest challenges, delivering increasing value and helping to make the world cleaner, healthier and more productive.

We enter 2023 with good momentum while remaining vigilant and alert to signs of changes in demand. The strength and quality of our order book, which is 36% higher than a year ago, gives us confidence into the first half of the year, as we continue to drive operational excellence to improve productivity and efficiency. Our expectation for 2023 is to deliver organic growth, consistent with our medium-term objectives of 6-7%, alongside strong progress on expanding margins and driving forward with our ambition to be a leading sustainable business."

Contacts:

Spectris plc

Andrew Heath, Chief Executive Officer

Derek Harding, Chief Financial Officer

investor.relations@spectris.com

Tulchan Communications

Martin Robinson

Giles Kernick

+44 20 7353 4200

A meeting with analysts will be held at 9am GMT today at Farmers & Fletchers In The City, 3 Cloth Street, London EC1A 7LD. 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.

Copies of this press release are available to the public from the registered office at Melbourne House, 44-46 Aldwych, London WC2B 4LL, and on the company's website at www.spectris.com.

About Spectris

Spectris combines precision with purpose, delivering progress for a more sustainable world. We provide critical insights to our customers through premium precision measurement solutions combined with technical expertise and deep domain knowledge. Precision is at the heart of what we do - our leading, high-tech instruments and software equip our customers to solve some of their greatest challenges to make the world cleaner, healthier and more productive. Our two, high quality divisions - Spectris Scientific and Spectris Dynamics - are placed in technology-driven end markets, with strong fundamentals and attractive growth trajectories. We have leading market positions in premium segments and employ 7,600 people located in more than 30 countries, all united behind our Purpose to deliver Value Beyond Measure for all our stakeholders. For more information, visit www.spectris.com.

Chief Executive's review

Reshaped, stronger, positioned for sustainable growth  

We have made excellent progress in 2022. Our strong results reflect the dedication and fabulous execution from our people. They have delivered for our customers,  improved our business and supported each other, in a global macroeconomic environment shaped by uncertainty. I would like to take this opportunity to thank everyone across Spectris for their continued hard work and willingness to continually aim high.

Our performance in 2022 reflects the significant progress we have made as a Group since we launched our transformation programme in 2019, and is consistent with the targets we laid out at our Capital Markets Day last October as part of our new Strategy for Sustainable Growth.

* market-based emissions

A strong performance in 2022

We continue to improve the quality of our business, giving us the confidence in our strategy of compounding growth in the future and continuing to expand operating margins. This is evidenced in our strong performance in 2022, with sales growth of 14% in 2022 on a reported and LFL basis. Reported growth is supported by acquisitions completed in 2021 and 2022, consistent with our strategy of compounding growth through M&A, and offsets for disposals, which removed £65.8 million of sales from the 2021 reported number. 14% LFL sales growth comprises 8% volume and 6% pricing, with further pricing strength expected to benefit sales in 2023.

Our order book is at record levels. Order intake increased 10% in 2022 (9% LFL), resulting in the closing order book for the Group being 36% higher than at December 2021 and covering approximately six months of sales. Asia continued to be a strong region, up 18% year over year, particularly China and Japan. In Europe, the Group increased orders by 10%, while the US softened in H2, and was flat for the full year. The order book strengthened across both Divisions, underpinning confidence in our guidance for 2023, with all businesses continuing to exceed market growth expectations. Our book-to-bill was 1.13 for 2022.

We are delivering higher quality, more profitable growth as evidenced by continued margin expansion. Adjusted operating profit of £222.4 million (2021: £189.6 million) increased by 17% (14% on a LFL basis). This resulted in an adjusted operating margin of 16.8% (2021: 16.3%), reflecting the growth in sales from both volume and pricing changes, as we successfully navigated constrained supply chains and controlled cost in an inflationary environment.

Statutory operating profit of £172.6 million (2021: £139.9 million) increased by 23% predominantly due to lower transaction-related costs of £8.3 million (2021: £19.0 million) and no restructuring charges in the current year (2021: £10.2 million). This gave a 13.0% statutory operating margin, 100bps higher than 12.0% reported for 2021.

Supply chain disruption and significant material inflation impacted our gross margins, particularly in the first half. In the second half we saw reducing supply chain disruption and slowing material inflation, while price increases resulted in progressive improvement in the gross margin. In addition, the Spectris Business System ('SBS') continues to have a meaningful impact in improving productivity, with LFL adjusted overheads 170bps lower as a percentage of sales.  These savings have enabled the Group to deliver an increased operating margin for the year. We expect to deliver further, strong progress on margin expansion in 2023.

We have delivered this robust margin performance alongside a 24% increase in R&D spend, to £103.8 million. We believe in innovation for growth, as evidenced by the improvement in our product vitality index from 23% to 25% over the past year. The investments we are making today are strengthening our product pipeline, setting us up for further organic growth.

Customer demand remains high and we continue to see positive momentum including a strong start to 2023 supported by strong double-digit LFL sales growth and momentum in orders with a book-to-bill greater than 1. The Group's considered pricing policy is delivering as expected and we are seeing continued improvement in gross margins as supply chains and inflation ease.

Our performance in 2022 demonstrates momentum and provides us confidence in the future. We have significant opportunities ahead of us and our high quality, focused portfolio provides us with confidence as we enter 2023. We expect to deliver organic growth consistent with our medium-term objectives of 6-7% alongside strong progress on expanding margins, as we drive forward with our ambitions to be a leading sustainable business.

Underpinned by our Purpose and our people

My confidence in our ability to be successful in fulfilling our ambitious goals is rooted in our people. Across Spectris, we have exceptional leaders, deep technical experts, innovative minds, out-of-the-box thinkers, a diverse team of people performing different roles in many different places around the world. Wherever they are or whatever they are doing, they are people that care about their work, each other, and the environment around them.

I passionately believe that bringing brilliant people together behind a common purpose and with clear values is the key to our future success. At Spectris, our Purpose is to create a cleaner, healthier, and more productive world.  This informs everything we do, from strategy decisions around the Board table, to day-to-day operational decisions within our businesses.

At Spectris, everyone in the business is encouraged to live our Values: be true, own it, and aim high. It is this way that we foster a purpose-led, healthy, high-performance culture that drives the business forward and makes Spectris a great and engaging place to work.

Strategy for Sustainable Growth

We have spent the last four years focusing and simplifying our business. At our Capital Markets Day in October 2022 we presented a Spectris that is almost unrecognisable from 2019.  Over the last three years, we have fundamentally reshaped the Group. Most importantly, we have significantly improved the quality of our business, giving me the confidence that we are today more capable of compounding growth into the future and continuing to expand operating margins, as a leading sustainable business.

Our Strategy for Sustainable Growth will deliver this compounding growth and increased profitability, along with strong cash flow and strong, consistent returns on invested capital. This is reflected in our medium-term performance framework for the Group, to deliver: 

·      Organic sales growth of 6-7% through the cycle

·      Adjusted operating margin of 20%+

·      Cash flow conversion of 80-90%

·      Return on gross capital employed (ROGCE) in the mid-teens (%)

·      Net Zero and increased employee engagement

The achievement of these performance objectives will materially enhance the value of the Group and deliver significant benefits to all of Spectris' stakeholders. The Group's strategy and business model is aligned to delivering this framework, through five key elements:

1.  Great businesses

Asset-light businesses focused on premium, precision measurement solutions and industry-leading domain expertise, aligned with our Purpose.

2.  Structural growth markets

Aligned with attractive, sustainable, structural growth markets with high barriers to entry.

3.  Customer centricity

Solving our customers' challenges with leading, differentiated solutions, equipping them to make the world cleaner, healthier and more productive.

4.  Investing in growth

Disciplined capital allocation for the benefit of all stakeholders - investment in growth through R&D and M&A.

5.  Operational excellence

Leveraging the Spectris Business System business improvement projects and our high-performance culture.

Great businesses focused on premium, precision measurement solutions

At our Capital Markets Day in October, we announced that following the significant refocusing of the Group in recent years, we are now developing Spectris around two world class Divisions. They are two great businesses - high quality, high growth, and high margin, with exciting potential.

Spectris Scientific aligns Malvern Panalytical and Particle Measuring Systems within one Division to form a global leader in advanced measurement techniques for materials analysis. Both of these businesses provide leading scientific instruments and services in the same end markets across the same customer workflows. Over a third of Spectris Scientific's revenue is in pharma, with a strong presence in the fast growing semiconductor and advanced materials markets, as well as primary materials and advanced research.

Spectris Dynamics comprises the HBK business, a global leader in advanced virtual and physical testing, and high precision sensing solutions. Differentiated by world leading brands and the breadth and depth of its solutions, Spectris Dynamics serves the automotive, machine manufacturing, aerospace, electronics and advanced research sectors.

Together, Spectris Scientific and Dynamics comprise circa 87% of Group revenue.

The Group's remaining businesses, Servomex and Red Lion Controls, will continue to be run separately.

Aligned with attractive, sustainable, structural growth markets

We are more aligned than ever to markets with a strong sustainability focus and attractive growth trajectories, positioned in technology-driven end segments with strong fundamentals.

Overall, our activities are impacted by several important global growth trends. Around the world, ageing populations are increasing healthcare demand; the climate crisis is accelerating the transition to cleaner energy and mobility solutions; scarcity of resources is causing customers to optimise production and improve yield and a more connected, data-driven world is focused on productivity.

Demand for our products and services is being amplified by these trends, supporting structural end market growth rates of 5-6% across the Group. With advantaged market positions and differentiated products and services, we expect to outperform our core underlying markets and deliver through cycle growth of 6-7%. In 2022, LFL sales exceeded market growth in each of our major end markets with Life sciences/Pharmaceutical up 13%, Technology-led industrials up 8%, Automotive up 16%, Electronics and semiconductor up 15%, Metals, minerals, mining up 14% and Academic research up 8%.

Spectris Scientific is focused on the high growth end markets of life sciences / pharmaceutical, metals, minerals, mining, electronics and semiconductors, and academic research. We are well positioned in high value areas where precision measurement, domain expertise and analytics are valued by our customers throughout the workflow, where customers need the best measurement, and can't, and won't, compromise.   

·       Life Sciences is experiencing continued investment in both small molecule and biologics drug development, on-shoring of facilities and increasing regulatory compliance. 

·      Material Sciences is experiencing significant investments in batteries, additive manufacturing, responsible resources extraction, and a wide variety of materials linked to electrification.

·      Semiconductor demand continues to be high to meet the demands of new technologies, with advanced semiconductor manufacturing requiring higher accuracy metrology and  ultra-clean environments. 

·       Academia enjoys government and industry-supported investments aligned with critical technologies underpinning fundamental research in many of the above areas, which will continue to compound our growth into the future. 

Spectris Dynamics is focused on four premium product lines (Virtual Test, Software, Data Acquisition and high quality Sensors) with high growth prospects and where we have leading positions. The products are complementary for customers and combine to offer the broadest test solutions in the market. Spectris Dynamics supports customers in the growth markets of automotive (including electric vehicles), aerospace and defence, industrial infrastructure and personal audio. These end markets require greater test and measurement functionality and fidelity to accelerate the time to market for new products and manage increasingly sophisticated measurements for automated manufacturing and in-process applications.

·     Our virtual test solutions enable customers to accelerate innovation, increase quality, reduce costs and deliver sustainability gains through deploying advanced simulators and simulation software.

·     We provide industry-leading software solutions to improve the integrity of designs and reduce the costs of innovation as well as in-test and end-of-line performance measurement. 

·     Our high performance data acquisition systems are the industry benchmark. They allow customers not only to capture and manage vast amounts of test and performance data, but crucially translate that data into critical insights by applying advanced analytics.

·     Increasingly sophisticated and connected machines require greater accuracy and intelligence at the point of measurement. Our sensors are being used more and more to create new measuring solutions, provide the highest accuracy, greatest control and improved productivity. 

Over the past three years, we have concentrated our activities, organically and through acquisitions, on the most attractive end markets, supported by structural sustainable growth trends, where we have differentiated positions and a strong opportunity to gain market share.

An example is the development of our Virtual Test business following the acquisition of VI-grade in 2018. Four years later, we are now a significant player in this fast-growing and exciting market. Through the consequent acquisition of RightHook, IMTEC Engineering and Concurrent Real-Time, combined with strong organic growth, the Virtual Test business more than doubled its revenues in 2022, and we expect it to more than double in size again through the next cycle. 

Customer centricity: leading solutions to make the world cleaner, healthier and more productive

Customer centricity is core to our business model.  Over the last four years we have shifted from largely transactional selling of hardware to being focused on solutions, adding value throughout our customers workflows and processes.   

We serve over 67,000 customers, supported by over 2,200 sales, application and service engineers  with our high touch approach. 80% of our sales are direct and our domain expertise is highly valued. The Group has over 60% repeat customers annually and a class leading net promoter score of over 50. Recurring and service revenues now account for approximately a third of Group sales.

At Spectris Scientific, we have been working with the Geological Survey of Finland to accelerate the green transition to a carbon-neutral world. Our MintecRobo, a fully automated and smart analytical laboratory solution, maximises the speed and accuracy of sample preparation which, in turn, minimises carbon emissions and supporting the drive for sustainable mining operations. We also provided Excelitas, the technology leader in delivering photonic innovations, with a solution to tackle Airborne Molecular Contamination. Our AirSentry unit has allowed the company to monitor its cleanroom for contamination, ensuring the quality of its manufacturing operations.  

At Spectris Dynamics, we were proud to design and install a measurement system for the Hornsea 2 project, the world's largest operational windfarm, owned by Danish energy company, Ørsted. Our technical expertise helped them to understand the geotechnical behaviour of the wind turbines and ensure safe and profitable generation of energy for the future. We were also pleased to help HORIBA MIRA, the leading automotive engineering services provider, in meeting their sustainability objectives. Our DiM250 dynamic simulator reduces programme costs and carbon footprint in developing new vehicles, allowing the company to strengthen its position in a fiercely competitive market.  

Investing in growth through R&D

Our Strategy is built on delivering sustainable, organic growth. Our strong domain knowledge andhigh level of customer intimacy drives customer-back innovation, which in turn informs our research and product development strategy, such that we intercept our customer needs for the future. This allows us to move faster and deliver greater value.

Much of our strong sales growth over the past two years has been supported by new and enhanced products.

At Spectris Scientific, we continue to see growing demand for our Zetasizer, in response to life sciences development and manufacturing investment, and for the Mastersizer 3000, driven by demand for batteries and green energy solutions. We also continue to see strong demand for our Lasair Pro line of products that are primarily used in cleanrooms for aseptic pharmaceuticals, aerospace, flat panel display manufacturing, semiconductor, and other industries.

In 2022 we also launched some major new innovations for the semiconductor market, such as the NanoAir 10, a revolutionary new aerosol nanoparticle counter with unsurpassed 10nm detection sensitivity and robustness, and the Ultra DI® 20 Plus, enabling ultrapure water contamination monitoring at an industry-leading sensitivity of 20 nm.  

In Spectris Dynamics, a major new product launch was our new FUSION and ADVANTAGE Data Acquisition offering (DAQ). This hardware and software combination bridges the gap between simulation, physical testing and data analysis. It is Spectris Dynamics' largest ever development project, refreshing our existing portfolio of data acquisition and software propositions, to address a wide range of industry applications in a single platform. Additionally, we continue to expand our simulation offerings, electrical power train test solutions and range of smart sensors.

Innovation underpins our organic growth ambitions over the medium term while also supporting enhanced margins. We have made significant investment in R&D by way of people, capabilities, and facilities. We were investing slightly more than 6% of sales in R&D three years ago. In 2022, investment in our R&D programmes increased materially to 7.8% of sales or £103.8 million (2021: £83.8 million or 7.2% of sales). R&D investment increased by £20.3 million (26%) on a LFL basis. Going forward, we expect R&D spend to be at around 8% of sales and all our R&D investments are expected to return an IRR of at least 15%.

In 2022, we introduced our vitality index for the first time. This measures current year revenue from products released over the previous five years as a percentage of total revenue in the current period. At the end of 2021, the index was 23% and increased to 25% by the end of 2022. We expect this to increase further over the next five years to over a third of total sales.  

We work on ensuring that any investment will enhance our organic growth potential over the medium term, support and enhance margins and generate attractive cash flows.

Investing in growth through M&A

We also have the opportunity to compound growth further through M&A.

We maintain an active pipeline of potential acquisition targets from early-stage technologies to bolt-on acquisitions of varying sizes, through to larger-scale opportunities. We have built up a solid team to execute M&A, that are very aligned to the priorities of both our Divisions. All acquisitions must have a clear strategic and financial rationale.

In 2022, we made the following acquisitions:

·     For Spectris Scientific, the acquisition of Creoptix AG ('Creoptix') in January strengthened our affinity offering for early-stage drug development, important to our pharma customers and our workflow strategy.

·     For Spectris Dynamics, the acquisition of Dytran Instruments, Inc. ('Dytran') completed in September, strengthening our piezo-electric sensor offering and expanding sales into North America.

·     Spectris Dynamics acquired a minority stake in CM Labs Inc. ('CM Labs') in April to explore new operator training segments alongside VI-grade's core products within the Virtual Test business.

·     Spectris Dynamics also signed a joint operation agreement in March with DEWESoft, a leading manufacturer of data acquisition ('DAQ') hardware, to help accelerate the development of our new Fusion DAQ platform and to create a new industry, open standard for DAQ products.

·     In March the Group also acquired MB connect line GmbH ('MB connect') which is being integrated into Red Lion Controls to strengthen its secure data offering.

The Group will continue to invest in M&A as an important component of our strategy to compound growth, enabling us to further enhance our advantaged positions in key end markets, strengthening and expanding our portfolio to add further value for our customers.

The Group will continue to review divestment opportunities where appropriate and where such activity is aligned to the Group's strategy. In April, we announced the divestment of Omega Engineering to Arcline Investment Management for $525 million (£410 million) at a valuation of approximately 20.4x Omega's 2021 adjusted EBITDA.

Having completed almost two thirds of the £300 million share buyback programme, our balance sheet position at 31 December has net cash of £228.0 million. This strong financial position provides the Group with significant headroom to pursue acquisitions.

Operational excellence: Spectris Business System driving productivity and competitiveness

We continue to drive operational excellence to improve productivity and strengthen our competitiveness.  Over the last three years, we have taken the Spectris Business System from concept to an effective vehicle to deliver ongoing continuous improvement, both at top and bottom line. SBS forms the basis for our continuous improvement mindset where everyone is empowered to improve the business every day. Over the past two years, over 600 of our key leaders have received SBS training and now apply the tools and processes to their daily ways of working.

The main objective of SBS is to remove waste, drive efficiency and strengthen competitiveness, as we profitably grow the business and enhance margins. In 2022, the Group reduced overheads by 170bps as a percentage of sales. Consequently, we are making good progress towards our immediate milestone operating margin target of 18%, and our new medium-term target of over 20%.

Last year, much of the SBS activity concentrated on reducing leadtimes to support customer order fulfilment in the face of supply constraints. For a number of products this resulted in us being able to offer much greater availability than our competitors. In addition to SBS, we are also making good progress towards implementing a number of business transformation projects, such as the new SAP S/4HANA installation in both Divisions. This will standardise, simplify and automate processes to enhance our operations, enabling our businesses to become both more efficient and also more scalable for growth. It will drive long-term structural improvements to our operating model, supporting our growth and margin expansion ambitions alongside driving efficiency and working capital improvements. The benefits are expected to start from 2024.

Leading sustainable business

Sustainability is at the heart of our Purpose to deliver Value Beyond Measure for all our stakeholders. We have a clear ambition to create a positive and lasting impact, with the intention of setting the benchmark among our peers for both the sustainability of our operations and for our opportunity to harness the power of precision measurement to make the world cleaner, healthier and more productive.

We are working on building a sustainable future:

·     For our planet. We have committed to becoming Net Zero across our own operations by 2030 and across our value chain by 2040, with our target validated by the Science Based Targets initiative (SBTi) against a 1.5 degree warming scenario. We are committed to investing £3 million per annum to support our Net Zero journey and we are making excellent progress with a 21.9% year-on-year reduction in LFL scope 1 and 2 (market-based) emissions and a 21% year-on-year improvement in energy efficiency in 2022. PMS within Spectris Scientific, achieved their target of all operations being powered by renewable energy in 2022.

·     For our people. We aim to be a great place to work for our current employees, and the next generation. We have a highly specialised workforce - in science, in engineering, in operations - and we need the very best talent to deliver on our ambitions. We are prioritising employee engagement, with a sustained emphasis on mental health, and for future talent are doing more than ever to build new and innovative pipelines, including partnerships with professional bodies including the Society of Hispanic Professional Engineers and the Society of Women Engineers to ensure we are building relationships with diverse pools of talent.

·     In 2022, we have been monitoring the cost of living challenges that are impacting some of our employees and have been addressing salaries where appropriate. Our colleagues in China have also been subject to continued COVID-19 lockdowns and we have been working closely with them to ensure their continued safety and mental wellbeing.

·     For our value chain. We are ensuring that both our customers and suppliers recognise us as long-term partners aligned with their values. We have built on our Code of Business Ethics with our active participation in the UN Global Compact, and the expanding use of EcoVadis to assess and assure the ESG risk in our supply chain.

·     For our society. We are proud to be engineering brighter futures for children across the world through the Spectris Foundation. During 2022, the Foundation has made grants of over £485,358, reaching over 21,000 students in over 15 countries to support wider access to a quality STEM education and £113,500 to employee nominated causes.

While we have no employees in Ukraine, we made a donation of £100,000 to the Red Cross as part of the Disasters Emergency Committee appeal and also matched employee donations of over £11,000 to help provide humanitarian aid.

Summary and outlook

Following the work of recent years to simplify and strengthen the Group, Spectris today is a more focused and improved business. This was evident in our strong performance in 2022 and the great execution by our teams around the Group.

We enter 2023 with good momentum, while remaining vigilant and alert to signs of changes in demand. The strength and quality of our order book, which is 36% higher than a year ago, gives us confidence into the first half of the year, as we continue to drive operational excellence to improve productivity and efficiency. Our expectation for 2023 is to deliver organic growth consistent with our medium-term objectives of 6-7%, alongside strong progress on expanding margins and driving forward with our ambitions to be a leading sustainable business.

Andrew Heath

Chief Executive

Financial review 

Financial performance 

Sales increased by 14% or £164.4 million to £1,327.4 million (2021: £1,163.0 million) on a continuing basis. The Omega operating segment, disposed during the year, is treated as a discontinued operation in accordance with IFRS 5 and is reclassified in the income statement for both 2022 and 2021. LFL sales increased by £149.7 million (14%), with the impact of disposals, net of acquisitions, reducing sales by £38.3 million (-3%) and foreign exchange movements increasing sales by £53.0 million (5%). 

For the year ended 31 December 2022

The statutory operating profit was £172.6 million, an increase of £32.7 million (2021: £139.9 million). Statutory operating margin of 13% was 100bps higher than 2021 (12%). The improved profit results from a £75.3 million volume and price driven gross profit increase less a £42.6 million increase in SG&A expenses associated with the additional volume.

Adjusted operating profit increased by 17% or £32.8 million to £222.4 million (2021: £189.6 million). LFL adjusted operating profit increased by £25.6 million (14%), with the impact of disposals, net of acquisitions, reducing adjusted operating profit by £5.3 million (3%), and foreign exchange movements increasing adjusted operating profit by £12.5 million (7%). 

In line with expectations, no restructuring costs were incurred in 2022 (2021: £10.2 million).

Net transaction-related costs and fair value adjustments were £8.3 million (2021: £19.0 million) relating to the three acquisitions completed during the year, plus the costs associated with potential acquisitions which were not completed in the year.   

The Group is progressing with its programme of process redesign and improvement enabled by implementing the latest SAP cloud-based systems across the Divisions, incurring costs of £21.7 million in the year (2021: £7.0 million). Consistent with the prior year, these material SaaS projects are excluded from adjusted operating profit.

The Group incurred £19.6 million of ongoing amortisation of acquisition-related intangible assets in the year (2021: £13.3 million).  

Adjusted operating margins increased by 50bps, while LFL adjusted operating margins remained flat compared to 2021 with operating cost improvements offsetting a decline in gross margins and increased R&D investment.  

LFL adjusted gross margins reduced in the year by 160bps to 56.9% as price increases implemented during the year were not sufficient to offset material input cost inflation experienced by the Group, particularly with respect to electronic components in the first half of the year. Gross margins improved during the course of the second half and we expect further progress during 2023.

LFL adjusted overheads increased by 9.1% in the year, but were 170bps lower as a % of sales, with headcount remaining broadly flat through the second half of the year and limited to supporting growth in the full year. Investment in R&D, that is reported in net overheads, amounted to £103.8 million or 7.8% of sales (2021: £83.8 million or 7.2% of sales). LFL R&D increased by £20.3 million (26.5%). 

Statutory profit for the year from continuing and discontinued operations after tax of £401.5 million (2021: £346.9 million) includes profit for the year from discontinued operations of £286.7 million comprising £10.2 million (2021: £ 11.3 million) of profit after tax from the Omega reportable segment and £276.5 million profit on disposals for that segment.

2021 included £226.5 million in relation to the disposal of Brüel & Kjær Vibro, Millbrook, NDC Technologies and other disposals, reported as profit on disposal within continuing statutory profit before tax. The Group adjusted the fair value of the debt instrument investment with a charge of £4.1 million reflecting the macro-led cost of capital increases.  The net finance charge of £17.3 million (2021: £7.4 million credit) includes £14.6 million of unrealised losses on intercompany loan balances (2021: £5.1 million gain). This is a consequence of the significant volatility of Sterling against the US Dollar and Euro, particularly in the second half of the year. The effective tax rate on adjusted profit before tax was 21.7% (2021: 21.5%).  

Major Acquisitions 

We will maintain a disciplined approach to M&A and target a sustainable balance sheet with leverage between 1-2x EBITDA through the cycle. In certain circumstances, we would be prepared to borrow more than 2x EBITDA for specific M&A but only if there was a clear and certain path to de-lever back below this level within a short period of time.

On 7 January 2022, the Group acquired 100% of the share capital of Creoptix for net consideration of £37.0 million, made up of £37.3 million gross consideration (consisting of £35.1 million of cash paid and £2.2 million of contingent consideration) less £0.3 million of cash acquired. Creoptix has been integrated into the Spectris Scientific Division. 

On 31 March 2022, the Group acquired 100% of the share capital of MB connect for net consideration of £8.7 million, made up of £9.0 million gross consideration in cash, less £0.3 million net cash acquired. There was no contingent consideration recognised on this acquisition. MB connect has been integrated into the Red Lion Controls business. 

On 1 September 2022, the Group acquired 100% of the share capital of Dytran for net consideration of £69.6 million, made up of £70.5 million gross consideration in cash less £0.9 million net cash acquired. There was no contingent consideration recognised on this acquisition. Dytran is being integrated into the Spectris Dynamics Division. 

Disposals 

On 1 July 2022, the Group disposed of its Omega business. The consideration received was $529 million (£417.9 million equivalent). This generated a pre-tax profit on disposal of £293.9 million, which has been included in discontinued operations. The Group has not disposed of any other businesses in the year.  

Consistent with IFRS 5, the Omega business is classified as a discontinued operation. The financial statements for the current and comparative periods in this report are amended accordingly. The statutory profit after tax from the discontinued operations (before profit on disposal of business) was £10.2 million for the six months of ownership (2021: £11.3 million for the twelve months of ownership). Volume and price driven sales increases were strong across all regions, especially in North America and China, reflecting strong customer demand in their core semiconductor market. Statutory profit benefited from this growth but was partly offset by higher material and labour costs.

Further details of this disposal are provided in Note 8 of the accounts below. 

Cash flow 

Adjusted cash flow decreased by £14.3 million to £163.8 million during the year, resulting in an adjusted cash flow conversion rate of 74% (2021: 94%).  

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. 

The Group experienced an increase in adjusted cash flow from continuing operations generated from adjusted operating profit, and the sale of property. This was offset by an increase in inventories due to the high order book and safety stocks required to ensure critical component supply into 2023 with increased trade receivables offset by trade payables in line with volume growth. The Group purchased a new manufacturing facility for Particle Measuring Systems ('PMS') in Colorado, US increasing the year-on-year capital expenditure by £15.3 million and contributing to the net decline in adjusted cash flow from continuing operations.

Capital expenditure during the year of £44.1 million (2021: £33.5 million) equated to 3.3% of revenue (2021: 2.9%) and was 111% of adjusted depreciation and software amortisation (2021: 96%). 

During the year ended 31 December 2022, 6,439,493 ordinary shares were repurchased and cancelled by the Group as part of the £300 million share buyback programme announced on 19 April 2022, resulting in a cash outflow of £191.0 million, including transaction fees of £1.2 million.

During the year ended 31 December 2021, 5,596,739 ordinary shares were repurchased and cancelled by the Group as part of the £200 million share buyback programme announced on 25 February 2021, resulting in a cash outflow of £201.3 million, including transaction fees of £1.3 million.

The Group continued to support the excellent work performed by the Spectris Foundation by supporting the ongoing running costs through additional donations of £0.1 million in the year (2021: £15.0 million initial donation).

Financing and treasury  

The Group finances its operations from retained earnings and, where appropriate, from third-party borrowings. Total borrowings as at 31 December 2022 were £0.1 million (2021: nil). 

At 31 December 2022, the Group had a cash and cash equivalents balance of £228.1 million. The Group also had various uncommitted facilities and bank overdraft facilities available. Gross debt was £0.1 million, resulting in a net cash position of £228.0 million, an increase of £60.2 million from £167.8 million at 31 December 2021. 

As at 31 December 2022, the Group had £414.9 million of committed facilities, consisting entirely of a $500 million multi-currency revolving credit facility ('RCF') maturing in July 2025. The RCF was undrawn at 31 December 2022 (2021: undrawn).  

At 31 December 2022, there was net finance income for covenant purposes of £0.1 million, resulting in the interest cover ratio being n/a (31 December 2021: 67 times). The minimum covenant interest cover requirement is 3.75 times (covenant defined earnings before interest, tax and amortisation divided by net finance charges). Leverage (covenant defined earnings before interest, tax, depreciation, and amortisation divided by net cash) was less than zero (31 December 2021: less than zero), due to the Group's net cash position, against a maximum permitted leverage of 3.5 times.  

The Group has prepared and reviewed cash flow forecasts for the period to 31 December 2027, which reflect forecasted changes in revenue across its business and performed a reverse stress test of the forecasts to determine the extent of downturn which would result in insufficient liquidity or a breach of banking covenants. Revenue would have to reduce by 31% over the period under review for the Group to run out of liquidity headroom. The reverse stress test does not take into account further mitigating actions which the Group would implement in the event of a severe and extended revenue decline, such as cancelling the dividend or reducing capital expenditure. 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 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.  

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 cash flows where there is reasonable certainty of an exposure. At 31 December 2022, approximately 65% of the estimated transactional exposures for 2023 of £144.6 million were hedged using forward exchange contracts, mainly against the Euro, US Dollar, Chinese Yuan Renminbi and Japanese Yen. 

The largest translational exposures during the year 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 adjusted operating profit being £12.5 million higher (2021: £10.2 million lower) than it would have been if calculated using prior year exchange rates.  

Transactional foreign exchange gains of £0.3 million (2021: £0.3 million losses) were included in administrative expenses, whilst sales include a loss of £4.3 million (2021: £2.4 million gain) arising on forward exchange contracts taken out to hedge transactional exposures in respect of sales. 

Pensions

The net pension liability at 31 December 2022 was £8.9 million, a reduction of £13.4 million versus the £22.3 million liability at 31 December 2021, primarily as a result in movements in market discount rates.

Sustainability  

As Group Finance Director I am committed to the success of the Group's journey to net zero and the adherence to TCFD. I am pleased to say that the strength of our balance sheet will support the required future investments to achieve our net zero commitment. In 2022 we have issued guidance to our businesses to ensure all appropriate accounting judgements are made as part of the preparation of the Group's financial statements. These are specified where appropriate in the notes to the accounts. 

Other Non-reportable Operating Segments 

The financial and operating performance of the Spectris Scientific and Spectris Dynamics reportable segments are detailed on the following pages in accordance with IFRS 8. The Red Lion Controls and Servomex businesses are reported within the Other non-reportable operating segments. 

On a statutory basis, sales for the segment of £177.4 million decreased by 14% in the year (2021: £206.3 million) due to 2021 disposals of the ex-ISD businesses, partially offset by the contribution from MB connect that was acquired in the first half of 2022. LFL sales increased by 14% resulting from increased volume and strong price discipline.

Adjusted operating profit for the segment was £27.2 million (2021: £26.2 million), an increase of 4% (16% LFL), with an adjusted operating margin of 15.3%, an increase of 260bps on 2021 (20bps LFL). This benefitted from the extra sales drop through, the pricing strategy, a focus on the product portfolio, improved operational performance and strong cost control.

Statutory operating profit rose 36% to £26.2 million (2021: £19.2 million), primarily due to restructuring costs charged in 2021 and lower transaction-related costs, with the statutory operating margin improving 550bps to 14.8%.

Red Lion Controls contributed to the sales increase with a combination of volume growth and revised pricing. The majority of the volume growth was in North America, driven by strong performance of the Graphite operator panel range in the oil & gas market and the new FlexEdge platform. MB connect has positively contributed to the operating margin in 2022. 

Servomex had a record year for orders received in 2022, mainly driven by the growth in its leading gas analysis products within the industrial gas and semiconductor markets. The growing order book is up circa 50% year-on-year. The business also contributed to the sales increase through both volume growth and pricing and maintained its level of profitability.