TIDMSXS
RNS Number : 5326D
Spectris PLC
20 February 2020
Spectris plc
2019 full year results
20 February 2020 - Spectris plc (SXS: LSE), the expert in
providing insight through precision measurement, announces full
year results for the twelve months ended 31 December 2019 .
Executing our Strategy for Profitable Growth
-- Sales of GBP1,632.0 million, reflecting a 0.4% LFL sales
increase
-- Adjusted operating profit increased 3.7%, on a LFL basis, to
GBP258.1 million
-- Adjusted operating margin of 15.8%, a 50-basis point
expansion on a LFL basis
-- Improved adjusted cash flow conversion of 91%; net cash of
GBP33.5 million at year end
-- Adjusted earnings per share up 1.9%, dividend per share
increase of 6.7%
-- Profit improvement programme delivered annualised benefits of
GBP25.5 million, restructuring costs totalled GBP52.2 million;
activities to continue into 2020
-- Further restructuring as part of the strategic review,
leading to a non-cash charge of GBP35.1 million relating to an
impairment of goodwill and GBP47.1 million relating to other
intangibles, mostly recorded at the first half results
-- Divestment of BTG Group completed and sale of EMS Brüel &
Kjær joint venture agreed
-- Proposed GBP175 million special dividend and share
consolidation
Like-for-like
2019 2018 Change change1
--------------------------------- ------- ------- -------- -------------
Adjusted1
Sales (GBPm) 1,632.0 1,604.2 1.7% 0.4%
Operating profit (GBPm) 258.1 248.3 3.9% 3.7%
Operating margin (%) 15.8% 15.5% 30bps 50bps
Profit before tax (GBPm) 247.4 241.4 2.5%
Earnings per share (pence) 168.0p 164.9p 1.9%
Adjusted cash flow conversion
(%) 91% 59% 32pp
Return on gross capital employed
(%) 13.5% 13.7% (20bps)
Statutory
Sales (GBPm) 1,632.0 1,604.2 1.7%
Operating profit (GBPm) 84.3 176.4 (52.2%)
Operating margin (%) 5.2% 11.0% (580bps)
Profit before tax2 (GBPm) 259.3 218.0 18.9%
Basic earnings per share (pence) 202.2p 157.6p 28.3%
Dividend per share for the
year (pence) 65.1p 61.0p 6.7%
--------------------------------- ------- ------- -------- -------------
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 Note 2 to the
Financial Statements.
2. The main adjusting items to statutory profit before tax in
2019 and 2018 were profits on disposal of businesses of GBP204.7
million and GBP56.3 million, respectively.
Commenting on the results, Andrew Heath, Chief Executive, said :
"2019 saw demonstrable progress in executing our Strategy for
Profitable Growth. The successful delivery of our profit
improvement programme, combined with an increased emphasis on
deploying the Spectris Business System, enabled us to deliver
increased profit and operating margin expansion, against a
weakening macroeconomic backdrop. Cashflow improved significantly
in the year and we successfully completed the sale of BTG and
announced the sale of the EMS Brüel & Kjær joint venture.
Additionally, we have announced a special dividend of GBP175
million, in line with our capital allocation policy. 2019 has been
a year of delivery upon which to build in 2020. We are intent on
further improving our operating margin, to at least previous highs,
and enhancing capital returns, as we continue to work on asset
optimisation and managing the portfolio.
Absent a material impact from coronavirus, for 2020, we
anticipate that markets will remain challenging in the first half
with a recovery only currently forecasted to emerge later in the
year. We expect limited top-line growth and will, therefore,
continue to concentrate on self-help initiatives to drive further
cost-efficiency and ensure a more resilient and profitable
business.
The combination of focusing on our customers, driving operating
leverage and the repositioning and simplification of our portfolio,
alongside a refreshed capital allocation framework, form the basis
for delivering a significant and sustainable increase in
shareholder value."
Contacts:
Spectris plc
Siobhán Andrews
Head of Corporate Affairs
+44 1784 485325
FTI Consulting
Richard Mountain/Susanne Yule
+44 203 727 1340
A meeting with analysts will be held at 8:30am GMT today at the
offices of FTI Consulting. 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 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 9,000 people located in more than 30 countries. For
more information, visit www.spectris.com.
Chief Executive's review
Financial performance
In 2019, sales increased by 1.7% to GBP1,632.0 million (2018:
GBP1,604.2 million). On an organic, constant currency
(like-for-like, 'LFL') basis, sales increased 0.4%. The sales
contribution from acquisitions were broadly offset by disposals and
there was a 1.5% positive impact from foreign currency exchange
movements.
Adjusted operating profit was GBP258.1 million (2018: GBP248.3
million) with an adjusted operating margin of 15.8% (2018: 15.5%).
On a LFL basis, operating margin improved by 50 basis points
('bps'), in part reflecting the successful impact of the profit
improvement programme, which helped drive a 50bps LFL decrease in
overheads. The Group's adjusted cash flow conversion rate improved
to 91% (2018: 59%). The Group recorded a return on gross capital
employed of 13.5% (2018: 13.7%) with the increase in adjusted
operating profit offset by a higher capital base as a result of
acquisitions completed in 2018.
By region, there was good growth in Asia, although LFL sales
were slightly lower in China. Both North America and Europe posted
lower sales on a LFL basis. In our end markets, there was strong
LFL sales growth to academic research and energy and utility
customers as well as growth in aerospace, semiconductor and
pharmaceutical, with declines in the electronics, telecoms, metals
and mining industries. Automotive was also lower, partly reflecting
a tough prior year comparator.
Malvern Panalytical delivered a 1.4% LFL sales increase, with
strong growth in Asia and to its academic research and advanced
materials customers, partly offset by lower LFL sales into
pharmaceutical. LFL adjusted operating profit increased 5%, with
margin expansion of 60bps, held back by the weaker performance at
Concept Life Sciences.
Malvern Panalytical has been focusing on identifying and
executing further growth opportunities across its three key end
markets, as well as launching new products which significantly
improve the quality and speed of the characterisation of materials.
It also continues to actively foster partnerships and
collaborations with academia to further expand the value it
provides to customers via data analytics, machine learning and
artificial intelligence. Combining best-in-class sensor products
with increased domain knowledge and newly developed AI capabilities
will aid Malvern Panalytical in expanding its capabilities into
more predictive and prescriptive value-adding solutions, a key
focus area for 2020.
At HBK , LFL sales declined 1.2% in the year reflecting more
difficult end markets, although there was good growth in North
America and to the aerospace industry, with a stronger overall
second half performance. Against this more challenging backdrop,
HBK delivered a solid financial performance with LFL adjusted
operating profit and margin increasing by 8% and 130bps,
respectively.
Considerable progress has been made on the merger with the
senior leadership team now established and a good part of the
restructuring completed. Merger activities will continue into 2020,
bringing additional benefits through further rationalisation and
focus, aligned to the execution of the strategy to accelerate
growth and further improve operating margins. Its simulation
offering, centred on VI-grade, and its new eDrive product will be
target growth areas into 2020 and beyond.
At Omega , LFL sales were 9.1% lower, impacted by USA-China
tariffs and slowing US industrial production, with sales weaker in
both these regions. The outsourcing of a significant product line
and the launch of the new digital platform also impacted sales, as
customers transitioned to the new website. As a result of the
decline in sales and the increased overheads incurred in developing
the website, LFL adjusted operating profit and margin both
contracted, by 39% and 600bps, respectively.
The launch of the new digital platform was a significant step in
providing customers with an industry-leading e-commerce capability.
While the customer transition was slower than anticipated, key
operating metrics have improved notably since the launch. Omega
also accelerated its product refresh programme during the year,
introducing 133 new product lines, with more planned for 2020.
These investments consolidate Omega's position as a leading,
specialist, digital provider in the process engineering
distribution space. Continuing to drive volume though the website
to deliver sales growth will be a key objective for 2020 and
beyond.
The Industrial Solutions division delivered 3.2% higher LFL
sales, with particularly strong growth in Asia. The majority of the
operating companies posted increased sales, against a tough
year-on-year comparator. Since July, these businesses have been
operating together under a new leadership team with a focus on
improving operational and financial performance. As a result, LFL
adjusted operating profit has increased 13% and LFL adjusted
operating margin has expanded 150bps.
The sale of BTG Group ('BTG') was successfully completed during
the year, which resulted in a net cash inflow of GBP262.7 million
and a profit on disposal of GBP206.1 million. In early 2020, we
announced the sale of our interest in the EMS Brüel & Kjær
('EMS B&K') joint venture. During 2020, we will continue to
execute on our portfolio management strategy, selectively investing
in those operating companies with platform potential and divesting
where Spectris is not the best long-term owner.
Capital allocation
As part of the strategic review, the capital allocation
framework was refreshed in 2019. Our strategy will result in the
Group being a highly cash-generative business. We will invest in
R&D and capital expenditure to maintain and grow the business,
supplemented by acquisitions, while maintaining an efficient
balance sheet, with target leverage between 1-2x EBITDA. In 2019,
the Group's adjusted cash flow conversion rate was 91%, an
improvement from the 59% recorded in 2018. We invested GBP100.9
million (6.2% of sales) in R&D (2018: GBP103.4 million, 6.4% of
sales). Capex totalled GBP81.6 million (2018: GBP94.1 million)
following the peak investment in Millbrook in the prior year. With
the net cash inflow from the divestment of BTG, the Group ended the
year with net cash of GBP33.5 million (2018: net debt GBP297.1
million).
The Board is proposing to pay a final dividend of 43.2 pence per
share which, combined with the interim dividend of 21.9 pence,
gives a total of 65.1 pence per share for the year, an increase of
6.7%. This is consistent with our policy of making progressive
dividend payments based upon affordability and sustainability and
represents the 30th year in succession of dividend growth. The
dividend will be paid on 22 June 2020 to shareholders on the
register at the close of business on 22 May 2020. The ex-dividend
date is 26 May 2020.
In addition, Spectris is proposing to return GBP175 million to
shareholders via a special dividend, combined with a share
consolidation. A special dividend of 150 pence per existing
ordinary share is proposed, and in order to maintain the
comparability of the Group's share price and per-share metrics
before and after the special dividend, the Group plans to undertake
a supporting share consolidation, which will be subject to
shareholder approval. The payment and record dates for the special
dividend will be aligned with those for the full-year dividend. 1
Further information regarding the special dividend, share
consolidation and related resolutions will be set out in the
Company's Notice of Annual General Meeting, which will be published
in due course.
This will take the Group's leverage to 0.4x, still leaving
sufficient headroom for M&A, which remains a central part of
our strategy. We will remain disciplined on this front with a focus
on synergistic acquisitions to build out the platforms or create
new platforms, from within our Industrial Solutions division.
Delivering value beyond measure for all our stakeholders
In 2019, we defined, communicated and started implementing the
new Spectris strategy. Our strategic direction is clear, as is the
basis by which we will deliver value for all our shareholders. We
have reviewed the composition of the portfolio, established a path
to simplify and focus the Group, and determined where we will play,
how we will win and how we will configure. We are prioritising
investment in our platform and potential platform businesses, which
in turn are focused on high-growth markets where they offer
competitive advantage. By focusing on sales growth, improving
margins and producing enhanced cashflow and capital returns, we
have the opportunity to deliver significant value to our
shareholders.
This work has further clarified our purpose; the role that
Spectris currently plays, and where we want to progress in terms of
our proposition to customers. Precision is at the heart of what we
do.Our businesses provide global customers with specialist insight
through our high-tech instruments and test equipment, augmented by
the power of our software. We are well positioned in our markets
with compelling and differentiated offerings that our customers
value highly. We ensure our customers get the measurements and
insights they need to meet their challenges and this, in turn,
enables them to deliver significant benefits to their own
consumers.
We can see how this is being delivered in our key end markets,
where there is rapid change underway. In pharmaceutical, the
ever-increasing demand for better healthcare continues to drive the
development of sophisticated new drugs and generic versions. In
automotive, new hybrid, electric and autonomous technologies are
rapidly being developed, and safety, environmental and
sustainability concerns are driving lower emissions, yield
improvements and compliance. There is also a digital revolution in
the home as well as the workplace. Each advance in technology, or
tightening of regulations, or certifications sets new challenges
for measurement, data gathering, modelling, simulation and
interpretation. In addition, we help our customers become more
effective and more productive in their existing operations or in
meeting higher regulatory, certification or quality demands.
As such, the demand for data, analytics and insights continues
to grow. In turn, this is driving the need for more sensors and
instruments, with greater levels of sensitivity and accuracy, and
more integrated software and services, including predictive and
prognostic analytics. This is the space where Spectris is going to
build and grow. We are harnessing the power of precision
measurement to equip our customers to make the world cleaner,
healthier, and more productive. In this way, Spectris know-how is
also creating significant value for society at large.
Fulfilling these strategic and operational priorities relies on
having the right people with the relevant skills. We invest in
innovating our products to ensure we provide our customers with
specialist insight. Likewise, we invest in our people to ensure we
have the skills, experience and knowledge to deliver this value for
our customers. It also helps to ensure that our people thrive and
have challenging and rewarding careers, while working in an ethical
and safe company.
For our investors, being positioned in attractive end markets
means we are best placed to drive growth and profitability. Our
objective is to improve profitability through better operational
leverage and optimising our assets, supported by active portfolio
management. We are deploying a more rigorous approach to capital
allocation to increase returns. This, in turn, will deliver
enhanced value to our shareholders.
1 The Group has taken the decision that its Dividend
Reinvestment Plan will apply to the payment of the special
dividend, in accordance with the terms and conditions of the
Dividend Reinvestment Plan.
Profit improvement programme and Spectris Business System
We successfully executed on the profit improvement programme
through 2019. Implementation of the initiatives are now mostly
complete, with savings arising from improving the sales mix,
product profitability, restructuring, site rationalisation and
reducing the size of the centre. We have closed facilities at
Malvern Panalytical, HBK, NDCT and CLS, reduced headcount through
organisational restructuring and retired lower margin products and
activities at NDCT, HBK and Malvern Panalytical.
The gross recurring benefit exceeded our original targets,
totalling GBP25.5 million, with a further GBP10 million still to be
delivered in 2020. The one-off restructuring costs totalled GBP52.2
million which were higher than the anticipated GBP45 million, with
the increase reflecting further restructuring action which has been
taken against the backdrop of slowing sales growth. We also took
decisive action in restructuring CLS. The total cash cost was
GBP34.3 million. Against the current lower growth backdrop, further
activities under the profit improvement programme will continue in
2020 as we embed our platform strategy. We anticipate further costs
in the range of GBP20-25 million with incremental benefits of GBP10
million. This predominantly relates to additional costs that are
being incurred to support the ongoing merger activity at HBK.
We are also fostering a continuous improvement culture to ensure
we operate at a lower overall cost and expand margins, while
continuing to drive growth and deploy our chosen strategic
initiatives. The Spectris Business System ('SBS') is key to
delivering this. This is a set of time-tested and proven tools to
address growth and product profitability, as well as waste
reduction, with Lean principles at its centre.
During 2019, we almost doubled the number and level of
participation in Kaizen events across the Group. These events have
realised material benefits in our core value drivers relating to
safety, customer satisfaction, on-time delivery, working capital
and quality. The events also demonstrate the talent in our people
and their passion to continue to enhance customer experience and
improve business performance.
During 2020, we will further strengthen the deployment of the
SBS across the Group, accelerating the Lean implementation through
increased leadership training and building on the existing tool
set. The areas of focus will be on product profitability,
value-based selling and sales force effectiveness to help our
businesses deliver more profitable growth; R&D effectiveness to
reduce the support burden and ensure spend is aligned with our
strategic initiatives; and interrogating structural costs and ways
of working to reduce G&A. As such, these initiatives are
targeted at improving sales, gross margin, accelerating product and
service vitality and optimising overheads to improve operating
margins.
Our people deliver the strategy
To support the execution and delivery of the new strategy, a new
leadership structure was established during 2019. The Presidents of
the platforms and the Industrial Solutions Business Group Director
have joined the Group Executive Committee. Amongst other things,
this change provides greater clarity and transparency in managing
the performance of the Group. We have also introduced a set of core
value drivers to ensure a consistent approach and measurement of
success across all our operating companies.
We have highly talented people. As the Group focuses on strategy
execution, there has been increased engagement with our employees
to keep them informed of the new direction and change programme.
Embedded in our new purpose statement is an emphasis on also
delivering value for the people who work across Spectris; providing
a great place to work, where everyone has the opportunity to reach
their full potential and feel that they are truly contributing to
sustainable growth and progress within our wider society.
Our values underpin our behaviour. They represent what we
believe and guide our behaviours, so that we are principled in what
we do and our culture reflects what we want to see in Spectris:
ambition, accountability and integrity. Work has been underway to
refresh our values, in line with the new strategy. Our new values
and code of business ethics will be launched early in 2020.
Coronavirus
We are experiencing less activity in China in February than
would normally be expected, as a result of the ever-changing
situation regarding coronavirus (COVID-19). We will continue to
monitor the situation closely to assess the extent and duration of
the potential impact on Spectris and provide updates, as
necessary.
Summary and outlook
2019 saw demonstrable progress in executing our Strategy for
Profitable Growth. The successful delivery of our profit
improvement programme, combined with an increased emphasis on
deploying the Spectris Business System, enabled us to deliver
increased profit and operating margin expansion, against a
weakening macroeconomic backdrop. Cashflow improved significantly
in the year and we successfully completed the sale of BTG and
announced the sale of the EMS Brüel & Kjær joint venture.
Additionally, we have announced a special dividend of GBP175
million, in line with our capital allocation policy. 2019 has been
a year of delivery upon which to build in 2020. We are intent on
further improving our operating margin, to at least previous highs,
and enhancing capital returns, as we continue to work on asset
optimisation and managing the portfolio.
Absent a material impact from coronavirus, for 2020, we
anticipate that markets will remain challenging in the first half
with a recovery only currently forecasted to emerge later in the
year.We expect limited top-line growth and will, therefore,
continue to concentrate on self-help initiatives to drive further
cost-efficiency and ensure a more resilient and profitable
business.
The combination of focusing on our customers, driving operating
leverage and the repositioning and simplification of our portfolio,
alongside a refreshed capital allocation framework, form the basis
for delivering a significant and sustainable increase in
shareholder value.
Andrew Heath
Chief Executive
Financial review
Financial performance
Sales increased by 1.7% or GBP27.8 million to GBP1,632.0 million
(2018: GBP1,604.2 million). Favourable foreign exchange movements
contributed GBP23.6 million (1.5%) and LFL sales increased by
GBP6.8 million (0.4%). These were partly offset by acquisitions,
net of disposals, which reduced sales by GBP2.6 million (0.2%).
Adjusted operating profit increased by 3.9% or GBP9.8 million to
GBP258.1 million (2018: GBP248.3 million). Favourable foreign
exchange movements contributed GBP3.0 million (1.2%) and LFL
adjusted operating profit increased by GBP9.2 million (3.7%),
partly offset by the impact of acquisitions, net of GBP2.4 million
(1.0%) of disposals.
Adjusted operating margins improved by 30bps, with LFL adjusted
operating margins up 50bps compared to 2018, with the difference
being explained by the dilutive effects of acquisitions and foreign
exchange movements. The improvement in the LFL operating margin was
due to a 50bps decrease in LFL overhead costs as a percentage of
sales with LFL gross margin flat at 56.7% (2018: 56.7%).
The flat gross margin reflects favourable pricing and
procurement savings offset by cost inflation and mix impacts. LFL
overheads were down by 0.7% (2018: up 4.7%) with savings generated
from the profit improvement programme through headcount reductions
and other targeted savings that more than offset overhead cost
inflation. The operating margin improvement was driven by
Industrial Solutions, up 150bps, which benefited from both positive
volume and pricing as well as positive reorganisation impacts, and
HBK up 130bps, mainly due to favourable pricing and overhead
savings.
Malvern Panalytical's operating margin was up 60bps, which
benefited from positive pricing and procurement savings and the
benefits of restructuring. This was offset by production cost
inflation, and a higher sales volume related growth in overheads.
These improvements were partially offset by Omega down 600bps,
where positive price impacts were offset by lower volumes, together
with increased IT and depreciation costs as a result of the ongoing
e-commerce investment.
Investment in our R&D programmes amounted to GBP100.9
million or 6.2% of sales (including GBP7.3 million of capitalised
development costs) (2018: GBP103.4 million or 6.4% of sales,
including GBP4.7 million of capitalised cost).
2019 2018
GBPm GBPm
--------------------------------------------------- ------ ------
Adjusted operating profit 258.1 248.3
Restructuring costs (52.2) (15.6)
Net transaction-related costs and fair value
adjustments (6.1) (12.2)
Depreciation of acquisition-related fair value
adjustments to property, plant and equipment (1.0) (0.8)
Profit on disposal of property 5.2 -
Impairment of goodwill (35.1) -
Amortisation and impairment of acquisition-related
intangible assets (84.6) (43.3)
--------------------------------------------------- ------ ------
Statutory operating profit 84.3 176.4
--------------------------------------------------- ------ ------
Statutory operating profit was down GBP92.1 million to GBP84.3
million (2018: GBP176.4 million) as the improvement in adjusted
operating profit was offset by restructuring costs of GBP52.2
million (2018: GBP15.6 million); net transaction-related costs,
depreciation and fair value adjustments of GBP7.1 million (2018:
GBP13.0 million); impairment of goodwill of GBP35.1 million;
amortisation and impairment of acquisition-related intangible
assets of GBP84.6 million (2018: GBP43.3 million) and a profit on
disposal of property of GBP5.2 million. Statutory operating margins
of 5.2% were 580bps lower than the prior year.
Statutory net finance costs decreased by GBP10.0 million to
GBP3.5 million (2018: GBP13.5 million) principally due to foreign
exchange gains arising during the year on retranslation of
short-term inter-company loan balances compared to foreign exchange
losses in respect of the same items in the prior year. Adjusted net
finance costs were up GBP1.1 million at GBP6.8 million (2018:
GBP5.7 million) due to the inclusion of interest on leases
following the adoption of IFRS 16 of GBP2.9 million, partly offset
by the inclusion of a full year of income on the Group's receivable
from the EMS B&K joint venture (2018: seven months of income)
and lower interest charges.
Statutory profit before tax increased by GBP41.3 million to
GBP259.3 million in 2019 from GBP218.0 million in 2018. Statutory
profit before tax in 2019 and 2018 benefited from profits on
disposal of businesses of GBP204.7 million and GBP56.3 million,
respectively. In 2019, statutory profit before tax was also
impacted by the impairment by GBP21.3 million of the non-current
receivable from the EMS B&K joint venture. Adjusted profit
before tax increased by 2.5% to GBP247.4 million.
The effective tax rate on adjusted profit before tax was 21.4%
(2018: 19.7%), an increase of 170bps primarily due to changes in
tax laws affecting the Group's intra-group financing arrangements.
On a statutory basis, the tax rate of 9.7% (2018: 15.0%) was below
the weighted average expected tax rate of 18.6% (2018: 26.0%),
primarily resulting from the majority of the BTG disposal proceeds
being received in respect of the sale of shares in Group companies,
which qualified as tax-exempt disposals under the relevant local
tax law. In 2020, the Group expects its effective tax rate to be
broadly in line with the rate in 2019. 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.
Adjusted earnings per share increased by 1.9% to 168.0 pence
(2018: 164.9 pence), reflecting the net impact of the 2.5% increase
in adjusted profit before tax and the decrease in the weighted
average number of shares from 117.5 million in 2018 to 115.8
million in 2019, following the share buyback. This was partly
offset by the increase in the effective tax rate. Statutory
earnings per share increased to 202.2 pence from 157.6 pence.
Acquisitions and disposals
The Group completed one acquisition during the year with a total
cost of GBP3.8 million. A net GBP5.9 million was paid in respect of
prior year acquisitions, making the net cash outflow in the year
GBP9.7 million. Furthermore, an amount of GBP1.6 million was spent
on transaction-related costs, which makes the total
transaction-related cash outflow for the year GBP11.3 million.
On 2 December 2019, the Group completed the disposal of BTG for
gross consideration of GBP274.5 million which resulted in a net
cash inflow of GBP262.7 million. The profit on disposal was
GBP206.1 million. Sales of GBP118.9 million and adjusted operating
profit of GBP22.6 million relating to BTG were included in the
operating results for the 11-month period of ownership prior to its
disposal.
On 17 January 2020, as part of the plan to simplify the Group's
portfolio, an announcement was made that agreement had been reached
for the sale of our interest in the EMS B&K joint venture for
consideration of GBP17.9 million in cash and approximately GBP1.2
million in shares in Envirosuite Limited. The closing of the deal
is subject to approval by Envirosuite's shareholders at a meeting
to be held on 24 February 2020 and the conditional placement of
shares by Envirosuite required to fund the consideration for the
transaction, with completion expected to take place shortly
thereafter. As a result, the receivable from the joint venture has
been impaired by GBP21.3 million to the expected recoverable amount
and the remaining balance of GBP18.9 million has been included
within assets held for sale at 31 December 2019 (see note 9).
Restructuring costs
The Group has incurred costs of GBP52.2 million relating to
restructuring in 2019 (2018: GBP15.6 million).
In 2019, this relates wholly to one-off costs of the profit
improvement programme (2018: GBP10.8 million relating to Project
Uplift and GBP4.8 million relating to the profit improvement
programme). These restructuring costs include GBP27.5 million of
staff-related costs including redundancy and related costs, GBP11.6
million related to impairments of assets including inventory,
property, plant and equipment and intangible assets and GBP13.1
million of other costs.
Impairments
During the year, GBP35.1 million was recognised as an impairment
of goodwill and GBP47.1 million as an impairment of intangible
assets. The impairment of goodwill of GBP35.1 million and GBP32.4
million of the impairment of intangible assets were in respect to
Concept Life Sciences, as announced at the half year results. The
remaining GBP14.7 million impairment of intangible assets resulted
from restructuring activities undertaken during the year following
decisions made at the strategic review.
Cash flow
2019 2018
Adjusted cash flow GBPm GBPm
------------------------------------------------- ------ ------
Adjusted operating profit 258.1 248.3
Adjusted depreciation and software amortisation1 58.3 35.3
Working capital and other non-cash movements (0.6) (42.8)
Capital expenditure, net of grants (81.6) (94.1)
------------------------------------------------- ------ ------
Adjusted cash flow2 234.2 146.7
------------------------------------------------- ------ ------
Adjusted cash flow conversion 91% 59%
------------------------------------------------- ------ ------
1. Adjusted depreciation and software amortisation represents
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.
2. Adjusted cash flow excludes cash outflows of GBP20.5 million
associated with IFRS 16 (see note 2).
Adjusted cash flow improved by GBP87.5 million to GBP234.2
million during the year, resulting in an adjusted cash flow
conversion rate of 91% (2018: 59%). The improvement principally
resulted from the favourable working capital movement mainly
attributable to improved receivables collection, growth in
profitability, a favourable impact from IFRS 16, and lower capital
expenditure principally in Millbrook and Omega. This was partially
offset by an increase in inventory principally in the Industrial
Solutions division and a decrease in trade payables across the
Group. We expect capital expenditure to be at similar levels in
2020.
Average trade working capital (the monthly average of the sum of
inventory, trade receivables, trade payables and other current
trading net assets), expressed as a percentage of sales, increased
by 230bps to 13.7% (2018: 11.4%). Excluding acquisitions, disposals
and foreign exchange, the LFL average trade working capital
increased by 250bps to 13.9%, with increases across all platforms,
mainly at Malvern Panalytical and Omega which experienced a higher
level of trade receivables and inventory, respectively. The
year-end trade working capital to sales ratio decreased by 110bps
to 13.5% in 2019
(2018: 14.6%).
Capital expenditure (net of grants) on property, plant and
equipment and intangible assets during the year of GBP81.6 million
(2018: GBP94.1 million) equated to 5.0% of sales (2018: 5.9%) and
was 140% of adjusted depreciation and software amortisation (2018:
267%).
2019 2018
Other cash flows GBPm GBPm
------------------------------------------------ ------ -------
Tax paid (37.0) (37.7)
Net interest paid (6.3) (8.8)
Dividends paid (72.3) (68.2)
Acquisition of businesses, net of cash acquired (9.7) (196.4)
Transaction-related costs paid (1.6) (10.8)
Proceeds from disposal of businesses, net
of tax paid of GBP1.2 million (2018: GBP0.6
million) 260.1 43.8
Loan to joint venture (2.2) (0.9)
Lease payments (20.5) -
Adjusting proceeds from disposal of property 9.1 -
Restructuring costs paid (34.3) (8.6)
Share buyback - (100.5)
Exercise of share options 1. 0 0.7
Foreign exchange 10.1 (5.9)
------------------------------------------------ ------ -------
Total other cash flows 96.4 (393.3)
Adjusted cash flow 234.2 146.7
------------------------------------------------ ------ -------
Decrease/(increase) in net debt 330.6 (246.6)
------------------------------------------------ ------ -------
Financing and treasury
The Group finances its operations from both retained earnings
and third-party borrowings.
The year-end gross debt balance consists entirely of fixed rate
borrowings.
As at 31 December 2019, the Group had GBP786.0 million of
committed facilities denominated in different currencies,
consisting of an $800.0 million (GBP606.4 million) revolving credit
facility maturing in July 2024 with a one-year extension option,
subject to approval by the lenders, a seven-year EUR94.8 million
(GBP80.7 million) term loan maturing in October 2020, and a
seven-year EUR116.2 million (GBP98.9 million) term loan maturing in
September 2022. The revolving credit facility was undrawn at the
year end. In addition, at 31 December 2019, the Group had a cash
balance of GBP213.1 million and various uncommitted facilities and
bank overdraft facilities available.
At the year end, the Group's gross borrowings amounted to
GBP179.6 million, 100% of which were at fixed interest rates (2018:
51%). The ageing profile at the year end showed that 45% (2018: 6%)
of borrowings are due to mature within one year, nil (2018: 23%)
between one and two years, and 55% between two and five years
(2018: 71%).
Overall, net debt decreased by GBP330.6 million (2018: increase
of GBP246.6 million) from GBP297.1 million to a net cash position
of GBP33.5 million, largely as a result of the receipt of proceeds
from the sale of BTG. Net bank interest costs were covered by
adjusted operating profit 40 times (2018: 37 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
2019, approximately 62% of the estimated transactional exposures
for 2020 were hedged using forward exchange contracts, mainly
against Sterling, the Euro and the Danish Krone.
The largest translational exposures during the year were to the
US Dollar, Euro, Danish Krone, Chinese Yuan Renminbi and Swiss
Franc, although since the disposal of BTG the Group no longer has a
significant translational exposure to the Swiss Franc.
Translational exposures are not hedged. The table below shows the
average and closing key exchange rates compared to Sterling .
2019 2018 2019 2018
(average) (average) Change (closing) (closing) Change
------------------ ----------- ----------- ------- ----------- ----------- ------
US Dollar (USD) 1.28 1.34 (4%) 1.32 1.28 3%
Euro (EUR) 1.14 1.13 1% 1.17 1.12 4%
Chinese Yuan 8.82 8.83 - 9.18 8.80 4%
Renminbi (CNY)
Swiss Franc (CHF) 1.27 1.31 (3%) 1.28 1.26 2%
------------------ ----------- ----------- ------- ----------- ----------- ------
During the year, currency translation effects resulted in
operating profit being GBP3.0 million higher
(2018: GBP0.1 million lower) than it would have been if
calculated using prior year exchange rates. Transactional foreign
exchange losses of GBP3.5 million (2018: GBP2.1 million gain) were
included in administrative expenses, whilst sales include a loss of
GBP2.9 million (2018: GBP1.4 million loss) arising on forward
exchange contracts taken out to hedge transactional exposures in
respect of sales.
Brexit
The Group operates in a range of end-user markets that may be
affected by Brexit developments in the future. Mitigating actions
have been put in place through an enhanced analysis including
stress testing for Brexit to determine severe but plausible
potential scenarios and the Group is continuously monitoring
events. As 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 any
emerging details relating to potential trade deals and their
associated impact, both positive and negative, on the Group.
Although the outcome of Brexit is difficult to quantify, we do not
expect the direct consequences of Brexit to have a material impact
to the Group.
Dividends and Annual Report
The Board is proposing to pay a final dividend of 43.2 pence per
share (2018: 40.5p) which, combined with the interim dividend of
21.9 pence per share (2018: 20.5 pence), gives a total dividend of
65.1 pence per share for the year (2018: 61.0 pence), an increase
of 6.7%. In addition, Spectris is proposing to return GBP175
million to shareholders via a special dividend, combined with a
share consolidation. A special dividend of 150 pence per existing
ordinary share is proposed, and in order to maintain the
comparability of the Group's share price and per-share metrics
before and after the special dividend, the Group plans to undertake
a supporting share consolidation, which will be subject to
shareholder approval.
The Annual Report will be made available to shareholders on 26
March 2020, 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.
Operating review
Malvern
Panalytical HBK Omega Industrial Solutions Total
------------------ ------------- --------------- -------------------- ----------------
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
Sales (GBPm) 448.2 436.7 429.0 426.5 138.3 147.2 616.5 593.8 1,632.0 1,604.2
LFL sales
growth (%) 1% (1%) (9%) 3% -%
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
Adjusted
operating
profit (GBPm) 76.2 73.0 60.4 56.6 16.9 26.8 104.6 91.9 258.1 248.3
LFL adjusted
operating
profit
growth (%) 5% 8% (39%) 13% 4%
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
Adjusted
operating
margin (%) 17.0% 16.7% 14.1% 13.3% 12.2% 18.2% 17.0% 15.5% 15.8% 15.5%
LFL adjusted
operating
margin
change (bps) 60bps 130bps (600bps) 150bps 50bps
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
Statutory
operating
(loss)/profit
(GBPm) (17.7)1 52.9 18.12 43.1 12.0 18.0 71.9 62.4 84.3 176.4
Statutory
operating
margin (%) (3.9%) 12.1% 4.2% 10.1% 8.7% 12.2% 11.7% 10.5% 5.2% 11.0%
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
Sales % of
Group sales 27% 27% 26% 27% 9% 9% 38% 37% 100% 100%
-------------- --------- ------- ------ ----- -------- ----- --------- --------- ------- -------
1. The statutory operating loss of GBP17.7 million was largely
impacted by the GBP67.5 million impairment of goodwill and
intangible assets in CLS.
2. The statutory operating profit of GBP18.1 million was largely
impacted by the costs of restructuring and impairment of intangible
assets as a result of the strategic review.
Throughout this Operating Review, all commentary refers to the
adjusted LFL measures unless otherwise stated. A reconciliation of
adjusted measures to statutory measures for all segments can be
found in Note 2.
Malvern Panalytical
LFL
2019 2018 Change change
--------------------------- ----- ----- ------ -------
Sales (GBPm) 448.2 436.7 3% 1%
Adjusted operating profit1
(GBPm) 76.2 73.0 4% 5%
Adjusted operating margin1
(%) 17.0% 16.7% 30bps 60bps
--------------------------- ----- ----- ------ -------
1. This is an alternative performance measure ('APM'). APMs are
defined in full and reconciled to the reported statutory measures
in Note 2 to the Financial Statements.
Financial performance
Sales increased 3% to GBP448.2 million, reflecting a 1% increase
in LFL sales, a 1% positive impact from foreign currency exchange
movements and 1% from acquisitions, net of disposals.
Sales growth for the year was driven by strong demand in Asia,
particularly in China, Japan and
South Korea. LFL sales were lower in both North America and
Europe, continuing a similar trend to the first half of the
year.
On a LFL basis, adjusted operating profit increased 5% and
adjusted operating margins increased 60bps, with the positive
impact from higher LFL sales, reflecting favourable pricing, and
good overhead cost control partly offset by the dilutive impact of
Concept Life Sciences ('CLS'). Following the weak first half
performance at CLS, new senior management were brought in and a
detailed strategic review was undertaken. As a result, the
environmental analytical laboratories business was exited, with
four sites being closed, and an impairment of goodwill and other
intangible assets was recognised at the half year. In addition, CLS
sold its environmental consultancy business in October. CLS' focus
is now solely on the pharmaceutical, life sciences and food markets
where it can collaborate with Malvern Panalytical.
Product launches
New product launches during the year included the latest
generation of Epsilon 1 X-ray fluorescence spectrometers which
provide fast and reproducible elemental analysis with greater
flexibility and precision than before. Also, the newest member of
the laser particle size analyser family, Topsizer Plus, was
launched for the Chinese market. Topsizer Plus retains the main
optical structure, consistent with the original product, but with
enhanced functionality and capability.
We have seen strong growth in the academic research sector
during the year, particularly in
North America and Asia, with funding benefiting from a number of
government initiatives across both geographies. Partnerships and
collaborations with academia were also an area of significant
activity in 2019. For example, a formal partnership was agreed with
the University of Bristol, focusing on areas of mutual interest,
including data analytics, machine learning and artificial
intelligence ('AI'). The partnership follows the opening of Malvern
Panalytical's new Data Science Hub at the University-run innovation
space. These types of collaboration are key in the move from
providing diagnostic solutions into more predictive and
prescriptive offerings as we combine our best-in-class sensors with
increased domain knowledge and newly developed AI application
capabilities.
Market trends and outlook
Pharma and food
Partly reflecting a tough year-on-year comparison, sales to the
pharmaceutical and food industries were lower on a LFL basis. 2019
saw uncertainty within the innovator pharmaceutical space, as
governments and other healthcare providers introduced tighter
pricing controls in order to manage rapidly increasing costs. In
response, a significant number of customer restructuring and
portfolio optimisation programmes were initiated. However, the
drive to reduce healthcare costs has prompted increased generic
drug product development, with global regulators expanding the
support they provide to companies to ensure new generics can be
rapidly brought to market. This has led to investment within
generic manufacturing hubs in India, China and south-east Asia,
offsetting the decline within the innovator segment. Additionally,
innovator portfolio developments have targeted more complex
biologic and novel gene-based therapies. This, coupled with
increased application of advanced analytics and modelling to
improve development pipeline efficiency and manage lifecycle costs,
is generating increased demand for our solutions. The outlook for
the sector therefore remains positive.
Food is, traditionally, a lower growth market, being driven by
consumer spending. However, there are higher growth niches, such as
confectionery products and beverages, where we have realised
opportunities in 2019. A continued focus on food safety, and the
need for sustainable sourcing and manufacture, represent further
opportunities relevant to our solution portfolio moving
forward.
Primary materials
LFL sales to primary materials customers were lower
year-on-year. This primarily reflected lower levels of activity in
the metals market during the year, although we expect this to
stabilise in the coming months, with leading mining companies
expecting an uplift in demand and supply in 2020 (particularly in
iron ore, nickel, zinc).
This recovery, combined with our online and automation
solutions, as well as enhanced cross selling within the segment,
should help drive a resumption in growth in 2020. With customers
focusing on delivering improved yields, productivity, product
quality and lowering costs in the extraction and processing of raw
materials, Malvern Panalytical instruments are well placed to help
them to deliver these improvements.
Advanced materials
Sales into the advanced materials industries have been strong,
particularly in North America and Asia, driven by China, with a
strong growth in aftermarket sales across all territories. From an
industry standpoint, the main growth drivers have been in academia
and the electronics, batteries, additive layer manufacturing and
catalysts markets. Demand is being driven by new product
development. For example, innovations in mobile devices, electric
cars and intelligent power management solutions are driving
significant growth in the research and development of batteries.
This includes Li-ion batteries as well as new emerging battery
technologies, such as Na-ion, Li-sulphur and zinc-air. Malvern
Panalytical instruments help customers control the quality and
function of battery materials, to enhance battery performance and
improve the cycle life. For example, a partnership was established
with the Next-Generation Energy Conversion and Storage Technologies
Lab at the University of Pittsburgh's Energy Innovation Center to
monitor the chemistry of what is happening inside a battery while
it is in use, which could provide opportunities for identifying new
materials as well as improving the battery itself.
We expect growth in this sector to continue, resulting from new
emerging applications, particularly in batteries and additive layer
manufacturing. Our focus is on customers involved in the research,
development and manufacturing of these novel materials and complex
systems and devices. Asia will be a key region driving this
growth.
HBK
LFL
2019 2018 Change change
-------------------------- ----- ----- ------ -------
Sales (GBPm) 429.0 426.5 1% (1%)
Adjusted operating profit
1 (GBPm) 60.4 56.6 7% 8%
Adjusted operating margin
1 (%) 14.1% 13.3% 80bps 130bps
-------------------------- ----- ----- ------ -------
1. This is an alternative performance measure ('APM'). APMs are
defined in full and reconciled to the reported statutory measures
in Note 2 to the Financial Statements.
Financial performance
Sales increased 1%, including a 1% positive impact from foreign
currency exchange movements and a 1% contribution from
acquisitions, net of disposals, and a 1% LFL sales decline, partly
reflecting some high one-off orders in 2018.
By region, North America posted an increase in LFL sales, while
Europe and Asia both saw a decline in LFL sales growth, with
Germany and China being the most challenging, reflecting the
downturn in automotive and the industrial markets in both
regions.
On a LFL basis, adjusted operating profit increased 8% and
operating margins rose by 130bps. The year-on-year improvement
reflected favourable pricing and lower overheads, as operational
improvements came through from the merger and execution of the
profit improvement programme, as well as some one-off costs in
2018.
HBK merger
During the year, work continued on the merger. The new senior
leadership team is now established and the strategy execution plan
is being implemented. Combining the sales and marketing teams led
to some disruption to sales activities earlier in the year, but the
integrated, global, go-to-market model is now in place and
delivering improved order flow, despite a more challenging market
environment. VI-grade is now part of the HBK platform and will lead
the development of an expanded simulation offering for customers.
Restructuring associated with the merger will continue into 2020,
to further bring down overhead costs, through additional headcount
reductions, site consolidations and closures. Further restructuring
costs will be incurred in 2020. These projects, will further
harmonise processes and systems across the business, bringing
additional benefits from the merger.
Product launches
HBK released a number of new products during 2019. These
included the next version of its BK Connect product, a highly
innovative sound and vibration software analytics platform, which
seamlessly integrates data acquisition, monitoring, analysis, data
viewing and reporting in the same system.
A new sound level meter, B&K 2245, was launched in April. It
is a reliable stand-alone noise measurement device, which works
seamlessly with specially-created apps, to undertake accurate noise
measurement, analysis and documentation. The meter can be tailored
for specific jobs across a wide range of industries and users; from
simple noise complaint investigations to more specialised tasks,
such as exhaust noise testing.
A new miniature pressure transducer series was also launched.
Being smaller, more lightweight and compact, it allows engineers to
carry out reliable pressure tests within confined areas, such as
gearboxes or coolant systems. Again, it can be deployed in a wide
variety of industries, for instance in automotive, aerospace and
shipping.
2019 also saw HBK significantly updating and standardising its
range of optical sensors, which are ideal for carrying out strain,
tilt, temperature and acceleration tests. The newLight sensors are
suitable for structural health monitoring used for highly stressed
structures (e.g. composite materials in wind turbines) and are
insensitive to electromagnetic fields and other harsh environmental
conditions.
Market trends and outlook
Automotive
Within the automotive sector, LFL sales declined in both Europe
and Asia, but grew in North America. The overall slowdown reflected
a tough comparator in 2018 and some impact from the downturn in
automotive.
With the HBK platform being mostly exposed to R&D within the
automotive sector, we still see robust demand for the development
of electric, hybrid and connected and autonomous vehicles ('CAV')
globally, as well as continued developments to internal combustion
engines, driven by the growing need to reduce carbon and GHG
emissions. This is underpinned by tightening emissions regulations
and policies, such as tax exemptions and subsidies, to encourage
the uptake of electric vehicles. Asia in particular, is anticipated
to lead the electric vehicle ('EV') market, owing to the
increasingly stringent regulations in the region and the
availability of nickel-metal/lithium-ion batteries at competitive
prices.
These technologies are also requiring new tests. For example,
the lack of engine noise from EVs is driving demand for new,
minimum sound level testing and driving demand for our simulators
and eDrive products, both of which are focus growth areas for HBK
into 2020 and beyond.
Our driving simulators allow customers to change vehicle
parameters and test hundreds of different configurations, as if
they were physically on a proving ground, with minimal effort, time
and cost, significantly reducing development time. For example,
Maserati has deployed our dynamic simulator, featuring the latest
generation driver-in-motion technology, that makes it possible to
achieve a 50% reduction in time-to-market for new cars, by carrying
out 90% of all development virtually on the simulator, and to
reduce the use of physical prototypes by 40%.
HBK's eDrive Testing is a revolutionary system for testing
electrical inverters and electrical machines.
It provides an all-in-one solution for simultaneous and
continuous acquisition of electric (voltage, power) and mechanical
(torque, speed) signals in order to understand the electric drive
and its losses in minutes. This is important for the optimisation
of the electric drive, as well as increasing efficiency.
Machine manufacturing
A significant portion of our sales in machine manufacturing are
for the automotive supply chain, where LFL sales rose year-on-year
in our two key regions, Europe and Asia. LFL sales were lower in
North America. While activity is expected to remain soft into 2020,
machine building fundamentals continue to make this an attractive
market for HBK.
Aerospace and defence
LFL sales grew in Europe but declined in North America and Asia,
although commercial business was good in all regions. We continue
to see notable R&D investment in the industry and good
opportunities, particularly for software products. For example, the
proven Catman Enterprise DAQ software is ideal for aerospace
testing applications, such as static and fatigue testing, and its
applications range from testing of sub-systems, such as landing
gear, up to a full-scale 'iron bird' test, where all major flight
controls, hydraulics and electrics are functionally tested. Demand
will be primarily driven by new development programmes and we
expect increasing demands of aircraft and space testing in 2020 and
beyond.
Consumer electronics and telecoms
LFL sales were lower in 2019, primarily reflecting fewer new
product launches by customers. The underlying trends in the
consumer electronics and telecoms market remain healthy, in our
view. Noise and sound have become critical marketing factors and
are often key differentiators in such products as smartphones and
voice-activated, smart home products. In addition, manufacturers
must comply with increasingly stringent noise legislation which
also drives the demand for testing. This is underpinning demand for
our electro-acoustic products where we expect to see moderate
growth in 2020.
Omega
LFL
2019 2018 Change change
--------------------------- ----- ----- -------- --------
Sales (GBPm) 138.3 147.2 (6%) (9%)
Adjusted operating profit1
(GBPm) 16.9 26.8 (37%) (39%)
Adjusted operating margin1
(%) 12.2% 18.2% (600bps) (600bps)
--------------------------- ----- ----- -------- --------
1. This is an alternative performance measure ('APM'). APMs are
defined in full and reconciled to the reported statutory measures
in Note 2 to the Financial Statements.
Financial performance
LFL sales decreased 9%. There was a 3% positive impact from
foreign currency exchange movements, resulting in reported sales
being 6% lower year-on-year. Omega has a high exposure to North
America (71%), where it recorded a decline in LFL sales, reflecting
slowing US industrial production, as well as some initial
disruption with the outsourcing of a product line to a third-party
supplier, a temporary disruption to order flows from the launch of
the new digital platform and some high one-off government orders in
2018. In Asia, LFL sales were also lower as a result of the
USA-China tariff situation and lower semiconductor demand, after a
strong year in 2018. LFL sales growth in Europe was lower, led by
Germany and the UK.
LFL adjusted operating profit declined 39% and LFL operating
margins fell 600bps. This resulted from the lower LFL sales and an
increase in overheads, due to extra licence costs and higher
depreciation in relation to the new digital platform.
New e-commerce platform
During 2019, Omega launched its new digital e-commerce platform
in its primary North American markets in order to strengthen its
market presence and position as a digital leader in the process
engineering distribution space. After experiencing some initial
customer adoption issues, as customers learned to navigate the new
website, key operating metrics have improved notably. Continuing to
drive volume though the website to deliver sales growth will be a
key objective through 2020 and beyond.
Product launches
Omega launched the first phase of its Industrial Internet of
things ('IIoT') platform during 2019. This included adding
non-contact, infra-red temperature smart sensors, as well as
extending the capabilities, and ease of use, of its wireless
transmitters for the core temperature sensing offer. Both series
are part of a broader Omega IIoT cloud platform launch planned for
early 2020.
Omega continues to innovate its temperature sensing offering, by
introducing a new patented, surface mount technology connector,
bringing temperature readings directly to the printed circuit board
in an automated, efficient way. The product results in superior
accuracy and reduced labour costs for customers.
As well as introducing new technologies, Omega continues to
strengthen key categories in growth areas. In total 133 new product
lines were launched in 2019, including a new line of
differentiated, price competitive thermal imaging devices. The
series stands out for its user-friendly software interface and
smartphone interface.
Finally, a new cross-platform strategy saw an HBK signal
conditioner introduced via Omega's digital channel, resulting in
the best performing product of this category for Omega - the ClipX
signal conditioner, which is setting new standards within
industrial control. The ClipX can help reduce the likelihood of
machine downtime because it is self-monitoring and able to detect
faults early on, with smart functions including health monitoring,
remote diagnosis, and pre-calculated channels.
Omega's core pressure-sensing expertise was recognised with
large orders for load pins and load cells (assists in the
measurement of force) in multiple applications, including testing
of cable integrity and lift operations in helicopter rescue hoists
and applications in life science research and clinical diagnostics.
Omega also secured a significant order for temperature transmitters
in medical imaging and scanning machines and remained as a key
supplier to one of the leading manufacturers in the offshore wind
turbine industry.
Market trends
LFL sales growth was down in North America, Omega's main market,
reflecting slowing US industrial production. Growth is expected to
be modest in 2020, with recovery starting in the second half.
In Asia, LFL sales decreased, particularly in China and South
Korea, reflecting a tough comparator, weaker macroeconomic
conditions in China and lower semiconductor demand globally. The
semiconductor market improved in the second half, with stronger
growth projected in 2020. Omega also felt the impact of tariffs in
its Chinese market as many of the components Omega sells there are
incorporated into OEM products destined for the USA. This impact is
expected to continue into 2020.
We continue to see an increasing trend of bringing intelligence
closer to or into the sensor, and a demand for features that allow
for connected applications that bypass manual configuration and
reduce installation labour. The expansion of our smart IIoT range
of sensors and control systems, and our ability to provide rapid,
custom-configuration places us in a strong position to grow in line
with these trends. Across all product segments, Omega is actively
working on addressing the increasing intersection of connectivity,
flexibility and ease-of-use demanded by its customers to drive
growth.
Industrial Solutions
LFL
2019 2018 Change change
----------------------------- ----- ----- ------ -------
Sales (GBPm) 616.5 593.8 4% 3%
Adjusted operating profit(1)
(GBPm) 104.6 91.9 14% 13%
Adjusted operating margin(1)
(%) 17.0% 15.5% 150bps 150bps
----------------------------- ----- ----- ------ -------
1. This is an alternative performance measure ('APM'). APMs are
defined in full and reconciled to the reported statutory measures
in Note 2 to the Financial Statements.
Financial performance
Sales rose 3% to GBP616.5 million, reflecting a LFL sales
increase of 3%. There was a 21% positive impact from foreign
currency exchange movements and a 1% negative impact from
acquisitions, net of disposals, reflecting the sale of BTG. On a
regional basis, LFL sales rose strongly in Asia and were up in
Europe, but this was partly offset by lower LFL sales in North
America.
LFL adjusted operating profit increased 13% and LFL adjusted
operating margins increased 150bps.This resulted from the increase
in LFL sales, particularly at PMS and Servomex, plus a higher gross
margin reflecting favourable pricing at all operating companies. In
addition, growth in overheads was constrained at a lower level than
the increase in sales, as a consequence of the successful
implementation of the profit improvement programme across the
operating companies.
Divisional strategy
The Industrial Solutions division ('ISD') comprises a portfolio
of high-value, niche businesses that compete globally. A new
divisional leadership team was established in 2019, with good
progress being made on improving the operational and financial
performance of these businesses while also executing on the
divestment strategy.
In December, the divestment of BTG was completed, in line with
the strategy to simplify and focus the portfolio on high-growth end
markets. Given BTG's presence in the pulp and paper industry,
Spectris believed its next stage of development would be better
fulfilled under different ownership. In January 2020, the sale of
the EMS Brüel & Kjær joint venture was announced. During 2020,
the ISD operating companies will be assessed continually for either
investment or potential disposal in line with Spectris'
strategy.
Market trends and outlook
Semiconductor and electronics
The semiconductor industry posted good LFL sales growth with
particularly strong growth in Asia (outside China), more than
offsetting a slowdown in North America. This growth was underpinned
by a strong order backlog at the start of 2019, supported by
notable sales of gas analysers and particle counters to major chip
manufacturing facilities in Asia. The backlog reduced through the
year, however, as the sector saw a decline in capital equipment
orders. Growth is expected to resume in 2020 and we are well
positioned with key customers and channel partners to benefit as it
does.
In addition, the roll-out of 5G networks is expected to support
growth, for example in the manufacture of chips and in
manufacturing applications and supporting solutions. This enhanced
mobile broadband network with improved reliability and uptime will
enable manufacturers to utilise wireless communications in
applications previously only attainable with wired communications,
reducing installation costs and enabling real-time connectivity to
stranded assets. Red Lion's next generation automation platform
will be 5G-ready and is expected to benefit from this market
opportunity.
The current softness in the electronics sector is expected
through the first quarter and potentially first half of 2020,
although recovery in the second half is anticipated based on
industry and customer forecasts.
Pharmaceutical and life sciences
The pharmaceutical and life sciences industries saw good LFL
sales growth in 2019, particularly in Asia, driven by China. LFL
sales were also higher in North America, although the
pharmaceutical pricing legislation in the USA could impact the
level of future investment. However, the continued increase in
regulatory scrutiny with emphasis on data and process integrity
should support demand for PMS' contamination monitoring hardware,
and high-level consulting services, to meet the latest
environmental monitoring needs. These requirements support PMS'
move to increase the number of partnerships with adjacent life
sciences businesses to expand the scope of its offering. For
example, PMS is working with Becton Dickinson and Company to
provide customers with a complete portfolio of active air
monitoring systems and high-quality prepared plated media, to meet
their environmental monitoring needs and regulatory
requirements.
Energy and utilities
In energy and utilities, environmental monitoring is also
becoming more stringent and this is where Servomex's gas analysers
play a critical role. This position underpinned strong sales into
the hydrocarbon processing and petrochemicals sectors across all
regions. Servomex has been realigning its organisational structure
around its core customer markets and expanding its sales and
customer service infrastructure into under-represented markets. In
addition, it is simplifying and expanding its product portfolio to
develop modular sensor and analyser products. These initiatives
should help underpin further growth in 2020 and beyond.
Similarly, B&K Vibro saw strong growth in sales in this
sector, particularly in North America and Asia. Two product
releases during the year will help underpin future growth. The
flagship machinery protection system, VC-8000, received
certification such that it can now be used in functional safety
applications. A new, fully integrated displacement transmitter was
also launched, which is simple to install and can halve the cost of
the installation. This sensor offers a unique streamlined solution
for both shaft displacement and vibration monitoring across a wide
range of industrial rotating machinery.
At ESG, sales were lower primarily reflecting financial pressure
and consolidation amongst its customers, as a result of the
downward pressure on oil pricing and lower cost, alternative
competition. A number of counter-measures were implemented which
has led to an enhanced pipeline coming into 2020, which should
underpin an improved performance.
Automotive
LFL sales into automotive increased, reflecting the investment
in new test facilities at Millbrook which added capacity for
electrified powertrain testing in Leyland, in Detroit and in a new
facility in California, serving the emerging technology cluster in
this region. In September, Millbrook formally opened its battery
test facility, a leading facility for testing large battery packs
for performance and durability, and also opened its CAV Village,
part of the UK government-backed TestBed UK. It includes a VI-grade
simulator, complete with virtual representation of Millbrook
proving ground, allowing CAV developers to operate in the virtual
and real environments, simultaneously. The development and
validation of CAVs is further supported by the installation of a
5G-enabled network at Millbrook. In Finland, the extended indoor
winter test facility was opened adding much-needed capacity for
snow and ice testing of tyres and vehicles, ahead of the
introduction of new European ice labelling regulations. Millbrook
has benefited from significant capital investment aligned with
priority testing for automotive OEMs and tier one suppliers and is
well positioned to serve customers into 2020 and beyond. The peak
year of capex investment is now behind us.
Other
In our other end markets, which are primarily served by NDCT,
the converting and film extrusion industries saw sales increase due
to stronger performance in the Americas. Cable and tubing saw a
decline due to the impact of tariff prices in China. A healthy
backlog entering 2019 drove very strong LFL sales to the food,
drink and tobacco sector in all regions and good growth into
metals, minerals and mining. In the latter, as part of the profit
improvement programme, a decision was taken to exit certain product
lines serving this industry and so the focus into 2020 will be on
its other key end markets.
Derek Harding
Chief Financial Officer
Consolidated Income Statement
For the year ended 31 December 2019
2019 2018
Continuing operations Note GBPm GBPm
--------------------------------------------------------------------------- ---- ------- -------
Revenue 3 1,632.0 1,604.2
Cost of sales (717.8) (696.8)
--------------------------------------------------------------------------- ---- ------- -------
Gross profit 914.2 907.4
--------------------------------------------------------------------------- ---- ------- -------
Indirect production and engineering
expenses (108.2) (106.8)
Sales and marketing expenses (345.7) (352.1)
Administrative expenses (376.0) (272.1)
--------------------------------------------------------------------------- ---- ------- -------
Adjusted operating profit 2 258.1 248.3
Restructuring costs 2 (52.2) (15.6)
Net transaction-related costs and fair
value adjustments 2 (6.1) (12.2)
Depreciation of acquisition-related
fair value adjustments to property,
plant and equipment 2 (1.0) (0.8)
Profit on disposal of property 2 5.2 -
Impairment of goodwill 2 (35.1) -
Amortisation and impairment of acquisition-related
intangible assets 2 (84.6) (43.3)
--------------------------------------------------------------------------- ---- ------- -------
Operating profit 2,3 84.3 176.4
--------------------------------------------------------------------------- ---- ------- -------
Share of post-tax results of joint venture 2, 9 (4.9) (1.2)
Impairment of non-current receivable
from joint venture 2, 9 (21.3) -
Profit on disposal of businesses 13 204.7 56.3
Financial income 4 7.9 2.5
Finance costs 4 (11.4) (16.0)
--------------------------------------------------------------------------- ---- ------- -------
Profit before tax 259.3 218.0
--------------------------------------------------------------------------- ---- ------- -------
Taxation charge 5 (25.2) (32.8)
--------------------------------------------------------------------------- ---- ------- -------
Profit for the year from continuing
operations attributable to owners of
the Company 234.1 185.2
--------------------------------------------------------------------------- ---- ------- -------
Basic earnings per share 7 202.2p 157.6p
Diluted earnings per share 7 201.6p 156.9p
Interim dividend paid and final dividend proposed for the year (per share) 6 65.1p 61.0p
Special dividend proposed (per share) 6 150.0p -
Dividends paid during the year (per share) 6 62.4p 58.0p
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
2019 2018
GBPm GBPm
--------------------------------------------------- ------ -----
Profit for the year attributable to owners
of the Company 234.1 185.2
Other comprehensive income:
Items that will not be reclassified to
the Consolidated Income Statement:
Re-measurement of net defined benefit obligation,
net of foreign exchange (10.6) 5.4
Tax credit/(charge) on items above 1.7 (1.4)
---------------------------------------------------- ------ -----
(8.9) 4.0
Items that are or may be reclassified subsequently
to the Consolidated Income Statement:
Net gain/(loss) on effective portion of
changes in fair value of forward exchange
contracts on cash flow hedges 3.1 (2.4)
Foreign exchange movements on translation
of overseas operations (32.7) 27.9
Currency translation differences transferred
to profit on disposal of business (35.8) (5.1)
Tax (charge)/credit on items above (0.6) 0.5
---------------------------------------------------- ------ -----
(66.0) 20.9
--------------------------------------------------- ------ -----
Total other comprehensive income (74.9) 24.9
---------------------------------------------------- ------ -----
Total comprehensive income for the year
attributable to owners of the Company 159.2 210.1
---------------------------------------------------- ------ -----
Consolidated Statement of Changes in Equity
For the year ended 31 December 2019
Capital
Share Share Retained Translation Hedging Merger redemption Total
capital premium earnings reserve reserve reserve reserve equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 1 January 2019 6.0 231.4 828.7 167.1 (3.9) 3.1 0.5 1,232.9
Adoption of IFRS
16 and
IFRIC 23 - - (2.9) - - - - (2.9)
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 1 January 2019
(restated) 6.0 231.4 825.8 167.1 (3.9) 3.1 0.5 1,230.0
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Profit for the
year - - 234.1 - - - - 234.1
Other comprehensive
income - - (8.9) (68.5) 2.5 - - (74.9)
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Total comprehensive
income
for the year - - 225.2 (68.5) 2.5 - - 159.2
Transactions with
owners recorded
directly in equity:
Equity dividends
paid by the Company - - (72.3) - - - - (72.3)
Share-based payments,
net of tax - - 3.6 - - - - 3.6
Proceeds from exercise
of equity-settled
share options - - 1.0 - - - - 1.0
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 31 December
2019 6.0 231.4 983.3 98.6 (1.4) 3.1 0.5 1,321.5
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Capital
Share Share Retained Translation Hedging Merger redemption Total
capital premium earnings reserve reserve reserve reserve equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 1 January 2018 6.2 231.4 820.8 144.3 (2.0) 3.1 0.3 1,204.1
Adoption of IFRS
9 and
IFRS 15 - - (18.6) - - - - (18.6)
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 1 January 2018
(restated) 6.2 231.4 802.2 144.3 (2.0) 3.1 0.3 1,185.5
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Profit for the
year - - 185.2 - - - - 185.2
Other comprehensive
income - - 4.0 22.8 (1.9) - - 24.9
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Total comprehensive
income
for the year - - 189.2 22.8 (1.9) - - 210.1
Transactions with
owners recorded
directly in equity:
Equity dividends
paid by the Company - - (68.2) - - - - (68.2)
Own shares acquired
for share buyback
programme (0.2) - (100.5) - - - 0.2 (100.5)
Share-based payments,
net of tax - - 5.1 - - - - 5.1
Proceeds from exercise
of equity-settled
options - - 0.9 - - - - 0.9
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
At 31 December
2018 6.0 231.4 828.7 167.1 (3.9) 3.1 0.5 1,232.9
----------------------- -------- -------- --------- ----------- -------- -------- ----------- -------
Consolidated Statement of Financial Position
As at 31 December 2019
2019 2018
Note GBPm GBPm
--------------------------------------- ---- ------- -------
ASSETS
Non-current assets
Intangible assets:
--------------------------------------- ---- ------- -------
Goodwill 8 646.8 766.3
Other intangible assets 8 178.5 263.3
--------------------------------------- ---- ------- -------
825.3 1,029.6
Property, plant and equipment 369.0 331.5
Investment in joint venture 9 - 5.0
Other receivable - joint venture 9 - 38.9
Deferred tax assets 9.0 11.3
--------------------------------------- ---- ------- -------
1,203.3 1,416.3
--------------------------------------- ---- ------- -------
Current assets
Inventories 197.2 216.4
Current tax assets 4.1 1.6
Trade and other receivables 335.7 381.5
Derivative financial instruments 1.5 0.4
Cash and cash equivalents 213.1 73.1
Assets held for sale 9 18.9 3.9
--------------------------------------- ---- ------- -------
770.5 676.9
Total assets 1,973.8 2,093.2
--------------------------------------- ---- ------- -------
LIABILITIES
Current liabilities
Borrowings (80.7) (23.7)
Derivative financial instruments (0.1) (2.2)
Trade and other payables (296.8) (344.1)
Lease liabilities (15.1) -
Current tax liabilities (20.8) (22.5)
Provisions (27.3) (31.6)
--------------------------------------- ---- ------- -------
(440.8) (424.1)
--------------------------------------- ---- ------- -------
Net current assets 329.7 252.8
--------------------------------------- ---- ------- -------
Non-current liabilities
Borrowings (98.9) (346.5)
Other payables (21.3) (27.4)
Lease liabilities (45.4) -
Provisions (5.6) -
Retirement benefit obligations (27.5) (32.1)
Deferred tax liabilities (12.8) (30.2)
--------------------------------------- ---- ------- -------
(211.5) (436.2)
--------------------------------------- ---- ------- -------
Total liabilities (652.3) (860.3)
--------------------------------------- ---- ------- -------
Net assets 1,321.5 1,232.9
--------------------------------------- ---- ------- -------
EQUITY
Share capital 6.0 6.0
Share premium 231.4 231.4
Retained earnings 983.3 828.7
Translation reserve 98.6 167.1
Hedging reserve (1.4) (3.9)
Merger reserve 3.1 3.1
Capital redemption reserve 0.5 0.5
--------------------------------------- ---- ------- -------
Total equity attributable to owners of
the Company 1,321.5 1,232.9
--------------------------------------- ---- ------- -------
Consolidated Statement of Cash Flows
For the year ended 31 December 2019
2019 2018
Note GBPm GBPm
------------------------------------------ ---- ------- -------
Cash generated from operations 10 277.8 215.8
Net income taxes paid (37.0) (37.7)
------------------------------------------ ---- ------- -------
Net cash inflow from operating activities 240.8 178.1
------------------------------------------ ---- ------- -------
Cash flows used from/(used in) investing
activities
Purchase of property, plant and
equipment and intangible assets (86.6) (97.0 )
Proceeds from disposal of property,
plant and equipment and software 11.2 5.6
Acquisition of businesses, net of
cash acquired 12 (9.7) (196.4)
Proceeds from disposal of businesses,
net of tax paid of GBP1.2m (2018:
GBP0.6m) 260.1 43.8
Proceeds from government grants 5.0 2.9
Interest received 0.7 0.6
------------------------------------------ ---- ------- -------
Net cash flows from/(used in) investing
activities 180.7 (240.5)
------------------------------------------ ---- ------- -------
Cash flows used in financing activities
Interest paid on borrowings (7.0) (9.4 )
Interest paid on lease liabilities (2.9) -
Dividends paid 6 (72.3) (68.2)
Share buyback purchase of shares - (100.5)
Net proceeds from exercise of share
options 1.0 0.7
Payments on principal portion of
lease liabilities (17.6) -
Loan to joint venture (2.2) (0.9)
Proceeds from borrowings 193.2 175.5
Repayment of borrowings (363.5) -
------------------------------------------ ---- ------- -------
Net cash flows used in financing
activities (271.3) (2.8 )
------------------------------------------ ---- ------- -------
Net increase/(decrease) in cash
and cash equivalents 150.2 (65.2)
------------------------------------------ ---- ------- -------
Cash and cash equivalents at beginning
of year 67.3 136.7
Effect of foreign exchange rate
changes (4.4) (4.2 )
------------------------------------------ ---- ------- -------
Cash and cash equivalents at end
of year 213.1 67.3
------------------------------------------ ---- ------- -------
2019 2018
Note GBPm GBPm
----------------------------------- ---- ------- -------
Reconciliation of changes in cash
and cash equivalents to movements
in net cash/(debt)
Net increase/(decrease) in cash
and cash equivalents 150.2 (65.2)
Proceeds from borrowings (193.2) (175.5)
Repayment of borrowings 363.5 -
Effect of foreign exchange rate
changes 10.1 (5.9 )
----------------------------------- ---- ------- -------
Movement in net cash/(debt) 330.6 (246.6)
Net debt at beginning of year (297.1) (50.5)
----------------------------------- ---- ------- -------
Net cash/(debt) at end of year 2 33.5 (297.1)
----------------------------------- ---- ------- -------
Notes to the accounts
1. Basis of preparation and accounting policies
The Consolidated Financial Statements have been prepared on a
historical cost basis except for items that are required by IFRS to
be measured at fair value, principally certain financial
instruments. The Consolidated Financial Statements have been
prepared in accordance with IFRS as issued by the International
Accounting Standards Board ('IASB') and interpretations issued by
the International Financial Reporting Interpretations Committee of
the IASB, as adopted by the European Union ('adopted IFRS'), and in
accordance with the provisions of the Companies Act 2006. The
Consolidated Financial Statements have been prepared on a going
concern basis. The full year results announcement is presented in
millions of pounds Sterling rounded to the nearest one decimal
place, which is the Group's presentational currency.
The Consolidated Financial Statements have been prepared using
consistent accounting policies with those of the previous financial
year. The Group has adopted IFRS 16 and IFRIC 23 in 2019 and
details of the impact on adoption are presented in the Consolidated
Statement of Changes in Equity.
The financial information included in the full year results
announcement does not constitute statutory accounts of the Company
for the years ended 31 December 2019 and 2018. Statutory accounts
for the year ended 31 December 2018 have been reported on by the
Company's auditor and delivered to the Registrar of Companies.
Statutory accounts for the year ended 31 December 2019 have been
audited and will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The report of the
auditors for both years was (i) unqualified, (ii) did not include a
reference to any matters to which the auditors drew attention by
way of emphasis without qualifying their report, and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies
Act 2006.
These results were approved by the Board of Directors on 19
February 2020.
2. Alternative performance measures
Policy
Spectris uses adjusted figures as key performance measures in
addition to those reported under IFRS, as management believe these
measures enable management and stakeholders to better assess the
underlying trading performance of the businesses as they exclude
certain items that are considered to be significant in nature
and/or quantum, foreign exchange movements and the impact of
acquisitions and disposals.
The alternative performance measures ('APMs') are consistent
with how the businesses' performance is planned and reported within
the internal management reporting to the Board and Operating
Committees. Some of these measures are used for the purpose of
setting remuneration targets. The key APMs that the Group uses
include like-for-like ('LFL') organic performance measures and
adjusted measures for the income statement together with adjusted
financial position and cash flow measures. Explanations of how they
are calculated and how they are reconciled to an IFRS statutory
measure are set out below.
Adjusted measures
The Group's policy is to exclude items that are considered to be
significant in nature and/or quantum and where treatment as an
adjusted item provides stakeholders with additional useful
information to assess the period-on-period trading performance of
the Group. The Group excludes such items which management have
defined as:
-- restructuring costs from significant programmes;
-- amortisation and impairment of acquisition-related goodwill
and other intangible assets;
-- bargain purchase on acquisition;
-- depreciation of acquisition-related fair value adjustments to
property, plant and equipment;
-- transaction-related costs, deferred and contingent
consideration fair value adjustments;
-- profits or losses on termination or disposal of
businesses;
-- impairment of non-current receivable from joint venture and
share of impairment of investment in joint venture;
-- unwinding of the discount factor on deferred and contingent
consideration;
-- unrealised changes in the fair value of financial
instruments;
-- gains or losses on retranslation of short-term inter-company
loan balances; and
-- related tax effects on the above and other tax items which do
not form part of the underlying tax rate (see Note 5).
During 2019, a profit on disposal of property of GBP5.2m in
Omega was treated as an adjusting item since it was significant in
quantum and would distort the underlying trading performance if
included.
In November 2018, the Group announced the implementation of a
Group-wide profit improvement programme. The total costs of
implementation of this programme are considered to be significant
in both nature and amount. On this basis the costs of the
implementation of this programme are excluded from adjusted
operating profit. Adjusted operating profit (including on a LFL
basis) is therefore presented before the impact of the Group profit
improvement programme costs.
The ongoing benefits arising from this programme are considered
to be part of underlying trading.
LFL measures
The Board reviews and compares current and prior year segmental
sales and adjusted operating profit at constant exchange rates and
excludes the impact of acquisitions and disposals during the
year.
The constant exchange rate comparison uses the current year
segmental information, stated in each entity's functional currency,
and translates the results into its presentation currency using the
prior year's monthly exchange rates, irrespective of the underlying
transactional currency.
The incremental impact of business acquisitions is excluded for
the first twelve months of ownership from the month of purchase.
For business disposals, comparative figures for segmental sales and
adjusted operating profit are adjusted to reflect the comparable
periods of ownership. Due to the change in ownership structure the
EMS B&K business was deconsolidated on 31 May 2018 and the
segmental LFL adjusted sales and adjusted operating profit for HBK
for 2018 exclude the trading results of EMS B&K for the first
five months of 2018. BTG was disposed of on 1 December 2019 and the
segmental LFL adjusted sales and adjusted operating profit for
Industrial Solutions for 2018 exclude BTG for the month of December
2018.
The LFL measure is presented as a means of eliminating the
effects of exchange rate fluctuations on the period-on-period
statutory results as well as allowing the Board to assess the
underlying trading performance of the businesses on a LFL basis for
both sales and operating profit.
Based on the above policy, the adjusted performance measures are
derived from the statutory figures as follows:
Income statement measures
a) LFL adjusted sales by segment
Malvern Industrial 2019
Panalytical HBK Omega Solutions Total
2019 sales by segment GBPm GBPm GBPm GBPm GBPm
----------------------- ------------ ------ ----- ---------- -------
Sales 448.2 429.0 138.3 616.5 1,632.0
Constant exchange rate
adjustment (3.5) (2.8) (4.5) (12.9) (23.7)
Acquisitions (3.8) (13.3) - (3.4) (20.5)
----------------------- ------------ ------ ----- ---------- -------
LFL adjusted sales 440.9 412.9 133.8 600.2 1,587.8
----------------------- ------------ ------ ----- ---------- -------
Malvern Industrial 2018
Panalytical HBK Omega Solutions Total
----------------------- ------------ ------ ----- ---------- -------
2018 sales by segment GBPm GBPm GBPm GBPm GBPm
----------------------- ------------ ------ ----- ---------- -------
Sales 436.7 426.5 147.2 593.8 1,604.2
Disposal of businesses (1.9) (8.8) - (12.4) (23.1)
----------------------- ------------ ------ ----- ---------- -------
LFL adjusted sales 434.8 417.7 147.2 581.4 1,581.1
----------------------- ------------ ------ ----- ---------- -------
b) Adjusted operating profit, operating margin and adjusted
EBITDA
Malvern Industrial 2019
Panalytical HBK Omega Solutions Total
------------------------------------
2019 adjusted operating
profit GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------------ ---- ----- ---------- ------
Statutory operating (loss)/profit (17.7) 18.1 12.0 71.9 84.3
Restructuring costs 16.4 17.7 2.2 15.9 52.2
Net transaction-related
costs and fair value adjustments (0.3) 3.1 - 3.3 6.1
Depreciation of acquisition-related
fair value adjustments
to property, plant and
equipment 0.4 - - 0.6 1.0
Profit on disposal of property - - (5.2) - (5.2)
Impairment of goodwill 35.1 - - - 35.1
Amortisation and impairment
of acquisition-related
intangible assets 42.3 21.5 7.9 12.9 84.6
------------------------------------ ------------ ---- ----- ---------- ------
Adjusted operating profit 76.2 60.4 16.9 104.6 258.1
Constant exchange rate
adjustment 0.3 0.6 (0.6) (3.3) (3.0)
Acquisitions 0.5 0.4 - (0.9) -
------------------------------------ ------------ ---- ----- ---------- ------
LFL adjusted operating
profit 77.0 61.4 16.3 100.4 255.1
------------------------------------ ------------ ---- ----- ---------- ------
Malvern Industrial 2018
Panalytical HBK Omega Solutions Total
------------------------------------
2018 adjusted operating
profit GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------------ ---- ----- ---------- ------
Statutory operating profit 52.9 43.1 18.0 62.4 176.4
Restructuring costs 3.6 4.3 1.6 6.1 15.6
Net transaction-related
costs and fair value adjustments 1.3 1.4 - 9.5 12.2
Depreciation of acquisition-related
fair value adjustments
to property, plant and
equipment 0.2 - - 0.6 0.8
Amortisation of acquisition-related
intangible assets 15.0 7.8 7.2 13.3 43.3
------------------------------------ ------------ ---- ----- ---------- ------
Adjusted operating profit 73.0 56.6 26.8 91.9 248.3
Disposals 0.4 0.4 - (3.2) (2.4)
------------------------------------ ------------ ---- ----- ---------- ------
LFL adjusted operating
profit 73.4 57.0 26.8 88.7 245.9
------------------------------------ ------------ ---- ----- ---------- ------
Malvern Industrial 2019
Panalytical HBK Omega Solutions Total
--------------------------- ------------ ---- ----- ---------- ------
2019 operating margin % % % % %
--------------------------- ------------ ---- ----- ---------- ------
Statutory operating margin (3.9) 4.2 8.7 11.7 5.2
--------------------------- ------------ ---- ----- ---------- ------
Adjusted operating margin 17.0 14.1 12.2 17.0 15.8
--------------------------- ------------ ---- ----- ---------- ------
LFL adjusted operating
margin 17.5 14.9 12.2 16.7 16.1
--------------------------- ------------ ---- ----- ---------- ------
Malvern Industrial 2018
Panalytical HBK Omega Solutions Total
--------------------------- ------------ ---- ----- ---------- ------
2018 operating margin % % % % %
--------------------------- ------------ ---- ----- ---------- ------
Statutory operating margin 12.1 10.1 12.2 10.5 11.0
--------------------------- ------------ ---- ----- ---------- ------
Adjusted operating margin 16.7 13.3 18.2 15.5 15.5
--------------------------- ------------ ---- ----- ---------- ------
LFL adjusted operating
margin 16.9 13.6 18.2 15.3 15.6
--------------------------- ------------ ---- ----- ---------- ------
2019 2018
Restructuring costs GBPm GBPm
----------------------------- ---- ----
Profit improvement programme 52.2 4.8
Project Uplift costs - 10.8
----------------------------- ---- ----
Restructuring costs 52.2 15.6
----------------------------- ---- ----
2019 2018
Adjusted EBITDA GBPm GBPm
-------------------------------------------- ----- -----
Statutory operating profit 84.3 176.4
Depreciation and impairment of owned
assets 35.5 30.3
Depreciation and impairment of right-of-use
assets 22.1 -
Amortisation and impairment of intangible
assets 95.2 49.1
Impairment of goodwill 35.1 -
--------------------------------------------- ----- -----
EBITDA 272.2 255.8
Restructuring costs excluding impairment
of owned and right-of-use property,
plant and equipment and intangible assets 43.4 15.6
Profit on disposal of property classified
as an adjusting item (5.2) -
Net transaction-related costs and fair
value adjustments 6.1 12.2
--------------------------------------------- ----- -----
Adjusted EBITDA 316.5 283.6
--------------------------------------------- ----- -----
EBITDA is calculated as statutory operating profit before
depreciation, amortisation and impairment of property, plant and
equipment, intangible assets and goodwill. Adjusted EBITDA is
calculated as EBITDA excluding other adjusting items as defined
previously. This measure is used for the purpose of assessing
capital management and covenant compliance and is reported to the
Group Executive Committee.
c) Adjusted net finance costs
2019 2018
GBPm GBPm
----------------------------------------- ----- ------
Statutory net finance costs (3.5) (13.5)
Net (gain)/loss on retranslation of
short-term
inter-company loan balances (4.0) 7.2
Unwinding of discount factor on deferred
and contingent consideration 0.7 0.6
------------------------------------------- ----- ------
Adjusted net finance costs (6.8) (5.7)
------------------------------------------- ----- ------
d) Adjusted profit before taxation
2019 2018
GBPm GBPm
----------------------------------- ----- -----
Adjusted operating profit 258.1 248.3
Adjusted share of post-tax results
of joint venture (3.9) (1.2)
Adjusted net finance costs (6.8) (5.7)
------------------------------------- ----- -----
Adjusted profit before taxation 247.4 241.4
------------------------------------- ----- -----
Share of post-tax results of the joint venture has been adjusted
to exclude GBP1.0m of impairment of acquisition-related intangible
assets consistent with the Group's treatment of adjusted operating
profit measures.
e) Adjusted earnings per share
2019 2018
Adjusted earnings GBPm GBPm
--------------------------------------------------------- ------- ------
Statutory profit after tax 234.1 185.2
Adjusted for:
Restructuring costs 52.2 15.6
Net transaction-related costs and fair value adjustments 6.1 12.2
Depreciation of acquisition-related fair value
adjustments to property, plant and equipment 1.0 0.8
Profit on disposal of property (5.2) -
Impairment of goodwill 35.1 -
Amortisation and impairment of acquisition-related
intangible assets 84.6 43.3
Profit on disposal of businesses (204.7) (56.3)
Impairment of non-current receivable from joint
venture 21.3 -
Share of impairment of acquisition-related intangible
in joint venture 1.0 -
Net (gain)/loss on retranslation of short-term
inter-company loan balances (4.0) 7.2
Unwinding of discount factor on deferred and contingent
consideration 0.7 0.6
Tax effect of the above and other non-recurring
items (27.7) (14.8)
---------------------------------------------------------- ------- ------
Adjusted earnings 194.5 193.8
---------------------------------------------------------- ------- ------
Adjusted earnings per share 2019 2018
---------------------------------------------- ----- -----
Weighted average number of shares outstanding
(millions) 115.8 117.5
------------------------------------------------ ----- -----
Adjusted earnings per share (pence) 168.0 164.9
------------------------------------------------ ----- -----
Basic earnings per share in accordance with IAS 33 'Earnings Per
Share' are disclosed in Note 7.
Financial position measures
f) Net cash/(debt)
2019 2018
GBPm GBPm
-------------------------- ------- -------
Bank overdrafts - (5.8)
Bank loans unsecured (179.6) (364.4)
---------------------------- ------- -------
Total borrowings (179.6) (370.2)
Cash and cash equivalents 213.1 73.1
---------------------------- ------- -------
Net cash/(debt) 33.5 (297.1)
---------------------------- ------- -------
Net cash/(debt) excludes lease liabilities arising under IFRS 16
as this aligns with the definition of net debt under the Group's
bank covenants.
Cash flow measures
g) Adjusted cash flow
2019 2018
GBPm GBPm
------------------------------------------ ------ ------
Net cash inflow from operating activities 240.8 178.1
Transaction-related costs paid 1.6 10.8
Restructuring cash outflow 34.3 8.6
Net income taxes paid 37.0 37.7
Purchase of property, plant and equipment
and intangible assets (86.6) (97.0)
Proceeds from government grants 5.0 2.9
Proceeds from disposal of property, plant
and equipment and software2 2.1 5.6
------------------------------------------ ------ ------
Adjusted cash flow 234.2 146.7
------------------------------------------ ------ ------
Adjusted cash flow conversion1 91% 59%
------------------------------------------ ------ ------
1. Adjusted cash flow conversion is calculated as adjusted cash
flow as a proportion of adjusted operating profit.
2. Excludes the proceeds from disposal of property of GBP9.1m in
2019 classified as an adjusting item.
The net cash inflow from operating activities in 2019 excludes
cash flows of GBP20.5m arising from lease and associated interest
payments as a result of the implementation of IFRS 16 from 1
January 2019 which requires these cash flows to be treated as a
financing cash flow. Prior to 1 January 2019, these cash flows were
included in the net cash inflow from operating activities.
Other measures
h) Return on gross capital employed (ROGCE)
The return on gross capital employed is calculated as adjusted
operating profit for the last 12 months divided by the average of
opening and closing gross capital employed. Gross capital employed
is calculated as net assets excluding net debt and excluding
accumulated amortisation and impairment of acquisition-related
intangible assets including goodwill.
31 December 31 December 31 December
2019 2018 2017
GBPm GBPm GBPm
------------------------------------------ ----------- ----------- -----------
Net (cash)/debt (see note 2f) (33.5) 297.1 50.5
Accumulated impairment losses on goodwill
(see note 8) 179.4 148.8 144.4
Accumulated amortisation and impairment
of acquisition-related intangible assets 366.3 306.1 253.0
Shareholders' equity 1,321.5 1,232.9 1,204.1
------------------------------------------ ----------- ----------- -----------
Gross capital employed 1,833.7 1,984.9 1,652.0
------------------------------------------ ----------- ----------- -----------
Average gross capital employed (current
and prior year) 1,909.4 1,818.5
------------------------------------------ ----------- -----------
Adjusted operating profit for year (see
note 2b) 258.1 248.3
------------------------------------------ ----------- -----------
Return on gross capital employed 13.5% 13.7%
------------------------------------------ ----------- -----------
i) Net transaction-related costs and fair value adjustments
Net transaction-related costs and fair value adjustments
comprise transaction costs of GBP2.1m (2018: GBP7.4m) that have
been recognised in the Consolidated Income Statement under IFRS 3
(Revised) 'Business Combinations' and other fair value adjustments
relating to deferred and contingent consideration comprising a
charge of GBP4.0m (2018: GBP4.8m). Net transaction-related costs
and fair value adjustments are included within administrative
expenses. Transaction-related costs have been excluded from the
adjusted operating profit and transaction costs paid of GBP1.6m
(2018: GBP10.8m) have been excluded from the adjusted cash
flow.
3. Operating segments
The Group has four reportable segments, as described below. From
1 July 2019, the Group's operating segments have changed following
the strategic review which commenced in November 2018. The new
segmental platform structure reflects the internal reporting
provided to the Chief Operating Decision Maker (considered to be
the Board) on a regular basis to assist in making decisions on
capital allocated to each segment and to assess performance. The
tables below show restated comparative figures for the operating
segments for the year ended 31 December 2018, reflecting the impact
of changes the Group made to its operating segments during the year
ended 31 December 2019. The operating segment results include an
allocation of head office costs. The following summarises the
operations in each of the Group's reportable segments:
-- The Malvern Panalytical platform provides products and
services that enable customers to determine structure, composition,
quantity and quality of particles and materials during their
research and product development processes, when assessing
materials before production, or during the manufacturing process.
The operating companies in this segment are Malvern Panalytical and
Concept Life Sciences (acquired January 2018). Concept Life
Sciences was merged into Malvern Panalytical as of 1 July 2019.
-- The HBK platform supplies test, measurement and analysis
equipment, software and services for product design optimisation,
and manufacturing control. The operating companies in this segment
are Hottinger, Brüel & Kjær and VI-grade (acquired August
2018). VI-grade was merged into HBK as of 1 July 2019.
The Omega pla tform is a global leader in the technical
marketplace, offering products for measurement and control of
temperature, humidity, pressure, strain, force, flow, level, pH and
conductivity. Omega also provides a complete line of data
acquisition, electric heating and custom-engineered products. The
operating company in this segment is Omega Engineering.
-- The Industrial Solutions division ('ISD') comprises a
portfolio of high-value, niche businesses. A number of ISD
companies have platform potential, with strong market positions,
growth prospects and margins. The operating companies in this
segment are Brüel & Kjær Vibro, ESG Solutions, Millbrook, NDC
Technologies, Particle Measuring Systems, Red Lion Controls,
Servomex and BTG (disposed on 1 December 2019).
Malvern Industrial 2019
Panalytical HBK Omega Solutions Total
Information about reportable
segments GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ ----- ----- ---------- -------
Segment revenues 448.4 430.7 138.5 616.7 1,634.3
Inter-segment revenue (0.2) (1.7) (0.2) (0.2) (2.3)
---------------------------------- ------------ ----- ----- ---------- -------
External revenue 448.2 429.0 138.3 616.5 1,632.0
---------------------------------- ------------ ----- ----- ---------- -------
Operating (loss)/profit (17.7) 18.1 12.0 71.9 84.3
Share of post-tax results
of joint venture1 (4.9)
Impairment of non-current
receivable from joint venture1 (21.3)
Profit on disposal of businesses1 204.7
Financial income1 7.9
Finance costs1 (11.4)
---------------------------------- ------------ ----- ----- ---------- -------
Profit before tax1 259.3
Taxation charge1 (25.2)
---------------------------------- ------------ ----- ----- ---------- -------
Profit after tax1 234.1
---------------------------------- ------------ ----- ----- ---------- -------
1. Not allocated to reportable segments
Malvern Industrial 2018
Panalytical HBK Omega Solutions Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------------ ----- ----- ---------- -------
Segment revenues 436.7 428.1 147.3 594.3 1,606.4
Inter-segment revenue - (1.6) (0.1) (0.5) (2.2)
---------------------------------- ------------ ----- ----- ---------- -------
External revenue 436.7 426.5 147.2 593.8 1,604.2
---------------------------------- ------------ ----- ----- ---------- -------
Operating profit 52.9 43.1 18.0 62.4 176.4
Share of post-tax results
of joint venture1 (1.2)
Profit on disposal of businesses1 56.3
Financial income1 2.5
Finance costs1 (16.0)
---------------------------------- ------------ ----- ----- ---------- -------
Profit before tax1 218.0
Taxation charge1 (32.8)
---------------------------------- ------------ ----- ----- ---------- -------
Profit after tax1 185.2
---------------------------------- ------------ ----- ----- ---------- -------
1. Not allocated to reportable segments
Geographical segments
The Group's operating segments are each located in several
geographical locations and sell to external customers in all parts
of the world. No individual country amounts to more than 3% of
revenue by location of customer, other than those noted below. The
following is an analysis of revenue by geographical
destination.
Malvern Industrial 2019
Panalytical HBK Omega Solutions Total
GBPm GBPm GBPm GBPm GBPm
---------------------- ------------ ----- ----- ---------- -------
UK 42.7 13.4 4.0 64.7 124.8
Germany 25.9 80.4 5.4 30.8 142.5
France 16.0 25.4 1.1 10.9 53.4
Rest of Europe 60.9 79.1 5.3 76.2 221.5
USA 84.9 88.3 89.9 195.3 458.4
Rest of North America 14.7 5.6 7.7 20.9 48.9
Japan 31.2 32.3 2.5 23.3 89.3
China 70.9 60.8 9.9 76.5 218.1
South Korea 12.4 10.1 4.1 27.4 54.0
Rest of Asia 50.9 20.1 6.0 60.6 137.6
Rest of the world 37.7 13.5 2.4 29.9 83.5
---------------------- ------------ ----- ----- ---------- -------
448.2 429.0 138.3 616.5 1,632.0
---------------------- ------------ ----- ----- ---------- -------
Malvern Industrial 2018
Panalytical HBK Omega Solutions Total
GBPm GBPm GBPm GBPm GBPm
---------------------- ------------ ----- ----- ---------- -------
UK 50.4 13.0 4.1 65.7 133.2
Germany 26.5 88.7 6.1 30.1 151.4
France 16.1 22.5 1.2 11.4 51.2
Rest of Europe 57.3 72.4 5.8 76.4 211.9
USA 84.1 81.4 94.2 188.0 447.7
Rest of North America 15.9 6.1 8.3 22.1 52.4
Japan 26.6 31.6 3.1 21.1 82.4
China 65.7 68.5 11.5 75.8 221.5
South Korea 11.3 10.7 4.6 24.6 51.2
Rest of Asia 48.6 19.3 6.0 53.4 127.3
Rest of the world 34.2 12.3 2.3 25.2 74.0
---------------------- ------------ ----- ----- ---------- -------
436.7 426.5 147.2 593.8 1,604.2
---------------------- ------------ ----- ----- ---------- -------
4. Financial income and finance costs
2019 2018
Financial income GBPm GBPm
-------------------------------- ----- -----
Interest receivable (0.7) (0.5)
Income on receivable from joint
venture (3.2) (2.0)
Net gain on retranslation of
short-term
inter-company loan balances (4.0) -
---------------------------------- ----- -----
(7.9) (2.5)
-------------------------------- ----- -----
2019 2018
Finance costs GBPm GBPm
------------------------------------------ ---- ----
Interest payable on loans and
overdrafts 7.1 7.3
Net loss on retranslation of
short-term
inter-company loan balances - 7.2
Unwinding of discount factor
on lease liabilities 2.9 -
Unwinding of discount factor
on deferred and contingent consideration 0.7 0.6
Net interest cost on pension
plan obligations 0.6 0.6
Other finance costs 0.1 0.3
-------------------------------------------- ---- ----
11.4 16.0
------------------------------------------ ---- ----
Net finance costs 3.5 13.5
-------------------------------------------- ---- ----
5. Taxation
2019 2018
----- -------- ------ ----- -------- -----
UK Overseas Total UK Overseas Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- -------- ------ ----- -------- -----
Current tax charge 2.1 36.7 38.8 3.9 37.1 41.0
Adjustments in respect of current
tax of prior years - (1.7) (1.7) (0.1) (2.0) (2.1)
Deferred tax - origination and
reversal of temporary differences (7.4) (4.5) (11.9) (3.3) (1.9) (5.2)
Deferred tax - changes in US
tax rate - - - - (0.9) (0.9)
----------------------------------- ----- -------- ------ ----- -------- -----
Taxation charge (5.3) 30.5 25.2 0.5 32.3 32.8
----------------------------------- ----- -------- ------ ----- -------- -----
The standard rate of corporation tax for the year, based on the
weighted average of tax rates applied to the Group's profits, is
18.6% (2018: 26.0%). The tax charge for the year is lower (2018:
lower) than the standard rate of corporation tax for the reasons
set out in the following reconciliation.
2019 2018
GBPm GBPm
-------------------------------------------------------- ------ ------
Profit before taxation 259.3 218.0
-------------------------------------------------------- ------ ------
Corporation tax charge at standard rate of 18.6% (2018:
26.0%) 48.2 56.7
Profit on disposal of business taxed at lower rate (29.8) (16.0)
Non-deductible impairments 9.9 -
Net impact of US tax reform measures - (0.9)
Effect of intra-group financing - (4.9)
Other non-deductible expenditure 3.3 3.8
Movements on unrecognised deferred tax assets 0.5 0.4
Tax credits and incentives (5.1) (4.1)
Change in tax rates (excluding US) - 0.3
Adjustments to prior year current and deferred tax
charges (1.8) (2.5)
-------------------------------------------------------- ------ ------
Taxation charge 25.2 32.8
-------------------------------------------------------- ------ ------
The Group's standard rate of corporation tax of 18.6% is lower
than the prior year rate (26%), principally due to the profit on
disposal of BTG arising in countries with lower tax rates. The
standard rate of corporation tax applying to the profit on disposal
of BTG has been calculated by using a weighted average of the rates
in the main countries in which BTG operates.
'Profit on disposal of business taxed at a lower rate' above, in
the current year principally refers to the benefit of tax
exemptions for the sale of shares in certain countries.
'Tax credits and incentives' above refers principally to
research and development tax credits and other reliefs for
innovation such as the UK Patent Box regime and Dutch Innovation
Box regime, as well as tax reliefs available for Foreign Derived
Intangible Income in the US.
'Net impact of US tax reform measures' above refers to the
impact of the US Tax Cuts and Jobs Act of 2017. In 2018, this
comprises a credit of GBP0.9m arising as a prior year adjustment in
respect of remeasuring the prior year net deferred tax
liabilities.
The following tax (credits)/charges relate to items of income
and expense that are excluded from the Group's adjusted performance
measures.
2019 2018
GBPm GBPm
----------------------------------------------------------------- ------ ------
Tax credit on amortisation and impairment of acquisition-related
intangible assets (16.9) (9.6)
Tax credit on depreciation of acquisition-related
fair value adjustments to property, plant and equipment (0.2) (0.1)
Tax credit arising from net impact of US tax reform
measures - (0.9)
Tax credit on net transaction-related costs and fair
value adjustments (0.8) (0.6)
Tax charge on profit on disposal of property 1.2 -
Tax credit on retranslation of short-term inter-company
loan balances (0.1) (0.5)
Tax charge on profit on disposal of businesses 3.2 0.4
Tax credit relating to prior year adjustments (2.2) -
Tax credit on restructuring costs (11.9) (3.5)
----------------------------------------------------------------- ------ ------
Total tax credit (27.7) (14.8)
----------------------------------------------------------------- ------ ------
The effective adjusted tax rate for the year was 21.4% (2018:
19.7%) as set out in the reconciliation below:
2019 2018
Reconciliation of the statutory taxation charge to
the adjusted taxation charge GBPm GBPm
--------------------------------------------------- ---- ----
Statutory taxation charge 25.2 32.8
Tax credit on items of income and expense that are
excluded from the Group's adjusted profit before
tax 27.7 14.8
--------------------------------------------------- ---- ----
Adjusted taxation charge 52.9 47.6
--------------------------------------------------- ---- ----
The UK's dividend taxation regime prior to July 2009 is the
subject of long-running litigation between HMRC and other taxpayers
in relation to the tax charge on dividends received from EU-based
companies. The outcome of this dispute is likely to be relevant to
the Group in respect of certain dividends received by UK Group
companies before that date. Pending resolution in the courts, an
amount of GBP8.8m (2018: GBP8.8m) continues to be held as a tax
creditor for the potential tax liabilities arising if the final
decision is in HMRC's favour. An amount of GBP5.5m (2018: GBP5.4m)
relating to accrued interest on the potential tax liabilities is
also held as a tax-related provision and an amount of GBP0.9m
(2018: GBP1.4m) has been booked as a deferred tax asset in respect
of future tax relief on the accrued interest.
In October 2017, the EU Commission opened a formal State Aid
investigation into an exemption within the UK's Controlled Foreign
Company regime for certain finance income. A final decision was
published by the Commission during 2019, concluding that certain
aspects of the exemption (as it was implemented in UK law for the
years 2013-2018) constituted State Aid and requiring the UK to
recover such aid from affected parties. Spectris is impacted by
this decision since we have claimed the benefit of the group
finance exemption during the period in question.
The Group, along with the UK government and a number of other
affected taxpayers, has sought annulment of the EU Commission's
decision through the EU Courts. No provision has been made in
respect of this matter since we believe that it is more likely than
not that the decision will subsequently be annulled and no
additional tax will be due. In the event that the Commission's
decision is upheld then, as at 31 December 2019, the Group's
maximum estimated exposure is GBP19.0m (2018: GBP18.0m) in respect
of tax and GBP1.0m (2018: GBP0.5m) in respect of interest. However,
quantification of the liability in accordance with the Commission's
judgement is complex and depends on the facts of each individual
case, and therefore the Group's liability may ultimately be
determined to be less than this amount.
6. Dividends
2019 2018
Amounts recognised and paid as distributions to owners
of the Company in the year GBPm GBPm
------------------------------------------------------- ---- ----
Final dividend for the year ended 31 December 2018
of 40.5p (2017: 37.5p) per share 46.9 44.5
Interim dividend for the year ended 31 December 2019
of 21.9p (2018: 20.5p) per share 25.4 23.7
------------------------------------------------------- ---- ----
72.3 68.2
------------------------------------------------------- ---- ----
2019 2018
Amounts arising in respect of the year GBPm GBPm
------------------------------------------------------- ---- ----
Interim dividend for the year ended 31 December 2018
of 21.9p (2018: 20.5p) per share 25.4 23.7
Proposed final dividend for the year ended 31 December
2019 of 43.2p (2018: 40.5p) per share 50.1 46.8
------------------------------------------------------- ---- ----
75.5 70.5
------------------------------------------------------- ---- ----
In addition, subject to shareholder approval, a special dividend
of 150.0 pence per existing ordinary share is proposed, totalling
GBP175 million. In order to maintain the comparability of the
Group's share price and per-share metrics before and after the
special dividend, the Group plans to undertake a share
consolidation, which will be subject to shareholder approval.
The proposed final and special dividends are subject to approval
by shareholders at the AGM on 22 May 2020 and have not been
included as a liability in these Financial Statements.
7. Earnings per share
Basic earnings per share amounts are calculated by dividing net
profit for the year attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the
year (excluding treasury shares).
Diluted earnings per share amounts are calculated by dividing
the net profit attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the
year but adjusted for the effects of dilutive options.
Basic earnings per share 2019 2018
---------------------------------------------- ----- -----
Profit after tax (GBPm) 234.1 185.2
Weighted average number of shares outstanding
(millions) 115.8 117.5
----------------------------------------------- ----- -----
Basic earnings per share (pence) 202.2 157.6
----------------------------------------------- ----- -----
Diluted earnings per share 2019 2018
-------------------------------------------- ----- -----
Profit after tax (GBPm) 234.1 185.2
--------------------------------------------- ----- -----
Basic weighted average number of shares
outstanding (millions) 115.8 117.5
Weighted average number of dilutive
5p ordinary shares under option (millions) 0.4 0.6
Weighted average number of 5p ordinary
shares that would have been issued
at average market value from proceeds
of dilutive share options (millions) (0.1) (0.1)
--------------------------------------------- ----- -----
Diluted weighted average number of
shares outstanding (millions) 116.1 118.0
--------------------------------------------- ----- -----
Diluted earnings per share (pence) 201.6 156.9
--------------------------------------------- ----- -----
8. Goodwill and other intangible assets
Other
intangible
Goodwill assets Total
Cost GBPm GBPm GBPm
---------------------------------------- -------- ----------- -------
At 1 January 2019 915.1 619.7 1,534.8
Additions 2.4 21.8 24.2
Disposals (66.7) (29.7) (96.4)
Foreign exchange difference (24.6) (14.0) (38.6)
---------------------------------------- -------- ----------- -------
At 31 December 2019 826.2 597.8 1,424.0
---------------------------------------- -------- ----------- -------
Accumulated amortisation and impairment
---------------------------------------- -------- ----------- -------
At 1 January 2019 148.8 356.4 505.2
Charge for the period - 48.1 48.1
Impairment 35.1 47.1 82.2
Disposals (0.2) (22.8) (23.0)
Foreign exchange difference (4.3) (9.5) (13.8)
---------------------------------------- -------- ----------- -------
At 31 December 2019 179.4 419.3 598.7
---------------------------------------- -------- ----------- -------
Carrying amount
---------------------------------------- -------- ----------- -------
At 31 December 2019 646.8 178.5 825.3
---------------------------------------- -------- ----------- -------
At 1 January 2019 766.3 263.3 1,029.6
---------------------------------------- -------- ----------- -------
Millbrook
Since its acquisition in 2016, Spectris has made significant
capital investment in Millbrook alongside two bolt-on acquisitions
in Leyland and Millbrook Revolutionary Engineering. Given the early
programme life cycle stage, the headroom between the recoverable
amount (determined based on a value-in-use model) and the carrying
value of the Millbrook CGU is modest at GBP17m. We expect the
headroom to increase in future periods as the recent capital
investments depreciate and the expected returns on these assets are
realised. We have considered reasonably possible changes in key
assumptions that could cause an impairment at
31 December 2019, and have identified two key assumptions as
follows:
-- Discount rate applied to future cashflows - our assessment of
impairment assumes a pre-tax discount rate of 12.1% based on our
determination of Group WACC and risks specific to the Millbrook CGU
cashflows. An increase to 12.8% would see the headroom reduced to
nil.
-- Years 1 to 5 cashflows - our assessment of impairment assumes
a CAGR of 14% after year 1. A decrease in the CAGR by 2%,
equivalent to a 7% reduction in years 2 to 5 cashflows, would see
the headroom reduced to nil.
Impairment of goodwill
Results at Concept Life Sciences ('CLS'), which was acquired in
January 2018, were below expectations during the initial period of
ownership to 31 December 2018. Performance was impacted by a
reduction in project work from two major customers, delays in
gaining accreditations and sub-optimal performance at the
environmental laboratories. This was partly attributable to
internal issues reflecting the state of the business on acquisition
by the Group, which was in the process of integrating previous
acquisitions into two divisions, as well as distraction and
disruption caused by the acquisition. In February 2019, management
considered that remedial action was having a positive impact,
progress was being made and that the end markets for CLS were still
strong as customers look to outsource analytical services and
pharmaceutical development.
During the first six months of 2019, performance had not
improved as anticipated, with sales declining by 9% on a LFL basis
and resulting gross margin lower than 2018. This under-performance
was attributable to the exit of its major customer in the
pharmaceutical development/integrated drug development services
business as well as continued sub-optimal performance in the
environmental analytical services division. The analytical services
division, where continued focus on on-time delivery was impacted by
high staff attrition rates and a deterioration in customer
relationships. New senior management for CLS were in place by June
and a detailed strategic review of the CLS businesses was
undertaken. In agreement with the Spectris Group Executive, it was
proposed, subject to consultation and legal requirements, that the
environmental analytical laboratories be closed. New management
believed that in their current state, these laboratories would not
be able to recapture share in this market. The environmental
consultancy and testing business was subsequently sold in October
2019 (see note 13) and the four environmental laboratories were
closed. Management believe that the market for pharmaceutical
development/integrated drug development services remains strong and
attractive and existing activities here will be strengthened.
As a result of this, an impairment of CLS goodwill of GBP35.1m
was charged to the income statement during the year. This
impairment reflects the loss of value from the acquired workforce
particularly in the analytical service division, the loss of
expected future customer relationships across both divisions and
reduced synergies from cross-selling instruments and services. The
estimated recoverable amount of the CLS cash generating unit at 30
June 2019 was GBP105.3m which was determined on a value in use
basis using a pre-tax discount rate of 10.0% (31 December 2018:
13.4%).
Impairment of other intangible assets
Impairment of other intangible assets includes GBP32.4m relating
to customer relationships and technology acquired as part of the
CLS acquisition. The remaining GBP14.7m impairment of other
intangible assets relates to items impaired as a result of
restructuring activities undertaken following the strategic
review.
9. Investment in joint venture (EMS B&K) and assets held for
sale
The movement in the investment in the joint venture during the
year is shown below:
GBPm
------------------------------------------------------------------------------------------------ -----
As at 1 January 2019 5.0
------------------------------------------------------------------------------------------------ -----
Share of post-tax results of joint venture (including GBP1.0m impairment of acquired Intangible
assets) (4.9)
Foreign exchange (0.1)
Transfer to held for sale -
------------------------------------------------------------------------------------------------ -----
As at 31 December 2019 -
------------------------------------------------------------------------------------------------ -----
The Group also has a long-term receivable from EMS B&K which
arose on the formation of the joint venture. The recoverable amount
is based on the future value which is expected to be achieved upon
an ultimate exit of the joint venture.
During December 2019, as part of the plan to simplify the
Group's portfolio, the Group entered into preliminary discussions
in conjunction with its joint venture partner with a third party
for the acquisition of the joint venture. On 17 January 2020, an
announcement was made that agreement had been reached for the sale
of our interest in the joint venture for consideration of GBP17.9m
in cash and approximately GBP1.2m in shares in Envirosuite Limited.
The closing of the deal is subject to approval by Envirosuite's
shareholders at a meeting to be held on 24 February 2020 and the
conditional placement of shares by Envirosuite required to fund the
consideration for the transaction, with completion expected to take
place shortly thereafter.
As a result, the receivable from the joint venture has been
impaired by GBP21.3m to the GBP18.9m expected recoverable amount.
This remaining balance, which represents fair value less costs to
sell, has been included within assets held for sale at 31 December
2019. The investment in the joint venture (nil value) has also been
transferred to assets held for sale. In 2018, the GBP3.9m of assets
classified as held for sale related to the disposal of a property
in Omega.
10. Cash generated from operations
2019 2018
GBPm GBPm
--------------------------------------------------------------------- ------- ------
Cash flows from operating activities
Profit after tax 234.1 185.2
Adjustments for:
Taxation charge 25.2 32.8
Profit on disposal of businesses (204.7) (56.3)
Share of post-tax results of joint venture 4.9 1.2
Finance costs 11.4 16.0
Financial income (7.9) (2.5)
Depreciation and impairment of property, plant and equipment 57.6 30.3
Amortisation and impairment of intangible assets 95.2 49.1
Impairment of non-current receivable from joint venture 21.3 -
Impairment of goodwill 35.1 -
Transaction-related fair value adjustments 4.0 4.8
Profit on disposal of property, plant and equipment (4.9) (1.9)
Equity-settled share-based payment expense 3.0 5.1
--------------------------------------------------------------------- ------- ------
Operating cash flow before changes in working capital and provisions 274.3 263.8
Decrease/(Increase) in trade and other receivables 13.9 (30.4)
Increase in inventories (3.3) (17.4)
Decrease in trade and other payables (10.0) (3.6)
Increase in provisions and retirement benefits 2.9 3.4
--------------------------------------------------------------------- ------- ------
Cash generated from operations 277.8 215.8
--------------------------------------------------------------------- ------- ------
11. Share capital, treasury shares and employee benefit trust
shares
At 31 December 2019, the Group held 5,182,366 treasury shares
(2018: 5,636,153). During the year,
453,787 (2018: 111,207) of these shares were issued to satisfy
options exercised by, and SIP Matching Shares awarded to, employees
which were granted under the Group's share schemes. Nil ordinary
shares were repurchased and cancelled by the Group during the year
(2018: 3,825,802 ordinary shares were repurchased and cancelled as
part of the share buyback programme announced on 5 March 2018,
which concluded on 13 August 2018).
12. Acquisitions
The Group completed the acquisition of 100% of RightHook Inc. on
25 February 2019 for a gross consideration of GBP3.8m. RightHook
Inc. is an engineering software provider based in the USA. The
provisional fair value of net assets acquired was GBP1.4m,
including GBP1.8m of intangible assets and GBP0.4m of deferred tax
liabilities, which generated goodwill of GBP2.4m. The acquisition
is included in the HBK segment and cash generating unit.
2019 2018
Analysis of cash outflow in Consolidated Statement
of Cash Flows GBPm GBPm
------------------------------------------------------ ---- -----
Net consideration in respect of acquisitions during
the year 3.8 195.7
Deferred and contingent consideration on acquisitions
during the year to be paid in future years - (6.0)
------------------------------------------------------ ---- -----
Cash paid during the year in respect of acquisitions
during the year 3.8 189.7
Cash paid in respect of prior years' acquisitions 5.9 6.7
------------------------------------------------------ ---- -----
Net cash outflow relating to acquisitions 9.7 196.4
------------------------------------------------------ ---- -----
13. Profit on disposal of businesses
The Group completed the disposal of 100% of its pulp and paper
business, BTG on 1 December 2019 in exchange for gross
consideration of GBP274.5m. This generated a profit on disposal of
GBP206.1m which included transaction expenses of GBP7.9m, of which
GBP7.1m were paid during 2019.
The profit on disposal of BTG is calculated as follows:
2019
GBPm
-------------------------------------------------------------- ------
Goodwill and other intangible assets 73.4
Property, plant and equipment 26.1
Inventories 14.1
Trade and other receivables 23.1
Cash and cash equivalents 3.0
Trade and other payables (21.0)
Lease liabilities (3.4)
Provisions (0.3)
Net deferred and current tax liabilities (2.8)
Retirement benefit obligations (15.8)
-------------------------------------------------------------- ------
Net assets disposed 96.4
-------------------------------------------------------------- ------
Consideration received, satisfied in cash 272.8
Deferred consideration 1.7
Transaction costs (7.9)
-------------------------------------------------------------- ------
Net consideration from disposal of business 266.6
Net assets disposed of (including GBP3.0m of cash and cash
equivalents held by BTG) (96.4)
Currency translation differences transferred from translation
reserve 35.9
-------------------------------------------------------------- ------
Profit on disposal of business 206.1
-------------------------------------------------------------- ------
On 10 October 2019, the Group completed the disposal of its
environment consultancy and testing business for nil purchase
price. The net assets disposed were GBP2.3m, generating a loss on
disposal of GBP2.3m. Profit on disposal of businesses in the
Consolidated Income Statement also includes a GBP0.9m credit from
other disposals.
The disposals in the year did not meet the definition of
discontinued operations given in IFRS 5
'Non-Current Assets Held for Sale and Discontinued Operations'
and, therefore, no disclosures in relation to discontinued
operations were made.
The Consolidated Statement of Cash Flows includes GBP262.7m of
net proceeds from the sale of BTG, which consists of GBP272.8m of
consideration received in cash less GBP7.1m of transaction fees
paid and GBP3.0m of cash and cash equivalents held by BTG units
that were disposed of. The Consolidated Statement of Cash Flows
also includes GBP2.3m paid in respect of deferred consideration and
tax payments on the disposal of EMS B&K and GBP0.3m of payments
from other business disposals.
14. Subsequent events
On 17 January 2020, an announcement was made that agreement had
been reached for the sale of the Group's interest in the EMS
B&K joint venture for consideration of GBP17.9m in cash and
approximately GBP1.2m in shares in Envirosuite Limited. The closing
of the deal is subject to approval by Envirosuite's shareholders at
a meeting to be held on 24 February 2020 and the conditional
placement of shares by Envirosuite required to fund the
consideration for the transaction, with completion expected to take
place shortly thereafter. As a result, the receivable from the
joint venture has been impaired by GBP21.3m to the expected
recoverable amount and the remaining balance of GBP18.9m has been
included within assets held for sale at 31 December 2019 (see note
9).
On 31 January 2020, the Group sold its interest in the rheology
range of products to Netzsch Group for consideration of GBP8.8m in
cash. This product range, part of the Malvern Panalytical segment,
generated approximately GBP12m of revenue and GBP1m of operating
profit in 2019.
Dividend timetable
Event Date - 2020
---------------------------------------------------- ----------------------
Annual General Meeting 12 Noon on Friday 22
May
Share Consolidation Record Date 6.00pm on Friday 22
May
Final and Special Dividend Record Date (Combined 6.00pm on Friday 22
Dividend) May
Record Date for participation in the Dividend 6.00pm on Friday 22
Reinvestment Plan for the Combined Special Dividend May
Listing and Admission and commencement of dealings 8.00am on Tues, 26 May
in New Ordinary Shares (Post Consolidation)
New Ordinary Share trade Ex-entitlement for the From 8.00am on Tues,
combined Final and Special dividend 26 May
CREST accounts credited with New Ordinary Shares From 8.00am on Tues,
26 May
Payment of the Combined Final and Special Dividend Monday, 22 June
to Shareholders
Purchase of New Ordinary Shares for participants Monday, 22 June
in the Dividend Reinvestment Plan
---------------------------------------------------- ----------------------
Cautionary statement
This press release may contain forward-looking statements. These
statements can be identified by the fact that they do not relate
only to historical or current facts. Without limitation,
forward-looking statements often use words such as anticipate,
target, expect, estimate, intend, plan, goal, believe, will, may,
should, would, could or other words of similar meaning. These
statements may (without limitation) relate to the Company's
financial position, business strategy, plans for future operations
or market trends. No assurance can be given that any particular
expectation will be met or proved accurate and shareholders are
cautioned not to place undue reliance on such statements because,
by their very nature, they may be affected by a number of known and
unknown risks, uncertainties and other important factors which
could cause actual results to differ materially from those
currently anticipated. Any forward-looking statement is made on the
basis of information available to Spectris plc as of the date of
the preparation of this press release. All forward-looking
statements contained in this press release are qualified by the
cautionary statements contained in this section. Other than in
accordance with its legal and regulatory obligations, Spectris plc
disclaims any obligation to update or revise any forward-looking
statement contained in this press release to reflect any change in
circumstances or its expectations.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
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END
FR FFFFLFAIALII
(END) Dow Jones Newswires
February 20, 2020 02:00 ET (07:00 GMT)
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