TIDMSXS
RNS Number : 1100H
Spectris PLC
30 July 2019
SPECTRIS PLC
2019 HALF YEAR RESULTS
30 July 2019 - Spectris plc (SXS: LSE), the
productivity-enhancing instrumentation and controls company,
announces half year results for the six months ended 30 June
2019.
Headlines
-- Sales of GBP759.1 million, reflecting a 1% LFL(1) sales increase
-- Adjusted operating profit of GBP83.5 million, up 4%, and
adjusted operating margin up 0.3pp, on a LFL basis
-- Strong operating cash flow conversion of 89%
-- Adjusted earnings per share up 4%, dividend per share increase of 7%
-- Strategic review completed and now focused on executing our strategy for profitable growth
-- Benefits from profit improvement programme in 2019 now expected at the upper end of the
GBP15-20 million range; 2019 exit run rate of GBP30 million
re-confirmed
-- Further restructuring as part of the strategic review,
leading to a charge of GBP35.1 million relating to an impairment of
goodwill and GBP45.8 million relating to other intangibles
Like-for-like
H1 2019 H1 2018 Change change(1)
---------------------------------- -------- -------- --------- --------------
Adjusted(1)
Sales (GBPm) 759.1 728.0 4% 1%
Operating profit (GBPm) 83.5 77.2 8% 4%
Operating margin (%) 11.0% 10.6% 0.4pp 0.3pp
Profit before tax (GBPm) 77.2 74.1 4%
Earnings per share (pence) 52.4p 50.4p 4%
Operating cash flow conversion
(%) 89% 69% 20pp
Return on gross capital employed
(%) 13.4% 14.2% (0.8pp)
Statutory
Sales (GBPm) 759.1 728.0 4%
Operating (loss)/profit (GBPm) (46.1) 45.5 n/a
Operating margin (%) (6.1%) 6.3% (12.4pp)
(Loss)/profit before tax(2)
(GBPm) (50.1) 96.6 n/a
Basic (loss)/earnings per
share (pence) (41.8p) 74.6p n/a
Dividend per share (pence) 21.9p 20.5p 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 statutory measures in Note 2 to the Condensed
Financial Statements. Consistent with the Group Consolidated
Financial Statements for the year ended 31 December 2018, adjusted
measures are presented before restructuring costs.
2 The main adjusting items to statutory profit before tax in H1
2019 were goodwill impairment of GBP35.1 million, impairment of
intangible assets of GBP45.8 million and restructuring costs of
GBP29.1 million, reducing basic earnings per share by 95.1 pence.
The main adjusting items in H1 2018 were a profit on disposal of
business of GBP57.0 million and restructuring costs of GBP6.7
million, increasing basic earnings per share by 53.5 pence.
Commenting on the results, Andrew Heath, Chief Executive, said:
"We have delivered results in line with expectations in the first
half, despite the more challenging macroeconomic environment. While
our LFL sales growth moderated in the first half of 2019,
profitability and cash conversion improved.
Our expectations for the full year remain unchanged, while
recognising that the current macroeconomic conditions make it more
challenging. We will continue to focus on what we can control;
implementing targeted growth initiatives, refocusing the portfolio
and driving operating margin expansion, with increased benefits
from our profit improvement programme coming through in the second
half.
We have completed our strategic review and are clear on the
opportunities and potential ahead of us. We are now focused on
executing our strategy for profitable growth and creating
significant value for our customers, shareholders and
employees."
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 9:30am BST 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 plc is a leading supplier of productivity-enhancing
instrumentation and controls. The Company's products, technologies
and services help customers to improve product quality and
performance, improve core manufacturing processes, reduce downtime
and wastage and reduce time to market. Its global customer base
spans a diverse range of end-user markets. Spectris operates across
four business segments which reflect the applications and
industries it serves: Materials Analysis, Test and Measurement,
In-line Instrumentation and Industrial Controls. Headquartered
in Egham, Surrey, United Kingdom, the Company employs approximately
10,000 people located in more than 30 countries. For more
information, visit www.spectris.com.
CHIEF EXECUTIVE'S REVIEW
H1 2019 results overview(1)
As anticipated, organic sales growth in the first half of the
year moderated against a tough comparator in 2018, reflecting the
more challenging macroeconomic environment. Sales in the first half
of the year increased by 4% to GBP759.1 million (H1 2018: GBP728.0
million), a 1% increase on an organic, constant currency
(like-for-like, 'LFL') basis. Acquisitions, net of disposals,
contributed 1% to sales growth and there was a 2% positive impact
from foreign currency exchange movements.
Sales by segment LFL sales change Sales by destination LFL sales change
Materials Analysis 6% North America (3%)
----------------- --------------------- -----------------
Test and Measurement (3%) Europe (2%)
----------------- --------------------- -----------------
In-line Instrumentation 7% Asia 7%
----------------- --------------------- -----------------
Industrial Controls (7%) Rest of the world 14%
----------------- --------------------- -----------------
Group 1% Group 1%
----------------- --------------------- -----------------
Materials Analysis posted good LFL sales growth of 6%, with a
particularly strong performance in the semiconductor industry and a
rebound in academic research activity. Sales into Asia were notably
strong. In Test and Measurement, the 3% LFL sales decline primarily
reflected a tough comparator in the automotive sector in Europe and
Asia. In-line Instrumentation delivered an improved operational
performance with good growth, albeit against an easier comparator,
across the majority of its end markets, outside the converting and
film extrusion industries which were again weaker. Industrial
Controls recorded a 7% decline in LFL sales, impacted by USA-China
tariffs, slowing US industrial production and a temporary
disruption to activity following the launch of the new digital
platform at Omega in April.
LFL sales were lower in both North America and in Europe. Asia
continues to deliver good growth broadly spread across the region,
except for China where LFL sales were marginally lower, reflecting
disruption caused by the USA-China tariffs. By industry, there was
notable LFL sales growth across the semiconductor, energy/utilities
and academic research sectors.
Adjusted operating profit increased by 8% to GBP83.5 million (H1
2018: GBP77.2 million). On a LFL basis, the increase was 4%, after
adjusting for the impact of acquisitions, net of disposals, of 1%
and a 3% positive currency impact. Helped by the initiatives being
implemented under our profit improvement programme, the operating
margin improved to 11.0% (H1 2018: 10.6%), 0.3pp higher on a LFL
basis.
The Group's adjusted operating cash conversion rate was 89%. The
improvement resulted from the growth in profitability and changes
to the classification of lease payments, and also from favourable
working capital and capex movements.
The Board is proposing to pay an interim dividend of 21.9 pence
per share, an increase of 7%. This is consistent with our policy of
making progressive dividend payments based upon affordability and
sustainability. The dividend will be paid on 8 November 2019 to
shareholders on the register at the close of business on
11 October 2019. The ex-dividend date is 10 October 2019.
Strategy for profitable growth
Spectris serves a diverse set of end markets with a number of
high-quality businesses, which have strongly recognised brands in
their target markets. We believe there are significant
opportunities to improve the operational performance of the Group
and to drive shareholder value creation through increasing our
operating margin and by taking a more focused approach to portfolio
composition, asset optimisation and capital allocation
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 statutory measures in Note 2 to the Condensed Financial
Statements.
The work on the strategic review has now been completed and we
are now focused on executing our strategy for profitable growth. We
believe that Spectris represents an exciting opportunity to make a
good company even stronger. We are moving away from a number of
disparate businesses to a smaller number of highly attractive
platforms, investing to maintain and build their leadership
positions and differentiation into the future.
The strategic review confirmed the initial assessment of Malvern
Panalytical, HBK and Omega being platforms for growth. At our
Capital Markets Day event in June, we presented the attributes and
opportunities for each of these businesses:
-- Malvern Panalytical is a leader in the advanced measurement
and characterisation of materials. It provides best in class sensor
technologies, insightful data science and extensive domain
knowledge and through this, creates superior solutions that enable
its customers to accelerate innovation and be more efficient in
research, development and manufacturing. It operates in an
addressable served market of GBP3.2 billion growing at 4-5% per
annum and has opportunities to drive growth through market share
gain, expanding its capabilities into more predictive and
prescriptive solutions and adjacent M&A.
-- HBK provides a strongly differentiated and integrated
physical sensing, testing, modelling and simulation solution which
helps customers accelerate product development. It is positioned in
a GBP3.6 billion addressable served market with demand for test and
measurement hardware and software growing at 4-6% per annum. The
merger of BKSV and HBM commenced at the start of the 2019 so the
near-term focus for management is on fully integrating the two
businesses to deliver operating margin expansion. The end markets
in which HBK operates again provide organic headroom expansion as
well as adjacent M&A opportunities.
-- Omega is a market-leading, specialist, sensor provider to
process engineers providing a curated and differentiated product
offering. It offers strong application expertise and a leading
e-commerce experience. Its primary served market is North America -
a GBP2.0 billion market with growth potential of 4-5% per annum.
The launch of its new digital platform enables Omega to drive
growth and gain market share in the fragmented North American
market, with further potential from expanding its product offering
into near adjacencies in specialty distribution.
-- Industrial Solutions division - the remainder of the
portfolio has been grouped together as the Industrial Solutions
division and comprises a portfolio of high-value, niche businesses
that compete globally. These are now operating under a new
leadership team with a focus on operational and financial
performance. The portfolio comprises companies with platform
potential, which have strong market positions, good growth
prospects and margins but require additional scale and, where
appropriate, will receive targeted investments to deliver their
potential; and other companies which will be managed for value to
optimise their performance and potentially divested.
As well as reviewing the Group's operating company portfolio,
the strategic review also focused on capital allocation and
returns. Going forward, the Group will adopt an even more rigorous
capital allocation approach and has established a new investment
framework to ensure that future investment results in stronger
profit growth and value creation. A part of this, the Group is now
utilising return on gross capital employed ('ROGCE')(2) as a key
metric. Over the medium term, it is our ambition to improve the
overall ROGCE of the Group.
Profit improvement programme
Implementation of the initiatives under the profit improvement
programme have been underway across all of our operating companies.
Benefits and savings are arising from improving the sales mix,
product profitability, site rationalisation, improving
organisational effectiveness and driving Lean through our
operations. In addition, the size of the centre is being reduced
and it will be focused on Group-level governance, managing
financial performance and capital allocation across the Group,
driving strategy execution, Lean and organisation and talent
development. Progress to date includes closures of facilities at
Malvern Panalytical, NDCT and CLS; reduced headcount through
organisational restructuring at most of our operating companies and
at the centre; and the retirement of certain lower margin products
at NDCT.
2 For the calculation for ROGCE, please see Note 2 to the Condensed
Financial Statements.
The gross recurring benefit achieved year to date totalled GBP8
million and the one-off restructuring costs incurred were GBP29
million. We now expect the benefits in 2019 to be at the upper end
of the GBP15-20 million range previously announced, and still
anticipate an exit rate of GBP30 million by the year end. This will
require one-off restructuring costs during 2019 of around GBP45
million, with the increase reflecting the impact of additional
strategic decisions made to realign certain activities, the largest
of these being related to the restructuring at CLS. The total cash
cost of restructuring in 2019 is expected to be around GBP35
million, of which GBP13 million was incurred in the first half.
In addition, we have undertaken a number of activities to foster
a continuous improvement culture and focus on Lean as part of the
Spectris Business Systems ('SBS') initiatives. The first half of
the year has been a very active period with successful kaizen
events in the majority of our operating companies, primarily
focusing on improving on-time delivery. In addition, there have
been several larger commercially-oriented kaizens focusing on the
flow from lead generation opportunity to order conversion, and
supporting our sales, marketing and inside sales teams to become
more effective and efficient, demonstrating the extensive
application opportunities for the SBS tools. The objective of these
events is to help our businesses drive more profitable growth, as
well as support increased value selling.
All these initiatives are focused on improving gross margin and
constraining overheads to drive future operating margin expansion
and return our operating margin to at least our previous highs.
Restructuring activities
As we have undertaken this strategic review, we have critically
assessed and appraised all our assets and business. As well as
identifying the future growth drivers for Spectris, we have also
assessed if there are businesses which might be underachieving. As
a result of this assessment, it has been concluded that the
cessation of a business line within the Test and Measurement
segment and restructuring at Concept Life Sciences ('CLS') is
required.
Performance at CLS was below expectations in the first half of
the year, reporting an underlying loss of
GBP4.9 million, despite the remedial action to improve
operational effectiveness that had been put in place. This
unexpected under-performance is attributable to the exit of its
major customer in the pharmaceutical development/integrated drug
development services business ('IDDS'), as well as continued losses
in the environmental analytical services division. The senior
management for CLS were replaced in the second quarter and a
detailed strategic review of the businesses was undertaken.
Subsequently, it is proposed, subject to consultation and legal
requirements, that the environmental analytical laboratories be
closed. Management believe these laboratories will not be able to
recapture share in this market, without significant investment,
which cannot be justified. As a result, an impairment of goodwill
of GBP35.1 million and of other intangible assets of GBP32.4
million has been charged to the income statement.
Going forward, CLS will primarily focus on the pharmaceutical,
life sciences and food markets, where we see customers continuing
to outsource more analytical services and pharmaceutical
development work. From 1 July, CLS will move within the Malvern
Panalytical platform, as previously announced, where the
combination of the two businesses will provide the opportunity to
develop differentiated instrument and CRO offerings.
2019 2018
Half year Half year
GBPm GBPm
----------------------------------------------------- -------- -----------
Adjusted operating profit 83.5 77.2
Restructuring costs (29.1) (6.7)
Net transaction-related costs and fair value
adjustments (6.3) (5.8)
Depreciation of acquisition-related fair value
adjustments to property, plant and equipment (0.4) (0.4)
Profit on disposal of property 5.2 -
Impairment of goodwill (35.1) -
Amortisation and impairment of acquisition-related
intangible assets (63.9) (18.8)
----------------------------------------------------- -------- -----------
Statutory operating (loss)/profit (46.1) 45.5
----------------------------------------------------- -------- -----------
Executive Committee changes
As a result of the shift in the strategic focus for the Group,
the structure and composition of th Spectris Executive Committee
has been changed. Derek Harding joined the Board and Executive
Committee as Chief Financial Officer in March. The Presidents of
the three platform businesses - Malvern Panalytical - Paolo
Carmassi, HBK - Joe Vorih and Omega - Greg Wright and the new
Industrial Solutions segment Business Group Director, Mark Fleiner,
are now members of the Executive Committee.
Reflecting these changes, from 1 July the Group will also change
its reporting format and will reclassify its segmental reporting to
disclosures on the three platforms, providing greater transparency
on these businesses which comprise approximately 60% of Group
revenue and operating profit. The financials for the Industrial
Solutions operating companies will be consolidated and be presented
as a combined division. Pro-forma numbers will be provided later in
the year.
Summary and outlook
We have delivered results in line with expectations in the first
half, despite the more challenging macroeconomic environment. While
our LFL sales growth moderated in the first half of 2019,
profitability and cash conversion improved.
Our expectations for the full year remain unchanged, while
recognising that the current macroeconomic conditions make it more
challenging. We will continue to focus on what we can control;
implementing targeted growth initiatives, refocusing the portfolio
and driving operating margin expansion, with increased benefits
from our profit improvement programme coming through in the second
half.
We have completed our strategic review and are clear on the
opportunities and potential ahead of us. We are now focused on
executing our strategy for profitable growth and creating
significant value for our customers, shareholders and
employees.
Andrew Heath
Chief Executive
FINANCIAL REVIEW
Financial performance
Sales increased by 4% to GBP759.1 million (H1 2018: GBP728.0
million). Growth from acquisitions, net of disposals, contributed
GBP7.1 million (1%), favourable foreign exchange movements
contributed GBP15.7 million (2%) and LFL sales increased by GBP8.3
million (1%).
Adjusted operating profit increased by 8% to GBP83.5 million (H1
2018: GBP77.2 million). Growth from acquisitions, net of disposals,
contributed GBP0.5m (1%), favourable foreign exchange movements
contributed GBP2.5 million (3%) and LFL adjusted operating profit
increased by GBP3.3m (4%).
LFL gross margin decreased to 55.2% (0.7pp) in H1 2019 caused by
input cost inflation, adverse product mix and higher production
overheads. This was more than offset by a LFL overheads decrease of
1.2% (H1 2018: up 5.6%) reflecting lower marketing and consultancy
spend and strong control of employee costs which remained broadly
flat. This resulted in adjusted operating margin improving by 0.4pp
to 11.0%, with the LFL adjusted operating margins improving by
0.3pp compared to H1 2018.
Investment in our R&D programmes amounted to total spend
(including GBP3.5 million of capitalised development costs) of
GBP49.3 million or 6.5% of sales (H1 2018: GBP51.5 million or 7.1%
of sales) and decreased by 4% on a LFL basis in the period.
Statutory operating profit reduced by GBP91.6 million resulting
in a loss of GBP46.1 million (H1 2018: profit of
GBP45.5 million) as the improvement in adjusted operating profit
was offset by restructuring costs of
GBP29.1 million (H1 2018: GBP6.7 million); net
transaction-related costs, depreciation and fair value adjustments
of GBP6.7 million (H1 2018: GBP6.2 million); impairment of goodwill
of GBP35.1 million; amortisation and impairment of
acquisition-related intangible assets of GBP63.9 million (H1 2018:
GBP18.8 million); and a profit on disposal of property of GBP5.2
million (H1 2018: nil). Statutory margins of 6.1% were 12.4pp lower
than the prior period.
Statutory net finance costs decreased by GBP4.7 million to
GBP1.2 million (H1 2018: GBP5.9 million) principally due to foreign
exchange gains arising during the period on retranslation of
short-term intercompany loan balances compared to foreign exchange
losses arising in respect of the same items in the first half of
2018. Adjusted net finance costs were up GBP0.4 million at GBP3.5
million (H1 2018: GBP3.1 million) as a result of higher interest
charges driven by higher average borrowings.
Statutory profit before tax decreased from GBP96.6 million in H1
2018 to a loss before tax of GBP50.1 million in the period.
Statutory profit before tax in the prior period benefited from the
profit on disposal of the
EMS B&K business of GBP57.0 million, whilst statutory profit
before tax in H1 2019 has been impacted by the adjustments noted
above. Adjusted profit before tax increased by 4% to GBP77.2
million.
The effective tax rate on adjusted profit before tax for the
half year was 21.5% (H1 2018: 19.0%), 2.5pp higher than the prior
period as a result of changes in tax laws reducing the benefits
arising from intra-group financing arrangements. Based on the
forecast for the full year, the effective adjusted tax rate for the
full year is also estimated to be 21.5%.
Adjusted earnings per share increased by 4% from 50.4p to 52.4p,
reflecting the net impact of the 4% increase in adjusted profit
before tax and the decrease in the weighted average number of
shares from 119.0 million in H1 2018 to 115.7 million in H1 2019,
following the share buyback, partly offset by the increase in the
effective tax rate. Statutory basic earnings per share decreased
from 74.6p to a loss per share of 41.8p.
Acquisitions and disposals
The Group completed one acquisition during the period with a
total cost of acquisition of GBP3.8 million. A net GBP1.9 million
was paid in respect of prior years' acquisitions, making the net
cash outflow in the year
GBP5.7 million. Furthermore, an amount of GBP1.7 million was
spent on transaction-related costs, which makes the total
transaction-related cash outflow for the period GBP7.4 million.
Cash flow and financing
Adjusted operating cash flow generation of GBP73.9 million
during the period resulted in an adjusted operating cash flow
conversion rate of 89%, compared to 69% in H1 2018. The improvement
resulted from the growth in profitability and changes to the
classification of lease payments, and also from favourable working
capital and capex movements. Capital expenditure (net of grants) of
GBP39.3 million decreased by GBP0.7 million and included investment
at Millbrook of GBP18.4 million (H1 2018: GBP16.5 million). During
the period, there was a net inflow of working capital of GBP1.7
million (H1 2018: net inflow of GBP0.1 million). Average trade
working capital expressed as a percentage of sales, increased by
1.2pp to 12.6%.
The Group finances its operations from both retained earnings
and third-party borrowings, with a broadly even split of the
period-end gross debt balance between fixed rate and floating rate
borrowings. During the period, net debt increased by GBP15.5
million (H1 2018: increase of GBP181.0 million) from GBP297.1
million to
GBP312.6 million.
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. ROGCE for the 12 months ended
30 June 2019 was 13.4% compared to 14.2% in the comparable period,
a decrease of 0.8pp. The main driver of the decrease is the full
year impact of the acquisition of CLS in the first half of 2019
compared to the average capital employed at the first half
2018.
Currency
The Group has both translational and transactional currency
exposures. Translational exposures arise on the consolidation of
overseas company results into Sterling.
The largest translational exposures are to the US Dollar, Euro,
Danish Krone, Japanese Yen and Swiss Franc. Translational exposures
are not hedged. The table below shows the average and closing key
exchange rates compared to Sterling.
H1 2019 H1 2018 H1 2019 H1 2018
(average) (average) Change (closing) (closing) Change
----------------- ----------- ----------- -------- ----------- ----------- --------
US Dollar (USD) 1.29 1.38 (6%) 1.27 1.31 (3%)
Euro (EUR) 1.14 1.14 1% 1.12 1.13 (1%)
Japanese Yen
(JPY) 142 150 (5%) 137 146 (6%)
Swiss Franc
(CHF) 1.29 1.33 (3%) 1.24 1.31 (5%)
----------------- ----------- ----------- -------- ----------- ----------- --------
During the period, currency translation effects resulted in
operating profit being GBP2.5 million higher
(H1 2018: GBP1.6 million lower) than it would have been if
calculated using prior year exchange rates. Transactional foreign
exchange losses of GBP1.0 million (2018: GBP1.6 million gains) were
included in administrative expenses, whilst sales include a loss of
GBP1.2 million (2018: GBP0.5 million gain) 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 around the
world and 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.
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.
USA-China tariffs
The Group has a number of activities which are being or have the
potential of being impacted by the introduction of tariffs between
China and the USA. An assessment has been made as to the annualised
impact of the proposed tariffs. Separate assessments have been made
with respect to the anticipated impact of tariffs on our North
American business' sourcing of goods from China - either directly
or via other parties in their supply chains and tariffs on sales of
goods manufactured in China by Group companies to customers in the
USA. We are working on the assumption that the current planned
tariffs continue for the foreseeable future. Based upon this
assessment, we believe that USA-China tariffs could have the
potential to impact the Group by GBP4 million to GBP8 million of
adjusted operating profit over the course of a full year.
Dividends
The Board has declared an interim dividend of 21.9 pence per
share, an increase of 7% compared to the prior period.
OPERATING REVIEW
Materials In-line Industrial
Analysis Test and Measurement Instrumentation Controls Total
------------------ ---------------
H1 H1 H1
H1 2019 H1 2018 H1 2019 H1 2018 2019 H1 2018 H1 2019 H1 2018 2019 2018
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
Sales (GBPm) 254.6 233.9 238.2 239.8 156.1 141.8 110.2 112.5 759.1 728.0
LFL sales
growth (%) 6% (3%) 7% (7%) 1%
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
Adjusted
operating
profit
(GBPm) 29.7 28.7 17.6 17.2 18.4 11.2 17.8 20.1 83.5 77.2
LFL adjusted
operating
profit
growth (%) 3% (3%) 56% (16%) 4%
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
Adjusted
operating
margin
(%) 11.7% 12.2% 7.4% 7.2% 11.8% 7.9% 16.2% 17.9% 11.0% 10.6%
LFL adjusted
operating
margin
growth (pp) (0.2pp) - 3.6pp (1.9pp) 0.3pp
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
Statutory
operating
(loss)/profit
(GBPm) (54.7)(1) 19.6 (12.4)(2) 7.8 6.5 5.3 14.5 12.8 (46.1) 45.5
Statutory
operating
margin
(%) (21.5%) 8.4% (5.2%) 3.3% 4.2% 3.7% 13.2% 11.4% (6.1%) 6.3%
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
Sales % of
Group sales 34% 32% 31% 33% 21% 20% 14% 15% 100% 100%
---------- -------- ---------- --------- ------ ------------ -------- -------- ------- ------
1 The statutory operating loss of GBP54.7 million was largely
impacted by the GBP67.5 million impairment of goodwill and
intangible assets in CLS.
2 The statutory operating loss of GBP12.4 million was largely
impacted by the costs of restructuring and impairment of intangible
assets arising 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 to the Condensed Financial Statements.
MATERIALS ANALYSIS
Our Materials Analysis operating companies provide 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,
Particle Measuring Systems ('PMS') and Concept Life Sciences
('CLS', acquired January 2018).
Segment performance
LFL
H1 2019 H1 2018 Change change
------------------------------ ---------- ---------- --------- --------
Sales (GBPm) 254.6 233.9 9% 6%
Adjusted operating profit(1)
(GBPm) 29.7 28.7 3% 3%
Adjusted operating margin(1)
(%) 11.7% 12.2% (0.5pp) (0.2pp)
------------------------------ ---------- ---------- --------- --------
1 Adjusted operating profit excludes restructuring costs of
GBP10.6m (H1 2018: GBP1.7m).
Sales growth of 6% for the period was driven by strong demand in
Asia, with the growth widely spread across the region. In North
America and Europe, sales were lower, reflecting a tough comparator
against the first half of 2018.
Adjusted operating profit was up 3%, while adjusted operating
margins decreased by 0.2pp. Adjusted operating margins were higher
at both Malvern Panalytical and PMS reflecting good sales growth
and improved pricing, combined with good overhead cost control at
Malvern Panalytical. This was offset by the dilutive impact from
CLS which made a loss in the period.
Sales at Malvern Panalytical have continued to benefit from the
re-organised sales and marketing functions that have been aligned
to three market sectors: advanced materials, pharma and food and
primary materials. Alongside a key account structure, these have
been focused on value-based selling in order to benefit our
customers and create differentiation from the competition, through
combining our high-spec technology and application expertise. We
are looking to further differentiate our offering and deliver
increasing value to our customers by developing more predictive and
prescriptive solutions. Through our partnership with the University
of Bristol, one of the leading universities in digital
technologies, we have now opened a new data science office to
develop this.
New product launches by Malvern Panalytical in the period
include the latest generation of Epsilon 1 X-ray fluorescence
spectrometers. It enables fast and reproducible elemental analysis
with greater flexibility and precision than before. It has the
capabilities of a larger instrument in a compact system which means
the instrument can be taken directly to the sample and used in
situ. This can deliver substantial cost-savings for the customer
associated with both the class-leading sensitivity and performance
of the new system, and also eliminates sample preparation and
transportation requirements. For example, a major energy company
has used this product in combination with a Mastersizer 3000 in
situ on its offshore oil rig to analyse drilling samples, enabling
results delivery in minutes and eliminating the costs and time
delays of taking the samples onshore for testing.
Also launched was the newest member of the laser particle size
analyser family, Topsizer Plus for the Chinese market. Topsizer
Plus retains the main optical structure consistent with the
original product but with enhanced functionality and capability.
This provides an extended test range and detection capability and a
new intelligent software platform which provides more customised
reporting capabilities.
PMS launched new Pharmaceutical Net(R) Pro cleanroom monitoring
software for data and collection management, reporting and
automation. The software is used with its FacilityPro(R) Processors
which connect directly to environmental sensors,
temperature/humidity sensors, HMI stations, as well as light towers
for visual alarm indication. With regulation continuing to evolve
and become more stringent, PMS' monitoring solutions are key to
helping customers meet industry requirements. We have been working
with a large global pharmaceutical leader, where we have a
long-standing relationship, to upgrade their existing environmental
monitoring system to meet their expanding capacity requirements and
new industry regulations. The combination of the leading solutions
combined with our expertise and a deep customer knowledge enables
us to expand this project to other customers.
Sales to the pharmaceuticals and fine chemicals industries were
flat, although underlying demand remains robust and our order book
here remains good. They were notably lower in North America,
reflecting a tough comparator against a very strong growth period
in 2018. Sales increased in Europe and Asia, with growth in the
latter driven by China and South Korea reflecting strong demand for
new products launched in 2018.
The metals, minerals and mining sector saw a decrease in sales,
with weaker sales into the metals industry, partly offset by good
demand in minerals and mining. Sales into the metals industry are
weaker as a result of a lower level of exploration activity and a
slower iron and steel market resulting from the trade disputes.
Other areas such as building materials have shown good growth and
system orders in advanced materials were strong, notably in
academia.
Sales to academic research customers in the first half of the
year continued the positive trend from the second half of 2018,
with strong growth across all key regions. A significant pick-up in
demand continued in North America and Asia as increased government
funding led to greater market activity. Innovation in our products
also helped drive demand - for example, a partnership between
Malvern Panalytical and the University of Pittsburgh's Energy
Innovation Center was announced for research into rechargeable
battery systems utilising the latest innovations in our X-ray
diffraction products.
Sales to the semiconductor and electronics industries posted
strong growth, particularly in Asia reflecting a strong order
backlog as we entered 2019. There has been some softness in the
electronics sector in this region, but this is expected to recover
in the second half as demand for consumer electronics and IIoT
applications continues to increase. The growth in semiconductor
capital spending has eased in the first half of 2019, but our order
backlog and the appeal of our high-accuracy products has supported
demand, in such areas as high purity process chemicals and
leading-edge microelectronic processes which require very clean
process chemicals that are highly filtered and regulated to a
particle size of 20 nm or below.
Segment market trends
In the pharmaceutical sector, the global growth in disposable
incomes and consequent demand for effective healthcare continues to
result in sustained investment in R&D. Alongside this, an
increasing awareness of total lifecycle cost awareness is pushing
customers to reduce both development costs and time to market for
new products, underpinning an increased need for new solutions and
services. Increasing regulatory compliance and sterility assurance
for drug manufacturing processes is also continuing to drive demand
for our hardware and services.
In the metals, mining and materials sector, we expect to see
some softness in demand in metals and mining, although the
materials order book remains robust. Our focus here is on customers
involved in the research, development and manufacturing of novel
materials and complex systems and devices.
After a strong first half, with its dependence on government
funding, we expect growth in the academic research market to be
variable, although demand in Asia is benefiting from a number of
government initiatives.
Within the semiconductor industry, after an exceptionally strong
year in 2018 the semiconductor capital equipment market will be
down in 2019. Recovery is expected to begin in the second half,
with further growth expected in 2020.
TEST AND MEASUREMENT
Our Test and Measurement operating companies supply test,
measurement and analysis equipment, software and services for
product design optimisation, manufacturing control and microseismic
monitoring. The operating companies in this segment are ESG
Solutions ('ESG'), HBK (Hottinger, Brüel & Kjær, the merger of
Brüel & Kjær Sound & Vibration and HBM since January 2019),
Millbrook and VI-grade Group
('VI-grade', acquired August 2018).
Segment performance
LFL
H1 2019 H1 2018 Change change
------------------------------ ---------- ---------- --------- --------
Sales (GBPm) 238.2 239.8 (1%) (3%)
Adjusted operating profit(1)
(GBPm) 17.6 17.2 2% (3%)
Adjusted operating margin(1)
(%) 7.4% 7.2% 0.2pp -
------------------------------ ---------- ---------- --------- --------
1 Adjusted operating profit excludes restructuring costs of
GBP9.0m (H1 2018: GBP1.8m).
Sales declined by 3%, down in North America and Europe, with a
more marked decline in Asia where market conditions have been more
challenging.
Adjusted operating profit decreased 3% and operating margins
were flat. The impact of the lower sales volumes and higher
depreciation at Millbrook was mostly contained by lower overheads
for the segment and ESG moving into profitability.
Since the start of 2019, BKSV and HBM have been merged into HBK
(Hottinger, Brüel & Kjær). The businesses are being combined in
order to leverage the strengths and complementary expertise across
the measurement chain to enhance our customer proposition, as well
as to realise synergies between the two complementary businesses.
An extended leadership team is being formed and has established the
strategy for the combined group. The execution plan for that
strategy, including an integrated go-to-market model for the joint
sales organisation, is being implemented. Overall, sales fell in
the first half of the year reflecting a number of high one-off
orders in 2018, some disruption in sales and marketing from
merger-related activities and increased production lead times for
vibration test systems products. However, there has been good
growth in new software products.
During 2019, HBK launched a new entry-level sound level meter,
the B&K 2245, for users new to sound measurement, or those who
only make measurements occasionally. It is compact and lightweight,
and can be paired with apps on a smartphone or tablet to provide a
large touchscreen display and easy remote control, tailored to
different customer use cases.
Sikorsky has selected HBK as a partner to deploy a fleet of its
DAQ systems. Development of such a complex machine as a helicopter
requires a multitude of systems to be tested and qualified and
HBK's modular, scalable and flexible architecture met Sikorsky's
requirements, with its easily- and quickly-reconfigurable system
which supports an extremely wide range of sensors and transducers.
Airbus, in the development of its H160 helicopter, has been
utilising HBK's Aircraft Noise Certification Test System to take
noise measurements (both internal and external) as part of an
aircraft's certification process. Having access to accurate noise
measurements during the R&D phase helps make the development
process more efficient.
Despite the slowdown in automotive, we continue to see strong
demand for our products in support of the proliferation of new
product platforms. VI-grade has established a partnership with
Multimatic in the USA for an advanced vehicle development and
driving simulation centre to be located near Detroit, to meet
customer demand for rapid, cost-effective development of
next-generation vehicle systems with features such as driver
assistance and autonomous operation.
Millbrook had a slower than expected start to the year, however
the continued expansion of its testing capacity and capability
provides for incremental growth in the second half of the year. The
first eight new battery test chambers commenced operation in the
first half, with the remaining four due to start up through the
third quarter. A second four-wheel drive climatic emissions chassis
dynamometer was commissioned in June. The facility is used to
simulate road driving conditions in a temperature-controlled
environment for powertrain development and type approval testing of
light duty vehicles. We increased our capacity for testing advanced
driver assistance systems ('ADAS') and connected and autonomous
('CAV') vehicle technologies via a new, secure test facility and a
full range of equipment required for performing all EuroNCAP 2020
and a wide range of non-standard CAV and ADAS test scenarios. The
development and validation of CAVs is further supported by the
installation of a 5G-enabled network at Millbrook. At Test World in
Finland, further indoor tyre testing capacity has been brought into
operation, allowing controlled and repeatable tyre testing on snow,
ice, and wet and dry asphalt, 365 days a year. Test World won 'Tire
Industry Supplier of the Year' category at the Tire Technology
International Awards for Innovation and Excellence 2019. In the
USA, Millbrook RE is growing strongly and has doubled its capacity
in Detroit within the last 12 months. It is now establishing a new
test facility in California, to support the development of electric
vehicles.
At ESG, sales of our new microseismic data acquisition,
processing and analysis product,
FRACMAP(R) Clarity, launched in 2018, have continued to be good.
It enables more strategic well planning, better completions
strategies and optimal reservoir drainage, bringing greater insight
for our oil and gas customers which becomes an even greater focus
for producers when prices are lower/more volatile. However, sales
declined overall reflecting the more volatile oil and gas price
backdrop.
Within the automotive sector, sales declined in the first half
of the year reflecting a tough comparator, and some slowdown in
activity in Asia (especially China) and Europe, with North America
posting a small growth in sales. We continue to see robust
underlying demand for testing equipment and services given the
growth in electric, hybrid and CAV vehicles globally as well as
policy changes in certain markets. Our primary audience are focused
within the R&D part of the automotive OEMs and although new car
registrations/sales have eased, customers continue to invest in new
product development.
In machine manufacturing, a significant portion of which
represents sales into the automotive supply chain, sales declined
marginally. Sales rose in Europe with good growth in Germany,
although we expect this pace to ease, and fell in Asia, driven by a
slower performance in China.
In the aerospace and defence sector, sales were slightly lower
with growth in North America and Europe offset by a decline in
Asia. We continue to see good R&D investment in the industry
and have been building our pipeline of opportunities.
Sales to our consumer electronics and telecoms customers were
only slightly higher in 2019, primarily reflecting fewer new
telecoms product launches by customers this year and lower growth
in Asia. Underlying demand from consumer electronics companies
continues to be good with our electro-acoustic products helping
manufacturers deliver the higher sound quality that customers now
demand from their mobile devices and speakers.
Sales into academic research institutes increased, with growth
in North America and Europe partly offset by lower sales into Asia
after growth in 2018, driven by very good growth in China.
Conditions in global oil and gas and mining markets had improved
in 2018, however there was a rapid decline in the WTI oil price in
the fourth quarter of 2018 due to fears of oversupply. The WTI oil
price increased steadily in the first quarter of 2019 but was more
volatile in the second quarter, with the total number of rigs down
in North America versus 2018. A reduction of capital from financial
institutions and investors also caused some oil and gas producers
to reduce spending. This has led to a sales decline versus the
strong first half of 2018. Consolidation activity in the market
also had an impact on sales as it affected some key clients.
Segment market trends
Despite some near-term headwinds in the automotive industry,
such as weaker-than-expected demand in China and other emerging
markets, we continue to expect significant R&D spending by
vehicle manufacturers as they comply with tightening environmental
regulations and look to improve their competitive position in the
development of electric vehicles and propulsion systems. The growth
in battery development continues at pace as does the testing of
connected and autonomous vehicles, where our hardware and software
offerings and new capacity coming onstream at Millbrook will drive
future revenues.
In aerospace, overall demand will be driven by new development
programmes and advanced testing requirements, where we are well
positioned given our expertise in serving complex testing
requirements.
Demand for audio quality testing in both R&D and production
applications in the consumer electronics and telecoms market remain
healthy, in our view. The prevalence of new product launches will
be a key driver of demand for our applications.
Market conditions in the oil and gas industry are harder to
predict, with the continued volatility in oil and gas prices likely
to have an impact on capital expenditure by many energy market
producers. Our new product offerings continue to position us
strongly but ultimately, demand will be determined by the level of
commercial activity at our customers which looks more
uncertain.
IN-LINE INSTRUMENTATION
In-line Instrumentation operating companies provide process
analytical measurement, asset monitoring and on-line controls, as
well as associated consumables and services for both primary
processing and the converting industries. The operating companies
in this segment are Brüel & Kjær Vibro, BTG,
NDC Technologies ('NDCT') and Servomex.
Segment performance
LFL
H1 2019 H1 2018 Change change
------------------------------ ---------- ---------- --------- --------
Sales (GBPm) 156.1 141.8 10% 7%
Adjusted operating profit(1)
(GBPm) 18.4 11.2 64% 56%
Adjusted operating margin(1)
(%) 11.8% 7.9% 3.9pp 3.6pp
------------------------------ ---------- ---------- --------- --------
1 Adjusted operating profit excludes restructuring costs of
GBP7.0m (H1 2018: GBP1.3m).
Sales increased 7%, with three of the operating companies in
this segment posting sales growth. On a regional basis, sales rose
in both Asia and North America, however were down marginally in
Europe.
Adjusted operating profit increased 56% and adjusted operating
margins increased 3.6pp. This reflected the higher sales and gross
margins at BTG and Servomex, the segment's larger two operating
companies, with a notably strong performance overall at
Servomex.
In the pulp and paper markets, sales for BTG increased compared
with 2018, led by strong growth in tissue manufacturing in Europe
and Asia. Packaging and graphic paper performance has been
performing well, despite the decline in the coated paper market and
a slowdown in China, reflecting the ongoing trade tensions with the
USA. The Process Solutions business is focused on executing several
pulping solution projects including an important strategic project
win earlier this year in Asia. These solution projects combine
innovative measurement, leading software and expert services, which
deliver sustainable gains in business performance to our pulping
customers and providing a means to deliver further cost
optimisation. A Brazilian pulp and paper producer selected BTG for
the supply of instruments and advanced process controls for its
plant. BTG will deliver a comprehensive process optimisation
solution to optimise chemical usage and reduce final brightness
variability.
In the energy and utilities market, sales rose, with notably
strong growth in Asia and North America more than offsetting lower
sales in Europe, with the higher oil price supporting steady
project investment in both upstream and downstream projects. In
this space, increasing environmental legislation, specifically in
relation to emissions monitoring and control, also continues to
drive opportunities for Servomex's products. This type of
application has helped good order growth in the hydrocarbon and
industrial gas segments, but gas monitoring applications are
equally in demand in other industries outside of energy.
Our condition monitoring business for rotating machinery
continues to expand in the growing LNG segment with shipments of
our VibroControl 6000 system to customers in Africa and Australia.
Our latest system VibroControl 8000 is gaining ground in Asia with
new wins in the oil and gas and energy segment in Indonesia and
China. VibroControl 8000 combines the capability of protecting
critical assets with condition monitoring especially focused on
rotating machinery in the industrial sector. Our wind segment
continues to grow based on strong performance of our OEM base where
we deploy our state-of-the-art monitoring solution DDAU
3/VibroSuite. Current activities focus on widening our customer
base to Asia and expanding our service offering through accelerated
investments in advanced software, built on our deep asset domain
knowledge to automatically detect performance anomalies and suggest
corrective actions.
At NDCT, sales to web and converting industries were down
overall, albeit with a rise in Europe, with markedly lower sales in
North America and Asia, reflecting the impact of the USA-China
tariff situation. This also reflects the demand softness
experienced in 2018, driven by industry consolidation and customers
delaying projects to focus on consolidating production lines,
however the order backlog has been built-up going into second half.
Sales to the food, drink and tobacco sector have seen robust growth
in North America supported by a strong backlog entering the year,
partially offset by weakness in Europe.
An important development and opportunity has been our work on
lithium-ion batteries and NDCT continues to progress activities to
further penetrate this market. With the successful completion of
NDCT's innovative measurement system, a leading global lithium ion
battery cell manufacturer is now equipped with the industry's
latest gauging technology. This solution consists of NDC's new
photon sensor and the company's new
Micro-Caliper Thickness Sensor that is optimised for providing
high-accuracy, high-resolution thickness measurements. NDCT is
seeing growing interest for its new measurement solution from other
leading lithium ion battery cell manufacturers.
Segment market trends
We continue to drive the mix shift in our pulp and paper
business to be less dependent on graphic paper,
a long-term declining market, into the higher growth areas of
tissue, packaging and pulp markets. Tissue growth is driven by
increasing consumer penetration in emerging markets and packaging
from the rise in online shopping. We also expect to continue to
capture new opportunities with our Process Solutions business,
including reliability services.
Despite an improving oil price since the start of the year, the
market environment in global oil and gas markets is difficult to
predict, given current contrary macroeconomic signals. The
requirements for emissions monitoring, as regulation becomes more
stringent, should support demand for our gas analysis products. In
the wind energy sector, investment is expected to continue to grow
and we are working on expanding our offering into new wind farm
owners and operators as well as OEMs.
We expect an improved performance in the web and converting
industries in the second half of the year, and will continue to
focus on key areas of growth such as the lithium-ion battery
market. In the food and bulk materials market, activity is expected
to remain robust.
INDUSTRIAL CONTROLS
Industrial Controls operating companies provide products and
solutions that measure, monitor, control and inform during the
production process. The operating companies in this segment are
Omega Engineering ('Omega') and Red Lion Controls ('Red Lion').
Segment performance
LFL
H1 2019 H1 2018 Change change
------------------------------ ---------- ---------- --------- --------
Sales (GBPm) 110.2 112.5 (2%) (7%)
Adjusted operating profit(1)
(GBPm) 17.8 20.1 (11%) (16%)
Adjusted operating margin(1)
(%) 16.2% 17.9% (1.7pp) (1.9pp)
------------------------------ ---------- ---------- --------- --------
1 Adjusted operating profit excludes restructuring costs of
GBP2.5m (H1 2018: GBP1.9m).
Sales decreased by 7% in the period. This segment has a high
exposure to North America (c. 70%), where sales were lower, partly
reflecting slowing US industrial production and were also lower in
Asia as a result of the continuing USA-China tariff situation.
Adjusted operating profit decreased 16% and operating margins
declined by 1.9pp, reflecting the lower sales volumes. To offset
the slower demand, a greater focus on operational improvement and
Lean initiatives is underway.
At Omega, in addition to the macroeconomic impact, the lower
sales in the USA reflected initial disruption with outsourcing of a
product line to a third-party supplier, a temporary disruption to
order flows from the launch of the new digital platform in the USA
as users learned to navigate the new website, and some high one-off
government orders in 2018.
Following the initial launch in Canada in December 2018, Omega
launched its new e-commerce platform in its primary US market in
April in order to strengthen its market presence and further
facilitate customer experiences. Combining Omega's strong
application knowledge and technical support with enhanced online
capabilities, including the ability for customers to configure and
customise products, the new website positions Omega well to take
advantage of the demographic shift in the engineering workforce
towards greater online adoption, and accelerate its plans to grow
market share.
Omega continued its product refresh programme and launched key
new products to expand its portfolio and access growing
technologies, in order to supplement its traditional temperature,
pressure and flow business. In electronics, Omega expanded its
offering with new panel meters and data loggers. Its new data
logger includes eight channel inputs to simultaneously measure
current, voltage, temperature and pulse, and display real-time
analysis via a colour touch screen. In the level market, Omega
released new ultrasonic liquid level sensors products that deliver
reliable level measurement for applications such as bulk storage
tanks for chemicals, water, wastewater or oil. In temperature, new
hand-held thermal imagers have been launched featuring a mobile app
for data capturing and continuous analysis typically used in
applications such as electronic thermal distribution analysis,
solar panel and HVAC inspection, and fatigue testing of materials
through long-term detection. Omega's other product launches have
been focused on refreshing the technology of the portfolio for
example, its new line of high precision digital pressure gauges,
providing both the highest level of precision and local temperature
indication, and its next level of thermocouple calibrators,
providing ease-of-use and laboratory grade calibrations in a highly
portable package.
As well as focusing on products, Omega's strategic accounts
programme to identify and target key customers has secured pressure
and load business in transducers for military applications while
continuing to develop opportunities in the renewable energy space
in Europe and China. It is also co-developing custom design
products with an industry leader for safety-related use in the
maritime industry.
In April, Red Lion launched its new brand identity that reflects
its strength and positioning in the market. For example, this year
Red Lion has been recognised as one of the 50 most promising IoT
Solutions Provider 2019 by CIO review and as a Technology Innovator
during the 32(nd) Annual Control Engineering Engineer's Choice
Awards whilst also being named as a 'First Team Supplier' by the
readers of Automation World magazine for the eighth consecutive
year.
Red Lion has also been refreshing its product lines. In
February, Red Lion introduced new capabilities for its
award-winning Crimson(R) software, which allows customers to
simplify their system architectures, increase scalability and
accelerate data integration initiatives with no additional hardware
or expensive software customisation required. This ensures the
reliable transmission of real-time and historical data directly to
enterprise business systems using a single, easy-to-use
environment. In June, Red Lion released a new full range of signal
conditioners that boost signal strength while allowing for longer
cable runs through industrial environments. These new products
offer amplification, isolation, and conversion capabilities,
ensuring signal integrity in harsh environments and across long
distances, with the option to change the signal to the desired
input needed dependent upon the application.
Red Lion's strategic focus on the key vertical markets of
factory automation, water and wastewater, transportation and energy
continued - for example, Red Lion worked with a customer to help
provide reliable communication infrastructure to remotely monitor a
pipeline delivering water to a treatment facility.
Segment market trends
Given the predominance of sales in the North American market,
the performance of this segment will be influenced by industrial
markets in that region, where growth in 2019 has been subdued.
As online traffic flows rebound and customers become accustomed
to the new website, the enhanced digital
e-commerce platform, in combination with the launch of new
products and a focus on key accounts, is expected to recover order
volume in the second half for Omega.
In the medium term, the demand from industrial companies wishing
to drive productivity and operational efficiencies, by having
effortless and secure access to their manufacturing data, is
expected to increase. Our ability to provide connected devices,
digital monitoring and optimisation solutions enables our customers
to benefit from our deep applications knowledge, as we apply our
process applications and products expertise to address their
industrial optimisation requirements.
Principal Risks and Uncertainties
A number of potential risks and uncertainties exist which could
have a material impact on the Group's performance over the second
half of the financial year and could cause actual results to differ
materially from expected and historical results.
The Group has processes in place for identifying, evaluating and
managing the key risks which could have an impact upon the Group's
performance.
The current risks, together with a description of how they
relate to the Group's strategy and the approach to managing them,
are set out on pages 32 to 36 of the 2018 Annual Report and
Accounts which is available on the Group's website at
www.spectris.com. The Group has reviewed these risks and concluded
that they will continue to remain relevant for the second half of
the financial year. The potential impact of these risks on our
strategy and financial performance, together with details of our
specific mitigation actions, are set out in the 2018 Annual
Report.
The full list of principal risks relevant as at the half year
comprises:
- Acquisitions
- Strategy execution
- People
- Compliance with laws and regulations
- New product development
- Political and economic risks
- Competitive activity
- Fluctuations in exchange rates
- Supply chain dependencies and disruption
- Intellectual property
- Information security
Responsibility statement of the Directors in respect of the
Interim report
We confirm that to the best of our knowledge:
a) the condensed set of financial statements has been prepared
in accordance with IAS 34 'Interim Financial Reporting';
b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
and their impact during the first six months and description of the
principal risks and uncertainties for the remaining six months of
the year); and
c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related party
transactions and changes therein).
By order of the Board
Andrew Heath Derek Harding
Chief Executive Chief Financial Officer
30 July 2019
INDEPENT REVIEW REPORT TO SPECTRIS PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2019 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of financial position, the condensed consolidated statement of
changes in equity of, the condensed consolidated statement of cash
flows and related notes 1 to 12. We have read the other information
contained in the half-yearly financial report and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2019 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
Reading, UK
30 July 2019
CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
For the six months ended 30 June 2019
2019 2018 2018
Half Half Full
year year year
Continuing operations Note GBPm GBPm GBPm
---------------------------------------------------- ----- -------- -------- --------
Revenue 3 759.1 728.0 1,604.2
Cost of sales (342.0) (319.9) (696.8)
Gross profit 417.1 408.1 907.4
Indirect production and engineering expenses (54.7) (58.0) (106.8)
Sales and marketing expenses (175.4) (175.5) (352.1)
Administrative expenses (233.1) (129.1) (272.1)
Adjusted operating profit 2 83.5 77.2 248.3
Restructuring costs 2 (29.1) (6.7) (15.6)
Net transaction-related costs and fair
value adjustments 2 (6.3) (5.8) (12.2)
Depreciation of acquisition-related fair
value adjustments to property, plant
and equipment 2 (0.4) (0.4) (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 (63.9) (18.8) (43.3)
Operating (loss)/profit 2,3 (46.1) 45.5 176.4
Share of post-tax results of joint venture (2.8) - (1.2)
Profit on disposal of businesses 12 - 57.0 56.3
Financial income 4 4.4 0.3 2.5
Finance costs 4 (5.6) (6.2) (16.0)
(Loss)/profit before tax (50.1) 96.6 218.0
Taxation credit/(charge) 5 1.7 (7.8) (32.8)
---------------------------------------------------- ----- -------- -------- --------
(Loss)/profit for the year from continuing
operations attributable to owners of
the Company (48.4) 88.8 185.2
---------------------------------------------------- ----- -------- -------- --------
Basic (loss)/earnings per share 7 (41.8p) 74.6p 157.6p
Diluted (loss)/earnings per share 7 (41.8p) 74.2p 156.9p
Adjusted earnings per share 2 52.4p 50.4p 164.9p
Interim and final dividends paid/proposed
for the period (per share) 6 21.9p 20.5p 61.0p
Dividends paid during the period (per
share) 40.5p 37.5p 58.0p
---------------------------------------------------- ----- -------- -------- --------
CONDENSED Consolidated statement OF COMPREHENSIVE INCOME
(UNAUDITED)
For the six months ended 30 June 2019
2018 2018
2019 Half Full
Half year year year
GBPm GBPm GBPm
---------------------------------------------------- ----------- -------- ------
(Loss)/profit for the period attributable
to owners of the Company (48.4) 88.8 185.2
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 (9.1) (2.3) 5.4
Tax on items above 1.5 0.4 (1.4)
----------------------------------------------------- ----------- -------- ------
(7.6) (1.9) 4.0
Items that are or may be reclassified subsequently
to the Consolidated Income Statement:
Net loss on effective portion of changes
in fair value of forward exchange contracts
on cash flow hedges (0.3) (2.2) (2.4)
Foreign exchange movements on translation
of overseas operations 3.6 7.2 27.9
Share of joint venture other comprehensive
income 0.4 - -
Currency translation differences transferred
to profit on disposal of business - (5.1) (5.1)
Tax on items above 0.1 0.3 0.5
3.8 0.2 20.9
---------------------------------------------------- ----------- -------- ------
Total other comprehensive (loss)/income (3.8) (1.7) 24.9
----------------------------------------------------- ----------- -------- ------
Total comprehensive (loss)/income for the
period attributable to owners of the Company (52.2) 87.1 210.1
----------------------------------------------------- ----------- -------- ------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
For the six months ended 30 June 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 - - (3.7) - - - - (3.7)
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
At 1 January 2019
(restated) 6.0 231.4 825.0 167.1 (3.9) 3.1 0.5 1,229.2
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
Loss for the period - - (48.4) - - - - (48.4)
Other comprehensive
(loss)/income - - (7.6) 4.0 (0.2) - - (3.8)
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
Total comprehensive
(loss)/income for
the period - - (56.0) 4.0 (0.2) - - (52.2)
Transactions with
owners recorded
directly in equity:
Equity dividends
paid by the Company - - (46.9) - - - - (46.9)
Share-based payments,
net of tax - - 3.1 - - - - 3.1
Proceeds from exercise
of equity-settled
options - - 0.6 - - - - 0.6
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
At 30 June 2019 6.0 231.4 725.8 171.1 (4.1) 3.1 0.5 1,133.8
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
For the six months ended 30
June 2018
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 - - (19.8) - - - - (19.8)
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
At 1 January 2018
(restated) 6.2 231.4 801.0 144.3 (2.0) 3.1 0.3 1,184.3
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
Profit for the period - - 88.8 - - - - 88.8
Other comprehensive
income - - (1.9) 2.1 (1.9) - - (1.7)
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
Total comprehensive
income for the period - - 86.9 2.1 (1.9) - - 87.1
Transactions with
owners recorded
directly in equity:
Equity dividends
paid by the Company - - (44.5) - - - - (44.5)
Own shares acquired
for share buyback
programme - - (100.0) - - - - (100.0)
Share-based payments,
net of tax - - 4.8 - - - - 4.8
Proceeds from exercise
of equity-settled
options - - 0.1 - - - - 0.1
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
At 30 June 2018 6.2 231.4 748.3 146.4 (3.9) 3.1 0.3 1,131.8
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
For the year ended 31 December 2018
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
------------------------ --------- --------- ---------- ------------ --------- --------- ------------ --------
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
As at 30 June 2019
2019 2018 2018
Half year Half year Full year
Note GBPm GBPm GBPm
------------------------------------- ------- ----------- ----------- -----------
ASSETS
Non-current assets
Intangible assets:
Goodwill 8 736.6 742.1 766.3
Other intangible assets 8 206.0 258.5 263.3
------------------------------------- ------- ----------- ----------- -----------
8 942.6 1,000.6 1,029.6
Property, plant and equipment 398.0 308.5 331.5
Investment in joint venture 2.6 6.0 5.0
Other receivable - joint venture 40.6 38.4 38.9
Deferred tax assets 11.3 10.5 11.3
------------------------------------- ------- ----------- ----------- -----------
1,395.1 1,364.0 1,416.3
Current assets
Inventories 240.0 212.8 216.4
Current tax assets 4.4 3.5 1.6
Trade and other receivables 347.1 311.9 381.5
Derivative financial instruments - - 0.4
Cash and cash equivalents 70.4 58.0 73.1
Assets held for sale - - 3.9
------------------------------------- ------- ----------- ----------- -----------
661.9 586.2 676.9
Total assets 2,057.0 1,950.2 2,093.2
------------------------------------- ------- ----------- ----------- -----------
LIABILITIES
Current liabilities
Borrowings (27.3) (30.0) (23.7)
Derivative financial instruments (2.4) (2.0) (2.2)
Trade and other payables (353.8) (395.9) (344.1)
Current tax liabilities (15.8) (19.3) (22.5)
Provisions (28.4) (26.9) (31.6)
(427.7) (474.1) (424.1)
------------------------------------- ------- ----------- ----------- -----------
Net current assets 234.2 112.1 252.8
------------------------------------- ------- ----------- ----------- -----------
Non-current liabilities
Borrowings (355.7) (259.5) (346.5)
Other payables (73.4) (27.1) (27.4)
Provisions (7.5) - -
Retirement benefit obligations (41.7) (36.8) (32.1)
Deferred tax liabilities (17.2) (20.9) (30.2)
(495.5) (344.3) (436.2)
Total liabilities (923.2) (818.4) (860.3)
------------------------------------- ------- ----------- ----------- -----------
Net assets 1,133.8 1,131.8 1,232.9
------------------------------------- ------- ----------- ----------- -----------
EQUITY
Share capital 6.0 6.2 6.0
Share premium 231.4 231.4 231.4
Retained earnings 725.8 748.3 828.7
Translation reserve 171.1 146.4 167.1
Hedging reserve (4.1) (3.9) (3.9)
Merger reserve 3.1 3.1 3.1
Capital redemption reserve 0.5 0.3 0.5
------------------------------------- ------- ----------- ----------- -----------
Total equity attributable to owners
of the Company 1,133.8 1,131.8 1,232.9
------------------------------------- ------- ----------- ----------- -----------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the six months ended 30 June 2019
2019 2018 2018
Half year Half year Full year
Note GBPm GBPm GBPm
---------------------------------------- --------------------- ----------- ----------- -----------
Cash generated from operations 9 97.1 82.9 215.8
Net income taxes paid (17.8) (19.9) (37.7)
---------------------------------------- --------------------- ----------- ----------- -----------
Net cash inflow from operating
activities 79.3 63.0 178.1
---------------------------------------- --------------------- ----------- ----------- -----------
Cash flows used in investing activities
Purchase of property, plant and equipment
and intangible assets (43.1) (42.6) (97.0)
Proceeds from disposal of property, plant
and equipment and
software 10.5 3.7 5.6
Acquisition of businesses,
net of cash acquired 11 (5.7) (173.3) (196.4)
(Payments)/proceeds on disposal
of businesses, net of tax
paid of GBP0.1m (2018: GBP0.6m) (0.4) 43.7 43.8
Loan to joint venture - (2.3) (0.9)
Proceeds from government grants 3.8 2.6 2.9
Interest received 0.1 0.3 0.6
Net cash flows used in investing activities (34.8) (167.9) (241.4)
--------------------------------------------------------------- ----------- ----------- -----------
Cash flows used in financing activities
Interest paid on borrowings (3.0) (2.7) (9.4)
Interest paid on lease liabilities (1.4) - -
Dividends paid 6 (46.9) (44.5) (68.2)
Share buyback purchase of shares - (25.3) (100.5)
Proceeds from exercise of equity-settled
options 0.6 0.1 0.7
Payments on principal portion of lease
liabilities (8.5) - -
Proceeds from borrowings 72.7 90.1 175.5
Repayment of borrowings (64.3) - -
Net cash flows used in financing activities (50.8) 17.7 (1.9)
--------------------------------------------------------------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (6.3) (87.2) (65.2)
--------------------------------------------------------------- ----------- ----------- -----------
Cash and cash equivalents at beginning
of period 67.3 136.7 136.7
Effect of foreign exchange rate changes - (4.0) (4.2)
--------------------------------------------------------------- ----------- ----------- -----------
Cash and cash equivalents at end of period 61.0 45.5 67.3
--------------------------------------------------------------- ----------- ----------- -----------
Reconciliation of changes in cash 2019 2018 2018
and cash equivalents to Half year Half year Full year
movements in net debt Note GBPm GBPm GBPm
---------------------------------------- --------------------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (6.3) (87.2) (65.2)
Proceeds from borrowings (72.7) (90.1) (175.5)
Repayment of borrowings 64.3 - -
Effect of foreign exchange rate changes (0.8) (3.7) (5.9)
--------------------------------------------------------------- ----------- ----------- -----------
Movement in net debt (15.5) (181.0) (246.6)
Net debt at beginning of period (297.1) (50.5) (50.5)
--------------------------------------------------------------- ----------- ----------- -----------
Net debt at end of period 2 (312.6) (231.5) (297.1)
---------------------------------------- --------------------- ----------- ----------- -----------
NOTES TO THE ACCOUNTS
1. Basis of preparation and accounting policies
a) Basis of accounting
The Condensed Consolidated Interim Financial Statements of the
Company for the six months ended 30 June 2019 comprise the Company
and its subsidiaries, together referred to as the 'Group'. These
Condensed Consolidated Interim Financial Statements are presented
in millions of Sterling rounded to the nearest one decimal place.
The Consolidated Financial Statements of the Group for the year
ended 31 December 2018 are available upon request from the
Company's registered office at Heritage House, Church Road, Egham,
Surrey TW20 9QD, and on the Company's website at
www.spectris.com.
These Condensed Consolidated Interim Financial Statements have
been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Conduct Authority and with IAS 34, 'Interim
Financial Reporting', as adopted by the European Union. They do not
include all of the information required for full annual financial
statements and should be read in conjunction with the Consolidated
Financial Statements of the Group for the year ended 31 December
2018.
The Condensed Consolidated Interim Financial Statements for the
six-month period ended 30 June 2019 are unaudited but have been
subject to an independent review by the auditor. They do not
constitute statutory financial statements as defined in section 434
of the Companies Act 2006. The comparative figures for the
financial year ended 31 December 2018 are derived from the
Company's statutory accounts for that financial year. Those
accounts have been reported on by the Company's auditor and
delivered to the Registrar of Companies. The Report of the auditor
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498(2) or 498(3) of the Companies Act
2006.
The Group's financial risk management objectives and policies
are consistent with those disclosed in the Consolidated Financial
Statements of the Group for the year ended 31 December 2018.
These Condensed Consolidated Interim Financial Statements were
approved by the Board of Directors on 30 July 2019.
b) Going concern
Having made enquiries and reviewed the Group's plans and
available resources, the Board of Directors are satisfied that the
Group has sufficient resources to continue in operation for the
foreseeable future, a period of not less than 12 months from the
date of this report. Accordingly, they continue to adopt the going
concern basis in relation to this conclusion.
c) Seasonality
The Group's financial results and cash flows have, historically,
been subject to seasonal trends between the first and second half
of the financial year. Historically, the second half of the
financial year sees higher revenue and profitability. There is no
assurance that this trend will continue in the future.
d) Principal accounting policies
The accounting policies applied by the Group in these Condensed
Interim Financial Statements are the same as those applied by the
Group in the Consolidated Financial Statements of the Group for the
year ended 31 December 2018, except for the adoption of IFRS 16
'Leases' which became effective for the Group on 1 January
2019.
IFRS 16 'Leases'
IFRS 16 provides a single model for lessees which recognises a
right-of-use asset and lease liability for all leases, with
exceptions available for short-term and low-value leases. The
impact of IFRS 16 is to recognise a lease liability and
corresponding asset in the Statement of Financial Position for
leases previously classified as operating leases. The most
significant impact has been that the Group's land, building and car
leases are now recognised on the Statement of Financial Position.
Previously rentals payable under operating leases were not
recognised on the Statement of Financial Position and were charged
to the Consolidated Income Statement on a straight-line basis over
the term of the relevant lease. The Group has adopted IFRS 16
retrospectively with the cumulative effect of initially applying
the standard recognised at the date of initial application on 1
January 2019 with no restatement of comparative information.
Right-of-use assets for all leases have been measured on transition
as if IFRS 16 had always been applied.
The key judgements in applying IFRS 16 for the Group are: the
selection of discount rates and determining whether lease extension
and termination options included in the contract are reasonably
certain to be exercised.
The Group has applied the exemptions available in IFRS 16 for
excluding low-value assets and short-term leases from the
requirements of the standard and right-of-use assets have been
adjusted by the carrying amount of onerous lease provisions at 31
December 2018 instead of performing impairment reviews under IAS
36.
The impacts of the adoption of IFRS 16 at 1 January 2019 were: a
decrease in retained earnings of GBP3.7m, an increase in property,
plant and equipment of GBP63.7m, an increase trade and other
payables of GBP68.5m (including lease liabilities of GBP70.8m), a
decrease in provisions of GBP0.5m, a decrease in trade and other
receivables of GBP0.4m and an increase in deferred tax assets of
GBP1.0m. In H1 2019, the Group incurred a finance charge of
GBP1.4m, reflecting the unwinding of discount on lease liabilities,
with depreciation of GBP9.0m and impairment of GBP3.1m on
right-of-use assets. These items effectively replace the operating
lease rentals previously charged to profit before taxation under
IAS 17 'Leases'. For the year ended 31 December 2018, operating
lease rentals charged to profit before tax amounted to GBP20.1m.
The lease liabilities recognised at 1 January 2019 are GBP8.2m less
than the total operating lease commitments of GBP79.0m disclosed in
the Annual Report and Accounts for 2018, which were prepared under
IAS 17. The difference is due to the impact of discounting on lease
liabilities introduced under IFRS 16 and the exclusion of low-value
assets and short-term leases from IFRS 16. The right-of-use assets
are shown within property, plant and equipment and the lease
liabilities are presented within trade and other payables in the
Condensed Consolidated Statement of Financial Position.
New Accounting Policy under IFRS 16
The Group assesses whether a contract is or contains a lease, at
inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangement in which it is the lessee, except for short-term leases
(defined as leases with a lease term of 12 months or less) and
leases of low value assets. For these leases, the Group recognises
the lease payments as an operating expense on a straight-line basis
over the term of the lease.
The lease liability is initially measured at the present value
of the lease payments that are not paid at the commencement date,
discounted by using the rate implicit in the lease. If this rate
cannot be readily determined, the Group uses its incremental
borrowing rate. Lease payments included in the measurement of the
lease liability comprise: fixed lease payments (including in
substance fixed payments), less any lease incentives; variable
lease payments that depend on an index or rate, initially measured
using the index or rate at the commencement date; the amount
expected to be payable by the lessee under residual value
guarantees; the exercise price of purchase options, if the lessee
is reasonably certain to exercise the options; and payments of
penalties for terminating the lease, if the lease term reflects the
exercise of an option to terminate the lease. The lease liability
is subsequently measured by increasing the carrying amount to
reflect interest on the lease liability (using the effective
interest method) and by reducing the carrying amount to reflect the
lease payments made.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the
commencement day and any initial direct costs. They are
subsequently measured at cost less accumulated depreciation and
impairment losses. Right-of-use assets are depreciated over the
shorter period of lease term and useful life of the underlying
asset. Whenever the Group incurs an obligation for costs to
dismantle and remove a leased asset, restore the site on which it
is located or restore the underlying asset to the condition
required by the terms and conditions of the lease, a provision is
recognised and measured under IAS 37.
The Group remeasures the lease liability (and makes a
corresponding adjustment to the related right-of-use asset)
whenever: the lease term has changed or there is a change in the
assessment of exercise of a purchase option, in which case the
lease liability is remeasured by discounting the revised lease
payments using a revised discount rate; the lease payments change
due to changes in an index or rate or a change in expected payment
under a guaranteed residual value, in which cases the lease
liability is remeasured by discounting the revised lease payments
using the initial discount rate; or a lease contract is modified,
in which case the lease liability is remeasured by discounting the
revised lease payments using a revised discount rate.
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;
- amortisation and impairment of acquisition-related goodwill
and other intangible assets;
- 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;
- 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 the period, a profit on disposal of property of GBP5.2m
in the Industrial Controls segment has been treated as an adjusting
item since it is significant in quantum and would distort the
underlying trading performance if included.
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.
Within the In-line Instrumentation segment, the BTG business has
large functional currency mismatches against its underlying
transaction currencies which distort LFL comparison at times of
significant currency movements. Accordingly, the Group has modified
the basis on which BTG's LFL results are translated into Sterling
by using the actual underlying transaction currency mix for
determining transactional gains/losses to provide more accurate and
reliable information on BTG's underlying performance.
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. The EMS B&K business was disposed of on
31 May 2018 and the segmental LFL adjusted sales and adjusted
operating profit for 2018 exclude the trading results of EMS for
the first five months of 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 and adjusted sales by segment
2019
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
2019 Half year - sales
by segment GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- ------------ ---------------- ----------- -----------
Sales 254.6 238.2 156.1 110.2 759.1
Constant exchange rate
adjustment (3.8) (2.8) (3.7) (5.4) (15.7)
Acquisitions (3.8) (12.1) - - (15.9)
------------------------ ---------- ------------ ---------------- ----------- -----------
LFL adjusted sales 247.0 223.3 152.4 104.8 727.5
------------------------ ---------- ------------ ---------------- ----------- -----------
2018
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
2018 Half year - sales
by segment GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- ------------ ---------------- ----------- -----------
Sales 233.9 239.8 141.8 112.5 728.0
Disposal of businesses - (8.8) - - (8.8)
------------------------ ---------- ------------ ---------------- ----------- -----------
LFL adjusted sales 233.9 231.0 141.8 112.5 719.2
------------------------ ---------- ------------ ---------------- ----------- -----------
b) Adjusted operating profit, operating margin and adjusted
EBITDA
2019
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
-------------------------------------
2019 Half year - adjusted
operating profit GBPm GBPm GBPm GBPm GBPm
------------------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating (loss)/profit (54.7) (12.4) 6.5 14.5 (46.1)
Restructuring costs 10.6 9.0 7.0 2.5 29.1
Net transaction-related
costs and fair value adjustments (0.3) 2.7 3.3 0.6 6.3
Depreciation of acquisition-related
fair value adjustments
to property, plant and
equipment 0.1 0.3 - - 0.4
Profit on disposal of property - - - (5.2) (5.2)
Impairment of goodwill 35.1 - - - 35.1
Amortisation and impairment
of acquisition-related
intangible assets 38.9 18.0 1.6 5.4 63.9
Adjusted operating profit 29.7 17.6 18.4 17.8 83.5
Constant exchange rate
adjustment (0.6) - (0.9) (1.0) (2.5)
Acquisitions 0.5 (0.6) - - (0.1)
------------------------------------- ---------- ------------ ---------------- ----------- -----------
LFL adjusted operating
profit 29.6 17.0 17.5 16.8 80.9
------------------------------------- ---------- ------------ ---------------- ----------- -----------
b) Adjusted operating profit, operating margin and adjusted EBITDA
2018
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
-------------------------------------
2018 Half year - adjusted
operating profit GBPm GBPm GBPm GBPm GBPm
------------------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating profit 19.6 7.8 5.3 12.8 45.5
Restructuring costs 1.7 1.8 1.3 1.9 6.7
Net transaction-related
costs and fair value adjustments 0.5 1.7 3.5 0.1 5.8
Depreciation of acquisition-related
fair value adjustments
to property, plant and
equipment 0.1 0.3 - - 0.4
Amortisation of acquisition-related
intangible assets 6.8 5.6 1.1 5.3 18.8
Adjusted operating profit 28.7 17.2 11.2 20.1 77.2
Disposal of businesses - 0.4 - - 0.4
------------------------------------- ---------- ------------ ---------------- ----------- -----------
LFL adjusted operating
profit 28.7 17.6 11.2 20.1 77.6
------------------------------------- ---------- ------------ ---------------- ----------- -----------
2018
Materials Test and In-line Industrial Full year
Analysis Measurement Instrumentation Controls Total
-------------------------------------
2018 Full year - adjusted
operating profit GBPm GBPm GBPm GBPm GBPm
------------------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating profit 72.1 42.8 32.2 29.3 176.4
Restructuring costs 4.4 5.2 3.0 3.0 15.6
Net transaction-related
costs and fair value adjustments 1.4 6.4 4.2 0.2 12.2
Depreciation of acquisition-related
fair value adjustments
to property, plant and
equipment 0.2 0.6 - - 0.8
Amortisation and impairment
of acquisition-related
intangible assets 17.3 12.2 3.2 10.6 43.3
------------------------------------- ---------- ------------ ---------------- ----------- -----------
Adjusted operating profit 95.4 67.2 42.6 43.1 248.3
------------------------------------- ---------- ------------ ---------------- ----------- -----------
2019
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
2019 Half year - operating
margin % % % % %
---------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating margin (21.5) (5.2) 4.2 13.2 (6.1)
---------------------------- ---------- ------------ ---------------- ----------- -----------
Adjusted operating margin 11.7 7.4 11.8 16.2 11.0
---------------------------- ---------- ------------ ---------------- ----------- -----------
LFL adjusted operating
margin 12.0 7.6 11.5 16.0 11.1
---------------------------- ---------- ------------ ---------------- ----------- -----------
2018
Materials Test and In-line Industrial Half year
Analysis Measurement Instrumentation Controls Total
2018 Half year - operating
margin % % % % %
---------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating margin 8.4 3.3 3.7 11.4 6.3
---------------------------- ---------- ------------ ---------------- ----------- -----------
Adjusted operating margin 12.2 7.2 7.9 17.9 10.6
---------------------------- ---------- ------------ ---------------- ----------- -----------
LFL adjusted operating
margin 12.2 7.6 7.9 17.9 10.8
---------------------------- ---------- ------------ ---------------- ----------- -----------
2018
Materials Test and In-line Industrial Full year
Analysis Measurement Instrumentation Controls Total
2018 Full year - operating
margin % % % % %
---------------------------- ---------- ------------ ---------------- ----------- -----------
Statutory operating margin 13.3 8.2 10.3 12.8 11.0
---------------------------- ---------- ------------ ---------------- ----------- -----------
Adjusted operating margin 17.6 12.9 13.6 18.9 15.5
---------------------------- ---------- ------------ ---------------- ----------- -----------
b) LFL and adjusted operating profit by segment and EBITDA
2019 2018 2018
Half year Half year Full year
Restructuring costs GBPm GBPm GBPm
------------------------------ ----------- ---------- -----------
Profit improvement programme 29.1 - 4.8
Project Uplift costs - 6.7 10.8
------------------------------ ----------- ---------- -----------
Restructuring costs 29.1 6.7 15.6
------------------------------ ----------- ---------- -----------
2019 2018 2018
Half year Half year Full year
Adjusted EBITDA GBPm GBPm GBPm
--------------------------------------------- ----------- ----------- -----------
Statutory operating (loss)/profit (46.1) 45.5 176.4
Depreciation and impairment of owned assets 18.3 14.1 30.3
Depreciation and impairment of right-of-use 12.1 - -
assets
Amortisation and impairment of intangible
assets 70.0 21.4 49.1
Impairment of goodwill 35.1 - -
EBITDA 89.4 81.0 255.8
Restructuring costs excluding impairment
of owned, right-of-use and intangible
assets 21.0 6.7 15.6
Profit on disposal of property classified (5.2) - -
as an adjusting item
Net transaction-related costs and fair
value adjustments 6.3 5.8 12.2
Adjusted EBITDA 111.5 93.5 283.6
---------------------------------------------- ----------- ----------- -----------
EBITDA is calculated as statutory operating profit before
depreciation and 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.
c) Adjusted net finance costs
2019
Half 2018 2018
year Half year Full year
GBPm GBPm GBPm
------------------------------------------------ ------ ----------- -----------
Statutory net finance costs (1.2) (5.9) (13.5)
Net (gain)/loss on retranslation of short-term
inter-company loan balances (2.6) 2.5 7.2
Unwinding of discount factor on deferred and
contingent consideration 0.3 0.3 0.6
------------------------------------------------ ------ ----------- -----------
Adjusted net finance costs (3.5) (3.1) (5.7)
------------------------------------------------ ------ ----------- -----------
d) Adjusted profit before taxation
2019
Half 2018 2018
year Half year Full year
GBPm GBPm GBPm
-------------------------------------------- ------ ----------- -----------
Adjusted operating profit 83.5 77.2 248.3
Share of post-tax results of joint venture (2.8) - (1.2)
Adjusted net finance costs (3.5) (3.1) (5.7)
-------------------------------------------- ------ ----------- -----------
Adjusted profit before taxation 77.2 74.1 241.4
-------------------------------------------- ------ ----------- -----------
e) Adjusted earnings per share
2019
Half 2018 2018
year Half year Full year
Adjusted earnings GBPm GBPm GBPm
---------------------------------------------------- ------- ----------- -----------
Statutory (loss)/profit after tax (48.4) 88.8 185.2
Adjusted for:
Restructuring costs 29.1 6.7 15.6
Net transaction-related costs and fair value
adjustments 6.3 5.8 12.2
Depreciation of acquisition-related fair value
adjustments to property, plant and equipment 0.4 0.4 0.8
Profit on disposal of property classified
as an adjusting item (5.2) - -
Impairment of goodwill 35.1 - -
Amortisation and impairment of acquisition-related
intangible assets 63.9 18.8 43.3
Profit on disposal of businesses - (57.0) (56.3)
Net (gain)/loss on retranslation of short-term
inter-company loan balances (2.6) 2.5 7.2
Unwinding of discount factor on deferred and
contingent consideration 0.3 0.3 0.6
Tax effect of the above and other non-recurring
items (18.3) (6.3) (14.8)
---------------------------------------------------- ------- ----------- -----------
Adjusted earnings 60.6 60.0 193.8
---------------------------------------------------- ------- ----------- -----------
2019
Half 2018 2018
Adjusted earnings per share year Half year Full year
---------------------------------------------------- ------- ----------- -----------
Weighted average number of shares outstanding
(millions) 115.7 119.0 117.5
Adjusted earnings per share (pence) 52.4 50.4 164.9
---------------------------------------------------- ------- ----------- -----------
Basic earnings per share in accordance with IAS 33 'Earnings Per
Share' are disclosed in Note 7.
Financial position and cash flow measures
f) Net debt
2019
Half 2018 2018
year Half year Full year
GBPm GBPm GBPm
--------------------------- ------- ----------- -----------
Bank overdrafts 9.4 12.5 5.8
Bank loans unsecured 373.6 277.0 364.4
--------------------------- ------- ----------- -----------
Total borrowings 383.0 289.5 370.2
Cash and cash equivalents (70.4) (58.0) (73.1)
--------------------------- ------- ----------- -----------
Net debt 312.6 231.5 297.1
--------------------------- ------- ----------- -----------
Net debt excludes lease liabilities arising under IFRS 16 as
this aligns with the Group's bank covenants.
g) Adjusted operating cash flow
2019
Half 2018 2018
year Half year Full year
GBPm GBPm GBPm
-------------------------------------------- ------- ----------- -----------
Net cash inflow from operating activities 79.3 63.0 178.1
Transaction-related costs paid 1.7 1.7 10.8
Restructuring cash outflow 13.0 5.3 8.6
Net income taxes paid 17.8 19.9 37.7
Purchase of property, plant and equipment
and intangible assets (43.1) (42.6) (97.0)
Proceeds from government grants 3.8 2.6 2.9
Proceeds from disposal of property, plant
and equipment and software(2) 1.4 3.7 5.6
-------------------------------------------- ------- ----------- -----------
Adjusted operating cash flow 73.9 53.6 146.7
Adjusted operating cash flow conversion(1) 89% 69% 59%
-------------------------------------------- ------- ----------- -----------
1 Adjusted operating cash flow conversion is calculated as
adjusted operating cash flow as a proportion of adjusted operating
profit.
2 Excludes the proceeds from disposal of property of GBP9.1m in
H1 2019 classified as an adjusting item.
The net cash inflow from operating activities in H1 2019
excludes cash outflows of GBP9.9m arising from lease 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.
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.
30 June 30 June 30 June
2019 2018 2017
GBPm GBPm GBPm
------------------------------------------------ -------- -------- --------
Net debt 312.6 231.5 155.5
Accumulated impairment losses on goodwill 185.4 146.3 147.4
Accumulated amortisation and impairment of
acquisition-related intangible assets 371.0 276.1 253.9
Shareholders' equity 1,133.8 1,131.8 1,047.7
Gross capital employed 2,002.8 1,785.7 1,604.5
------------------------------------------------ -------- -------- --------
Average gross capital employed (current period
and prior period) 1,894.2 1,695.1
------------------------------------------------ -------- --------
Adjusted operating profit for six months to
June 2019 and 2018 83.5 77.2
------------------------------------------------ -------- --------
Adjusted operating profit for six months to
December 2018 and 2017 171.1 163.5
------------------------------------------------ -------- --------
Total adjusted operating profit for last 12
months 254.6 240.7
------------------------------------------------ -------- --------
Return on gross capital employed 13.4% 14.2%
------------------------------------------------ -------- --------
i) Net transaction-related costs and fair value adjustments
Net transaction-related costs and fair value adjustments
comprise costs of GBP3.8m (Half year 2018: GBP5.8m; Full year 2018:
GBP7.4m) that have been recognised in the Condensed Consolidated
Income Statement under IFRS 3 (Revised) 'Business Combinations' and
other fair value adjustments relating to deferred and contingent
consideration comprising a charge of GBP2.5m (Half year 2018: nil;
Full year 2018: charge of 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 costs paid of GBP1.7m (Half year
2018: GBP1.7m; Full year 2018: GBP10.8m) have been excluded from
the adjusted operating cash flow.
3. Operating segments
The Group has four reportable segments, which are the Group's
strategic business units. These units offer different applications,
assist companies at various stages of the production cycle and are
focused on specific industries. These segments reflect 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 segment results include an allocation of head office
expenses.
2019
Half
Materials Test and In-line Industrial year
Analysis Measurement Instrumentation Controls Total
Information about reportable
segments GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- ------------ ---------------- ----------- -------
Segment revenues 254.6 238.9 156.2 110.3 760.0
Inter-segment revenue - (0.7) (0.1) (0.1) (0.9)
External revenue 254.6 238.2 156.1 110.2 759.1
------------------------------ ---------- ------------ ---------------- ----------- -------
Operating (loss)/profit (54.7) (12.4) 6.5 14.5 (46.1)
Share of post-tax results
of joint venture(1) (2.8)
Financial income(1) 4.4
Finance costs(1) (5.6)
------------------------------ ---------- ------------ ---------------- ----------- -------
Loss before tax(1) (50.1)
Taxation credit(1) 1.7
------------------------------ ---------- ------------ ---------------- ----------- -------
Loss after tax(1) (48.4)
------------------------------ ---------- ------------ ---------------- ----------- -------
2018
Half
Materials Test and In-line Industrial year
Analysis Measurement Instrumentation Controls Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------
Segment revenues 234.3 240.0 141.8 112.6 728.7
Inter-segment revenue (0.4) (0.2) - (0.1) (0.7)
------------------------------------- ---------- ------------ ---------------- ----------- ------
External revenue 233.9 239.8 141.8 112.5 728.0
------------------------------------- ---------- ------------ ---------------- ----------- ------
Operating profit 19.6 7.8 5.3 12.8 45.5
Profit on disposal of businesses(1) 57.0
Financial income(1) 0.3
Finance costs(1) (6.2)
------------------------------------- ---------- ------------ ---------------- ----------- ------
Profit before tax(1) 96.6
Taxation charge(1) (7.8)
------------------------------------- ---------- ------------ ---------------- ----------- ------
Profit after tax(1) 88.8
------------------------------------- ---------- ------------ ---------------- ----------- ------
2018
Full
Materials Test and In-line Industrial year
Analysis Measurement Instrumentation Controls Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------
Segment revenues 541.4 524.2 312.4 228.4 1,606.4
Inter-segment revenue (0.3) (1.6) (0.2) (0.1) (2.2)
------------------------------------- ---------- ------------ ---------------- ----------- --------
External revenue 541.1 522.6 312.2 228.3 1,604.2
------------------------------------- ---------- ------------ ---------------- ----------- --------
Operating profit 72.1 42.8 32.2 29.3 176.4
Share of post-tax results
of joint venture(1) (1.2)
Profit on disposal of businesses(1) 56.3
Financial income(1) 2.5
Finance costs(1) (16.0)
------------------------------------- ---------- ------------ ---------------- ----------- --------
Profit before tax(1) 218.0
Taxation charge(1) (32.8)
------------------------------------- ---------- ------------ ---------------- ----------- --------
Profit after tax(1) 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. Individual country revenues which amount to more than
3% of total revenue by location of customer are shown below in the
analysis of revenue by geographical destination.
2019 2018 2018
Half year Half year Full year
GBPm GBPm GBPm
----------------------- ---------- ---------- ----------
UK 61.8 63.3 133.2
Germany 67.7 69.2 151.4
France 25.1 23.0 51.2
Rest of Europe 101.2 100.4 211.9
USA 218.2 206.7 447.7
Rest of North America 24.0 24.8 52.4
Japan 41.2 36.3 82.4
China 96.4 97.5 221.5
South Korea 27.1 20.6 51.2
Rest of Asia 61.2 54.8 127.3
Rest of the world 35.2 31.4 74.0
------------------------- ---------- ---------- ----------
759.1 728.0 1,604.2
----------------------- ---------- ---------- ----------
4. Financial income and finance costs
2019
Half 2018 2018
year Half year Full year
Financial income GBPm GBPm GBPm
------------------------------------------------------- ------ ----------- -----------
Interest receivable (0.1) (0.3) (0.5)
Income on receivable from joint venture (1.7) - (2.0)
Net gain on retranslation of short-term inter-company
loan balances (2.6) - -
------------------------------------------------------- ------ ----------- -----------
(4.4) (0.3) (2.5)
------------------------------------------------------- ------ ----------- -----------
2019
Half 2018 2018
year Half year Full year
Finance costs GBPm GBPm GBPm
------------------------------------------------------- ------ ----------- -----------
Interest payable on loans and overdrafts 3.5 3.1 7.3
Net loss on retranslation of short-term inter-company
loan balances - 2.5 7.2
Unwinding of discount factor on lease liabilities 1.4 - -
Unwinding of discount factor on deferred
and contingent consideration 0.3 0.3 0.6
Net interest cost on pension plan obligations 0.3 0.3 0.6
Other finance costs 0.1 - 0.3
------------------------------------------------------- ------ ----------- -----------
5.6 6.2 16.0
------------------------------------------------------- ------ ----------- -----------
Net finance costs 1.2 5.9 13.5
------------------------------------------------------- ------ ----------- -----------
5. Taxation
The tax charge for the six months to 30 June 2019 is based on an
estimate of the effective rate of taxation for the full year. The
effective rate of taxation applied to adjusted profit before tax
for the half year is 21.5% (Half year 2018: 19.0%; year ended 31
December 2018: 19.7%). A reconciliation of the tax charge on
adjusted profit before tax to the total tax charge is presented
below.
2019 2018 2018
Half year Half year Full year
GBPm GBPm GBPm
Tax charge on adjusted profit before tax 16.6 14.1 47.6
Tax charge on profit on disposal of business - 0.4 0.4
Tax credit on net transaction-related costs
and fair value adjustments (0.2) (0.3) (0.6)
Tax charge on profit on disposal of property 1.3 - -
Tax credit on amortisation and impairment
of acquisition-related intangible assets(1) (12.8) (4.7) (9.6)
Tax credit on depreciation of acquisition-related
fair value adjustments to property, plant
and equipment (0.1) (0.1) (0.1)
Tax credit arising from net impact of US
tax reform measures - - (0.9)
Tax credit on retranslation of short-term
inter-company loan balances - (0.1) (0.5)
Tax credit on restructuring costs (6.5) (1.5) (3.5)
Total tax (credit)/charge (1.7) 7.8 32.8
--------------------------------------------------- ---------- ---------- ----------
1 Includes GBP5.5m relating to the impairment of CLS intangible
assets.
In April 2019, the EU Commission published its final decision in
connection with the State Aid investigation into an exemption which
was introduced within the UK's Controlled Foreign Company (CFC)
regime in 2013. The Commission concluded that some, but not all,
aspects of the exemption (as it applied for the years 2013 to 2018)
constituted State Aid and that they would therefore require the UK
to assess and recover the amount of State Aid that each affected
taxpayer had received over those years. As previously disclosed,
the Group has benefited from this exemption and at
30 June 2019 has a maximum exposure of GBP19.0m in respect of
tax and GBP0.9m in respect of interest. Both the Group and the UK
government have appealed in the EU Courts against the Commission's
decision.
There is currently significant uncertainty surrounding HMRC's
likely approach to the assessment and recovery of amounts which
they consider to be due. In view of this uncertainty, no provision
has been made in the Group accounts since we do not consider it
possible at this stage to determine the realistic probable outcome
for the Group.
6. Dividends
The interim 2019 dividend of 21.9p per share (2018 interim
dividend: 20.5p) will be payable on 8 November 2019 to ordinary
shareholders on the register at the close of business on 11 October
2019. The ex-dividend date is 10 October 2019.
The estimated interim dividend to be paid is GBP25.4m and has
not been recognised in these accounts.
2019 2018 2018
Amounts recognised and paid as distributions Half year Half year Full year
to owners of the Company in the period GBPm GBPm GBPm
Prior year final dividend paid 46.9 44.5 44.5
Current year interim dividend - - 23.7
---------------------------------------------- ---------- ---------- ----------
46.9 44.5 68.2
---------------------------------------------- ---------- ---------- ----------
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.
2019 2018 2018
Basic (loss)/earnings per share Half year Half year Full year
(Loss)/profit after tax (GBPm) (48.4) 88.8 185.2
Weighted average number of shares outstanding
(millions) 115.7 119.0 117.5
----------------------------------------------- ---------- ---------- ----------
Basic (loss)/earnings per share (pence) (41.8) 74.6 157.6
----------------------------------------------- ---------- ---------- ----------
2019 2018 2018
Diluted (loss)/earnings per share Half year Half year Full year
------------------------------------------------ ---------- ---------- ----------
(Loss)/profit after tax (GBPm) (48.4) 88.8 185.2
------------------------------------------------ ---------- ---------- ----------
Basic weighted average number of shares
outstanding (millions) 115.7 119.0 117.5
Weighted average number of dilutive 5p
ordinary shares under option (millions) n/a 1.5 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) n/a (0.8) (0.1)
------------------------------------------------ ---------- ---------- ----------
Diluted weighted average number of shares
outstanding (millions) 115.7 119.7 118.0
------------------------------------------------ ---------- ---------- ----------
Diluted (loss)/earnings per share (pence) (41.8) 74.2 156.9
------------------------------------------------ ---------- ---------- ----------
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 11.7 14.1
Disposals - (0.5) (0.5)
Foreign exchange difference 4.5 3.8 8.3
----------------------------------------- ----------- ------------ --------
At 30 June 2019 922.0 634.7 1,556.7
Accumulated amortisation and impairment
----------------------------------------- ----------- ------------ --------
At 1 January 2019 148.8 356.4 505.2
Charge for the period - 24.2 24.2
Impairment 35.1 45.8 80.9
Disposals - (0.5) (0.5)
Foreign exchange difference 1.5 2.8 4.3
----------------------------------------- ----------- ------------ --------
At 30 June 2019 185.4 428.7 614.1
Carrying amount
----------------------------------------- ----------- ------------ --------
At 30 June 2019 736.6 206.0 942.6
----------------------------------------- ----------- ------------ --------
At 1 January 2019 766.3 263.3 1,029.6
----------------------------------------- ----------- ------------ --------
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 six months ended 30 June 2019, performance has not
improved as anticipated, with sales declining by 9% on a LFL basis
and resulting gross margin lower than 2018. This under-performance
is 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, despite continued focus
on on-time delivery, has been 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 is proposed, subject to consultation
and legal requirements, that the environmental analytical
laboratories be closed. New management believe that in their
current state, these laboratories will not be able to recapture
share in this market. 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
has been charged to the income statement in the period. 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 is
GBP105.3m which has been 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 GBP13.4m relates to intangible
assets impaired as a result of restructuring activities undertaken
following the strategic review.
9. Cash generated from operations
2019 2018 2018
Half year Half year Full year
GBPm GBPm GBPm
-------------------------------------------------- ---------- ---------- ----------
Cash flows from operating activities
(Loss)/profit after tax (48.4) 88.8 185.2
Adjustments for:
Taxation (credit)/charge (1.7) 7.8 32.8
Profit on disposal of businesses - (57.0) (56.3)
Share of post-tax results of joint venture 2.8 - 1.2
Finance costs 5.6 6.2 16.0
Financial income (4.4) (0.3) (2.5)
Depreciation and impairment of property,
plant & equipment 30.4 14.1 30.3
Amortisation and impairment of intangible
assets 70.0 21.4 49.1
Impairment of goodwill 35.1 - -
Acquisition-related fair value adjustments 2.2 - 4.8
Profit on disposal of property, plant and
equipment (5.2) (0.2) (1.9)
Equity-settled share-based payment expense 2.3 4.6 5.1
-------------------------------------------------- ---------- ---------- ----------
Operating cash flow before changes in working
capital and provisions 88.7 85.4 263.8
Decrease/(increase) in trade and other
receivables 33.6 30.4 (30.4)
Increase in inventories (22.2) (16.9) (17.4)
Decrease in trade and other payables (8.3) (12.8) (3.6)
Increase/(decrease) in provisions and retirement
benefits 5.3 (3.2) 3.4
-------------------------------------------------- ---------- ---------- ----------
Cash generated from operations 97.1 82.9 215.8
-------------------------------------------------- ---------- ---------- ----------
10. Share capital, treasury shares and employee benefit trust
shares
At 30 June 2019, the Group held 5,245,693 treasury shares (Half
year 2018: 5,683,891; Full year 2018: 5,636,153). During the
period, 390,460 (Half year 2018: 63,469; Full year 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. No ordinary shares were repurchased and
cancelled by the Group during the period (Half year 2018: 945,982
repurchased and 921,799 cancelled; Full year 2018: 3,825,802
repurchased and cancelled).
11. 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 provisional goodwill of GBP2.4m. The
acquisition is included in the Test and Measurement segment.
2019 2018 2018
Analysis of cash outflow in Condensed Consolidated
Statement Half year Half year Full year
of Cash Flows GBPm GBPm GBPm
---------------------------------------------------- ---------- ---------- ----------
Net consideration in respect of acquisitions
during the year 3.8 173.8 195.7
Deferred and contingent consideration on
acquisitions during the year to be paid
in future years - (2.0) (6.0)
---------------------------------------------------- ---------- ---------- ----------
Cash paid during the year in respect of
acquisitions during the year 3.8 171.8 189.7
Cash paid in respect of prior years' acquisitions 1.9 1.5 6.7
---------------------------------------------------- ---------- ---------- ----------
Net cash outflow relating to acquisitions 5.7 173.3 196.4
---------------------------------------------------- ---------- ---------- ----------
12. EMS B&K joint venture
The Group 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. This estimate is derived
from operating company cash flow forecasts, future growth rates and
multiples achieved from the sale of similar entities in the same
sector. The joint venture is delivering a nascent business plan and
as such, future events could change the assumptions used to
determine the recoverable amount. The current carrying value of the
receivable is GBP40.6 million.
In H1 2018, the disposal of EMS B&K into the joint venture
resulted in a profit on disposal of business of GBP57.0m.
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
contact rns@lseg.com or visit www.rns.com.
END
IR LFFIIDVIAFIA
(END) Dow Jones Newswires
July 30, 2019 02:00 ET (06:00 GMT)
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