Spectris PLC Annual Financial Report (3267U)

TIDMSXS

RNS Number : 3267U

Spectris PLC

28 March 2019

Spectris plc: Annual Report and Accounts 2018

The Company's Annual Report and Accounts for the year ended 31 December 2018 (the "Annual Report") and the Notice of Annual General Meeting to be held on 24 May 2019 (the "Notice of Meeting") have been published on the Company's website at www.spectris.com and have been posted to shareholders who have elected to receive hard copy communications.

Pursuant to UK Listing Rule 9.6.1, the following documents have also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM:

   -      The Annual Report. 
   -      The Notice of Meeting. 
   -      Form of Proxy. 
   -      Notice of Availability for documents on the Company's website. 

The final results for the year ended 31 December 2018, released by the Company on 19 February 2019, include the information required pursuant to Rules 4.1 and 6.3.5 of the UK Disclosure Guidance and Transparency Rules, excepting publication of the responsibility statement of the Directors in respect of the 2018 Accounts, and a description of the principal risks and uncertainties facing the Company, which are detailed below:

Directors Responsibility Statement

We confirm that to the best of our knowledge:

-- the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

-- the Strategic Report on pages 1 to 43 and the Directors' Report on pages 44 to 83 include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation, taken as a whole, together with a description of the principal risks and uncertainties that they face; and

-- the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Group's performance, business model and strategy.

Andrew Heath - Chief Executive

Clive Watson - Group Finance Director

Principal Risks and Uncertainties

 
  Fluctuations in exchange rates 
   We have operations which sell and purchase goods in foreign 
   currencies and whose results we record in a variety of different 
   currencies. We are therefore exposed to any significant changes 
   in exchange rates. 
 Link to Strategy:   Innovative solutions, Market presence 
                    ------------------------------------------------------------ 
 Risk Appetite:      Balanced 
                    ------------------------------------------------------------ 
 Assessment:         Moderate 
                    ------------------------------------------------------------ 
 Change in Risk      Same 
  Level: 
                    ------------------------------------------------------------ 
 Impact              - Unexpected variations in the Company's results. 
                      - Reduced profitability and cash flow. 
                    ------------------------------------------------------------ 
 Mitigation          - Natural hedging strategy, matching invoicing 
                      and purchasing currencies where practical. 
                      - Forward foreign exchange contracts cover up 
                      to 75% of forecast transactional exposures up 
                      to 18 months ahead. 
                      - Foreign currency investments hedged with borrowings 
                      in the same currency wherever possible. 
                      - Regular monitoring, including sensitivity analyses 
                      to understand the impact of exchange rate movements 
                      on the Group's reporting. 
                    ------------------------------------------------------------ 
 2018 update 
                       *    Implementation of new treasury management system in 
                            2019 will improve monitoring and compliance with the 
                            Group's transactional hedging policy. 
                    ------------------------------------------------------------ 
 
 
 Compliance with laws and regulations 
  We operate in a large number of jurisdictions and, consequently, 
  are subject to wide-ranging laws and regulations. 
  Any failure by the Group or its representatives to comply with 
  relevant laws and regulations could result in civil or criminal 
  liabilities, leading to significant fines and penalties or the 
  disqualification of the Group from participation in government-related 
  contracts for a period of time. In the event of a failure to 
  comply with export control regulations, the Group could also 
  be exposed to restrictions being placed upon its ability to 
  trade. 
 Link to Strategy:   Expanding globally, Operational excellence 
                    ---------------------------------------------------------- 
 Risk Appetite:      Highly Cautious 
                    ---------------------------------------------------------- 
 Assessment:         High 
                    ---------------------------------------------------------- 
 Change in Risk      Higher 
  Level: 
                    ---------------------------------------------------------- 
 Impact              - Reduced sales, profitability and cash flow. 
                      - Reputational damage. 
                      - Diversion of management resources resulting 
                      in lost opportunities. 
                      - Penalties arising from breach of laws and regulations. 
                      - Inability to attract and retain talent. 
                    ---------------------------------------------------------- 
 Mitigation          - Strong cultural alignment to the Spectris value 
                      of 'Absolute Integrity'. 
                      - Internal control framework and policies. 
                      - Ethics training provided to all employees. 
                      - Formal export controls compliance procedures 
                      in place, including strict product classification 
                      and transaction screening protocols. 
                      - Comprehensive insurance covers all standard 
                      categories of insurable risk. 
                      - Contract review and approval processes mitigate 
                      exposure to contractual liability. 
                    ---------------------------------------------------------- 
 2018 update         The compliance burden on the Group has heightened 
                      given our geographical concentration in areas 
                      that have seen an increase in regulatory risk 
                      during 2018. An ethics and compliance enhancement 
                      programme was endorsed by the Audit and Risk Committee 
                      in October 2018 and is expected to deliver further 
                      mitigation strengthening over the next 24 months. 
                      We continue to be responsive to issues raised 
                      through the Spectris hotline. For details of our 
                      ethics programme see page 39. 
                    ---------------------------------------------------------- 
 
 
 Information security 
  As with most organisations of a similar size and complexity, 
  our businesses face both internal and external information security 
  risks, the nature and complexity of which are constantly changing, 
  becoming more sophisticated and unpredictable. In addition, 
  the introduction of regulatory requirements, such as the General 
  Data Protection Regulation ('GDPR', which came into force in 
  May 2018), requires that we continue to develop our processes 
  and mitigations so that they remain effective and compliant. 
 Link to Strategy:   Innovative solutions, Market presence, Expanding 
                      globally, Capital deployment 
                    ------------------------------------------------------------ 
 Risk Appetite:      Cautious 
                    ------------------------------------------------------------ 
 Assessment:         Moderate 
                    ------------------------------------------------------------ 
 Change in Risk      Same 
  Level: 
                    ------------------------------------------------------------ 
 Impact              - Delay or impact on decision-making through lack 
                      of available reliable data or disruption of service. 
                      - Loss of commercially sensitive or personal information. 
                      - Reduced service to customers due to poor information 
                      handling or interruption of business. 
                    ------------------------------------------------------------ 
 Mitigation          - Our businesses employ a number of physical and 
                      logical control measures designed to reduce the 
                      risk of a breach in information security arising. 
                      - Our systems are monitored against unauthorised 
                      access. 
                      - A programme of continuous improvement focusing 
                      on information security risks evaluates whether 
                      the Group's existing controls in this area would 
                      benefit from additional strengthening. 
                      - Employees receive online and face-to-face awareness 
                      training of information security risks and controls. 
                      - Cyber risk and security is reviewed regularly 
                      by the Board to address the evolving landscape. 
                    ------------------------------------------------------------ 
 2018 update         The Group IT function continues to increase the 
                      maturity at our operating companies in respect 

                      of data classification, patch management and vulnerability 
                      management. A new Chief Information Officer joined 
                      Spectris in November 2018, who will continue to 
                      refine and drive both the ongoing risk assessment 
                      and the existing and planned mitigation activity. 
                      During 2018, the Group Head of Information Risk 
                      Governance filled three new positions in the Information 
                      Risk Governance team to add further strength. 
                      A Group IT Assurance Manager has also joined the 
                      Internal Audit function and will be a key third 
                      line of defence in 2019, delivering a plan of 
                      in-house assurance against the IT general controls 
                      in place across the Group and other risks associated 
                      with business systems and information security. 
                    ------------------------------------------------------------ 
 
 
 Acquisitions 
  Integration of the operations and personnel of acquired businesses 
  can be a complex process. Potential risks therefore exist that 
  the planned benefits from the acquisition may not be achieved 
  as a result of problems encountered during integration of the 
  acquired business, incorrect assumptions made in the business 
  case, changing market conditions, or issues which were not identified 
  during the due diligence process. Further, the Company could 
  be exposed to past acts or omissions of the acquired business. 
 Link to Strategy:   Market presence, Expanding globally, Capital deployment 
                    --------------------------------------------------------- 
 Risk Appetite:      Balanced 
                    --------------------------------------------------------- 
 Assessment:         Moderate 
                    --------------------------------------------------------- 
 Change in Risk      Same 
  Level: 
                    --------------------------------------------------------- 
 Impact              - Failure to successfully deliver the business 
                      plan. 
                      - Reduced profitability and cash flow. 
                      - Unforeseen liabilities. 
                    --------------------------------------------------------- 
 Mitigation          - Rigorous financial, commercial and legal assessment 
                      of target businesses involving external consultants 
                      and advisers as appropriate. 
                      - Strict authority levels which, subject to size, 
                      involve review by the Board for such transactions. 
                      - Comprehensive representations and warranties 
                      in purchase agreements. 
                      - Integration planning. 
                      - Regular review of the acquired businesses against 
                      the business case. 
                      - Post-acquisition control reviews. 
                    --------------------------------------------------------- 
 2018 update         Our acquisition activity during 2018 has included 
                      the expansion of test service capabilities for 
                      Materials Analysis and accessing new markets via 
                      the acquisition of Concept Life Sciences. We have 
                      been careful to maintain our financial, commercial 
                      and legal due diligence and disciplines, which 
                      has meant that we have also excluded ourselves 
                      from a number of potential acquisitions. We have 
                      recently recruited an Integration Manager to strengthen 
                      our capabilities with regard to integrating new 
                      acquisitions and merging operating companies within 
                      our Materials Analysis and Test and Measurement 
                      segments. 
                    --------------------------------------------------------- 
 
 
 Strategy execution 
  The Group is currently undertaking a strategic review. Progress 
  and initial conclusions from the review are set out on page 
  10. The Group considers that there is inherent risk associated 
  with the successful execution and delivery of the Group's strategic 
  priorities, and that managing this risk is of increased importance 
  during a period of strategic review and transition. 
  Some of the specific risks and mitigations associated with the 
  Group's strategic priorities are managed via their own principal 
  risk, for example competitive activity, how we develop new products 
  and how we acquire other businesses. Nevertheless, the Group 
  recognises the importance and value of managing strategic execution 
  risk in its own right. 
 Link to Strategy:   Innovative solutions, Market presence, Expanding 
                      globally, Operational excellence, Capital deployment 
                    ---------------------------------------------------------- 
 Risk Appetite:      Balanced 
                    ---------------------------------------------------------- 
 Assessment:         Moderate 
                    ---------------------------------------------------------- 
 Change in Risk      Higher 
  Level: 
                    ---------------------------------------------------------- 
 Impact              - Failure to realise the Group's growth plans. 
                      - Failure to realise the Group's plans for enhanced 
                      profitability. 
                      - Reduced capital returns and cash flow. 
                    ---------------------------------------------------------- 
 Mitigation          - Greater focus on performance management, capital 
                      allocation and shareholder value creation. 
                      - Simplifying the business to focus on scalable 
                      platform businesses, strongly aligned to attractive 
                      high growth end markets with the strongest capabilities. 
                      - Independent support and assurance in the development 
                      of the strategy. 
                      - Drive profitability through the cycle via a 
                      strong focus on margin expansion: 
                      - Profit improvement programme initiated. 
                      - Operating leverage from organic revenue growth. 
                      - Lean operating model and system. 
                      - Developing a clear strategy activation programme 
                      - aligning the organisation and culture with the 
                      new strategy programme. 
                      - Enabling the capabilities of our leaders and 
                      future leaders to drive successful execution. 
                    ---------------------------------------------------------- 
 2018 update 
                       *    Strategic review initiated in the fourth quarter. 
 
 
                       *    New profit improvement programme initiated in the 
                            fourth quarter. 
                    ---------------------------------------------------------- 
 
 
 Competitive activity 
  The nature of the markets in which we operate means that all 
  of our businesses are exposed to risk from competitor activity. 
 Link to Strategy:   Innovative solutions, Market presence 
                    --------------------------------------------------------- 
 Risk Appetite:      Balanced 
                    --------------------------------------------------------- 
 Assessment:         Moderate 
                    --------------------------------------------------------- 
 Change in Risk      Higher 
  Level: 
                    --------------------------------------------------------- 
 Impact              - Loss of market share. 
                      - Reduced financial performance. 
                      - Price and/or volume erosion as a result of competitor 
                      activities. 
                    --------------------------------------------------------- 
 Mitigation          - Ongoing monitoring of competitor activity and 
                      trends in the markets in which we compete. 
                      - Maintain market-leading positions through strong 
                      customer relationships and significant investment 
                      in R&D. 
                      - We have a diversified portfolio of products 
                      and markets that limits the overall risk from 
                      any single competitor. 
                    --------------------------------------------------------- 
 2018 update         We maintained high levels of investment in R&D 
                      (typically 6-7% of sales), with our operating 
                      companies bringing new products and solutions 
                      to market during the year to sustain and strengthen 
                      our strong customer relationships and competitive 
                      advantages. 
                      While our assessment of this risk for 2018 has 
                      slightly increased, planned enhancements to activities 
                      in new product development, specifically in product 
                      management and the management of speed and agility 
                      of innovation, will further contribute to the 
                      mitigation of this risk. 
                    --------------------------------------------------------- 
 
 
 People 
  The Group needs to attract, develop, motivate and retain the 
  right people to achieve our operational and strategic targets. 
  Effective talent management is essential to successfully delivering 
  our current business requirements and strategic goals, and to 
  realising the full potential of our businesses. Therefore, failure 
  to attract, retain or deploy talent could significantly impact 

  the successful execution of our strategy. 
 Link to Strategy:   Innovative solutions, Market presence, Expanding 
                      globally 
                    ----------------------------------------------------- 
 Risk Appetite:      Cautious 
                    ----------------------------------------------------- 
 Assessment:         Moderate 
                    ----------------------------------------------------- 
 Change in Risk      Higher 
  Level: 
                    ----------------------------------------------------- 
 Impact              - Loss of knowledge / expertise. 
                      - Business disruption. 
                      - Lost investment in people. 
                    ----------------------------------------------------- 
 Mitigation          - Structured recruitment process for senior and 
                      Group talent. 
                      - Organisational capability review processes in 
                      effect. 
                      - Group executive-level succession planning. 
                      - Staff turnover reporting. 
                    ----------------------------------------------------- 
 2018 update         We recognise the heightened importance of managing 
                      people risk during a period of strategic review 
                      and transformation. As a consequence, we have 
                      raised our assessed risk level and the following 
                      additional mitigations were planned and introduced 
                      in 2018 with further rollout during 2019: 
                      - Group HR information system. 
                      - Enhancements to Group approval/governance process 
                      covering all senior hires. 
                      - Assurance over key implemented mitigations. 
                    ----------------------------------------------------- 
 
 
 Supply chain dependencies and disruption 
  We are exposed to the risk that some of the components we source, 
  particularly for custom-built items or ageing products, are 
  provided by a single supplier and are therefore vulnerable to 
  interruption of supply. 
  Our businesses also manufacture components using proprietary 
  technologies at a number of locations. 
  Our ability to supply products to customers could be adversely 
  impacted by a significant disruptive event at any of these sites. 
 Link to Strategy:   Operational excellence 
                    ------------------------------------------------------- 
 Risk Appetite:      Cautious 
                    ------------------------------------------------------- 
 Assessment:         Low 
                    ------------------------------------------------------- 
 Change in Risk      Same 
  Level: 
                    ------------------------------------------------------- 
 Impact              - Inability to fulfil customer orders, resulting 
                      in lost sales and reputational damage. 
                      - Increased costs reduce profitability. 
                      - Loss of market share. 
                    ------------------------------------------------------- 
 Mitigation          - Strategic sourcing teams source cost-effective 
                      suppliers across a range of markets whilst validating 
                      suppliers' business processes, quality and standards. 
                      - Alternative sources of supply actively sought 
                      to reduce dependency upon single-source suppliers. 
                      - Business interruption insurance. 
                      - Strong contract review process. 
                    ------------------------------------------------------- 
 2018 update         We continued to identify and qualify secondary 
                      sources of supply where key dependencies have 
                      been identified. During the year, a Group Vice 
                      President Supply Chain (recruited in 2017) continues 
                      to drive the following: 
                      - Enhanced focus on the Group's critical suppliers 
                      based on specialist independent spend analysis. 
                      - Streamlining of previously fragmented vendor 
                      relationships into fewer, global, agreements. 
                      - Driving benefits out of the existing procurement 
                      projects. 
                    ------------------------------------------------------- 
 
 
 Political and economic risks 
  We operate in a range of end-user markets around the world and 
  may be affected by political, economic or regulatory developments 
  in any of these countries. Material adverse changes in the political 
  and economic environments in the countries in which we operate 
  have the potential to put at risk our ability to execute our 
  strategy. 
 Link to Strategy:   Expanding globally, Market presence 
                    --------------------------------------------------------------- 
 Risk Appetite:      Balanced 
                    --------------------------------------------------------------- 
 Assessment:         Moderate 
                    --------------------------------------------------------------- 
 Change in Risk      Increased 
  Level: 
                    --------------------------------------------------------------- 
 Impact              - Reduced sales, profitability and cash flow. 
                    --------------------------------------------------------------- 
 Mitigation          - Maintain a broad spread of markets, products 
                      and customers to limit risks associated with any 
                      given territory. 
                      - Market monitoring so that we can respond quickly 
                      to changing trading conditions. 
                      - Ensure we maintain a strong balance sheet and 
                      financial position. 
                    --------------------------------------------------------------- 
 2018 update         While the Group's balanced geographical mix, with 
                      similar exposure to North America, Europe and 
                      Asia, enables it to benefit from an improvement 
                      in trading conditions in each region, two particular 
                      risk scenarios have increased in potential impact/likelihood: 
                      - Uncertainty as to the outcome of Brexit and 
                      the prospect of 'no-deal'. During 2018, the Group's 
                      focus has shifted towards the 'no-deal' scenario. 
                      The Group has identified an extensive list of 
                      potential risks. Their associated mitigations 
                      are being continuously monitored to ensure the 
                      effective management of risk during this dynamic 
                      period. Mitigations include amending provisions 
                      within our commercial contracts and seeking approvals 
                      from alternative regulatory authorities to continue 
                      to operate in the EU/UK. 
                      - Risk associated with the escalation of tariff 
                      measures between the USA and China has also required 
                      focused monitoring and mitigation. Working with 
                      each of the Group's businesses in China, an assessment 
                      has been made as to the annualised impact of the 
                      proposed tariffs. In addition, separate assessments 
                      have been made with respect to the anticipated 
                      impact of tariffs on US imports from China. Mitigations 
                      in place include the use of alternatives for US-based 
                      businesses with China-based suppliers, as well 
                      as proactive filing for exemptions from US tariff 
                      increases on imports. 
                    --------------------------------------------------------------- 
 
 
 Intellectual property 
  In support of the Group's business model to provide technologically-advanced 
  solutions to its customers, the Group has continued to take 
  a holistic approach towards intellectual property protection 
  and management. The Group owns and registers patents and trademarks 
  and maintains trade secrets, confidential information and copyright 
  as well as exploiting intellectual property through licensing. 
  The key risks are that the Group may inadvertently infringe 
  third-party rights and that the Group may not hold sufficient 
  rights to prevent competitors independently developing similar 
  products. There are also risks that intellectual property may 
  be lost through failure to implement controls to safeguard confidential 
  information or actively manage registered intellectual property 
  rights. 
 Link to Strategy:    Innovative solutions, Market presence, Expanding 
                       globally, Capital deployment 
                     ----------------------------------------------------------- 
 Risk Appetite:       Cautious 
                     ----------------------------------------------------------- 
 Assessment:          Very low 
                     ----------------------------------------------------------- 
 Change in Risk       Same 
  Level: 
                     ----------------------------------------------------------- 
 Impact               - Reduced profitability and cash flow. 
                       - Loss of market share. 
                       - Failure to recoup investment in innovation. 
                     ----------------------------------------------------------- 
 Mitigation               - Policies and procedures in place requiring all 
                           of our businesses to: 
                           - maintain a watching brief on new third-party 
                           patent applications and competitor activity; 

                           - ensure adequate protection for key intellectual 
                           property, including registration where appropriate; 
                           - undertake specific freedom-to-operate technical 
                           reviews prior to commencing new product development, 
                           acquisitions or licences; and 
                           - register intellectual property where appropriate. 
                     ----------------------------------------------------------- 
 2018 update          The Group continues to undertake intellectual 
                       property audits and facilitates operating company 
                       self-assessments with a view to monitoring mitigation 
                       and key risk indicators in governance, software, 
                       internal and external information protection. 
                     ----------------------------------------------------------- 
 
 
 New product development 
  The development of new technologies and products necessarily 
  involves risk, including: 
  - the product being more expensive or taking longer to develop 
  than originally planned; 
  - the product failing to reach the commercialisation phase; 
  and 
  - not meeting market requirements or market requirements changing. 
 Link to Strategy:   Innovative solutions 
                    ---------------------------------------------------------- 
 Risk Appetite:      Balanced 
                    ---------------------------------------------------------- 
 Assessment:         Moderate 
                    ---------------------------------------------------------- 
 Change in Risk      Same 
  Level: 
                    ---------------------------------------------------------- 
 Impact              - Reduced profitability and cash flow. 
                      - Loss of market share. 
                      - Failure to recoup investment in innovation. 
                    ---------------------------------------------------------- 
 Mitigation          - Regular strategic evaluations of product portfolios 
                      and the markets in which we compete. 
                      - Project management disciplines are in place 
                      across our product development programmes and 
                      audits provide assurance that these disciplines 
                      are applied consistently. 
                      - Regular monitoring of project progress and performance 
                      against plan. 
                      - Working closely with customers to ensure that 
                      we develop solutions tailored to their specific 
                      needs. 
                    ---------------------------------------------------------- 
 2018 update         During 2018, the Group has enhanced its focus 
                      on value-driven product design, product portfolio 
                      management and project management. The latter 
                      has resulted in the establishment of a special 
                      interest group comprised of operating company 
                      and function representatives. The Group has already 
                      made progress in driving consistent and good practices 
                      in project management methodologies and tools. 
                      In addition, the Group has put in place a dashboard 
                      reporting process designed to monitor key performance 
                      and risk indicators, such as return on innovation 
                      and speed of innovation. 
                    ---------------------------------------------------------- 
 

Name of contact and telephone number for queries:

Rebecca Dunn

Deputy Company Secretary

01784 470 470

28 March 2019

LEI Number: 213800Z4CO2CZO3M3T10

For and on behalf of Spectris plc

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March 28, 2019 06:16 ET (10:16 GMT)