REG - Spectris PLC - 2017 FULL YEAR RESULTS <Origin Href="QuoteRef">SXS.L</Origin>

SpectrisAnnouncement

19/02/2018 07:05

RNS Number : 2027F
Spectris PLC
19 February 2018
SPECTRIS PLC
2017 FULL YEAR RESULTS
19 February 2018 - Spectris plc (SXS: LSE), the productivity-enhancing instrumentation and controls company, announces full year results for the twelve months ended 31 December 2017.
2017
2016
Change
Like-for-like
change1

Adjusted1

Sales (m)
1,525.6
1,345.8
13%
6%
Operating profit before Project Uplift costs of 15.8m (2016: 3.2m) (m)
239.3
204.0
17%
14%
Operating margin before Project Uplift costs (%)
15.7%
15.2%
0.5pp
1.1pp
Operating profit (m)
223.5
200.8
11%
8%
Profit before tax (m)
218.4
195.8
12%
Earnings per share (pence)
145.1p
127.5p
14%
Dividend (pence)
56.5p
52.0p
9%
Operating cash flow conversion (%)
75%
113%
(38pp)
Reported
Sales (m)
1,525.6
1,345.8
13%
Operating profit (m)2

182.4
38.3
376%
Operating margin (%)2

12.0%
2.8%
9.2pp
Profit before tax (m)2
278.4
31.9
>100%
Basic earnings per share (pence)2

197.0p
8.6p
>100%
1 Adjusted performance measures ('APMs') are used consistently throughout this press release and are referred to as 'adjusted', 'constant exchange rate'
or 'like-for-like (LFL)'. These are defined in full and reconciled to the reported statutory measures in Note 2 to the Financial Statements.
2 The main adjusting item to reported profit in 2016 was the 115.3 million impairment charge, which reduced basic earnings per share by 96.8 pence.
Highlights
 Good strategic progress in broadening our customer offering:
o Further software, services and testing capability added
o Acquisition of Concept Life Sciences in January 2018 adds high-quality test services business in the pharmaceutical, life sciences and advanced materials sectors
o Announced joint venture with Macquarie Capital for environmental monitoring business
o Investment in our strategic growth initiatives
 Project Uplift Phase 1 underway, delivering strongly on procurement; IT programme re-scoped
o Expect a net benefit of 3 million in 2018
o Phase 1 now expected to deliver annual savings of 25 million at a total cost of 35 million by end 2019
 Sales of 1,525.6 million, 13% growth year-on-year, reflecting a 6% LFL sales increase
 Adjusted operating profit of 223.5 million, an 8% LFL increase; reported operating profit of 182.4 million
 Adjusted earnings per share up 14%; dividend per share increase of 9%
 Adjusted operating cash flow conversion of 75% reflects increase in growth capex for Millbrook capacity expansion programme
 Share buyback of 100 million following divestment of Microscan
Commenting on the results, John O'Higgins, Chief Executive, said: "Our performance in 2017 was good with LFL increases in both sales and profit as we executed on our strategy, and helped by a recovery in the USA and certain key end markets. In 2018, we expect to see the benefit of organic sales growth, partly offset by the investment in our strategic growth initiatives and foreign currency exchange headwinds.
We remain focused on increasing productivity and reducing complexity through Project Uplift. The magnitude and phasing of the benefits and costs from this programme have varied from those originally envisaged, primarily due to a re-scoping of the IT project. As a result, we now expect Phase 1 to deliver annual savings of 25 million at a total cost of 35 million over the period to the end of 2019.
Our key priority remains the implementation of the strategy to provide a broader offering to our customers. Our balance sheet remains strong and we will continue to make acquisitions to support this strategy as we expand our software and services capability."
Contacts:
Spectris plc
John O'Higgins, Chief Executive
+44 1784 470470
Clive Watson, Group Finance Director
+44 1784 470470
Siobhn Andrews, Head of Corporate Affairs
+44 1784 485325
FTI Consulting
Richard Mountain / Susanne Yule
+44 203 727 1340
A meeting with analysts will be held at 8:30am GMT today at the offices of FTI Consulting. This will be available as a live webcast on the company's website at www.spectris.com and a recording will be posted on the website after the meeting.
Copies of this press release are available to the public from the registered office at Heritage House,
Church Road, Egham, Surrey TW20 9QD and on the company's website at www.spectris.com.
About Spectris
Spectris plc is a leading supplier of productivity-enhancing instrumentation and controls. The Company's products and technologies 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, England, the Company employs approximately 9,800 people located in more than 30 countries. For more information, visit www.spectris.com.
CHIEF EXECUTIVE'S STATEMENT
Results overview
Reported sales increased by 13% to 1,525.6 million (2016: 1,345.8 million) which reflected a 6% increase on an organic, constant currency (like-for-like, 'LFL') basis. During the year, we continued to make good strategic progress towards broadening our portfolio, adding further to our software and services offerings. As customers increasingly require an integrated solution, we are strategically positioning Spectris to align with their needs and this is transforming our business.
2017 operational performance
An improving demand backdrop in some of the key industries we serve has been an important factor behind the 6% increase in LFL sales which, combined with 2% net growth from acquisitions and disposals and a beneficial impact of 5% from foreign currency exchange movements, produced a 13% increase in reported sales.
Sales by segment
LFL sales change
Sales by geography
LFL sales change
H1
H2
FY
H1
H2
FY
Materials Analysis
3%
10%
7%
North America
1%
7%
4%
Test and Measurement
5%
6%
6%
Europe
6%
6%
6%
In-line Instrumentation
11%
3%
6%
Asia
10%
8%
9%
Industrial Controls
5%
7%
6%
Rest of the world
0%
2%
1%
Group
5%
7%
6%
Group
5%
7%
6%
LFL sales increased across all four segments and key regions. In Materials Analysis, a recovery in metals, minerals and mining plus good growth in pharma and semiconductor saw LFL sales increase 7% whilst automotive was the key sector driving the growth in Test and Measurement. Sales to academic research in both these segments were lower year-on-year. For In-line Instrumentation, the recovery of capital spending in energy and utilities and process industries led to higher LFL sales whilst Industrial Controls benefited from an improved performance at Omega as well as an ongoing recovery in North American industrial spending.
On a regional basis, LFL sales to North America increased by 4%, with the second half performance stronger than the first half. In Asia, LFL sales continued to grow strongly (up 9%), helped particularly by China which grew 11%, along with Japan and India. In Europe, LFL sales rose 6%, with a strong second half contribution from the UK while sales to Germany grew strongly in the first half. Sales to the Rest of the world were up 1%.
Adjusted operating profit increased 11% to 223.5 million andreported operating profit was 182.4 million compared to 38.3 million recorded in 2016 which included a non-cash impairment charge of 115.3 million. On a LFL basis, adjusted operating profit increased 8%, primarily reflecting the effect of the higher sales volumes and a turnaround in performance at Omega, partly offset by adverse product mix and overhead cost increases, reflecting increased headcount, wage inflation and the cost to achieve our strategic growth initiatives. LFL overheads will continue to increase in 2018 at a similar rate to that in 2017, reflecting inflationary pressures together with the annualisation of the costs of our strategic initiatives which commenced in 2017.
Adjusted operating profit includes costs of 15.8 million in relation to Project Uplift. Excluding these costs, adjusted operating margins were 15.7%, 0.5pp higher than in 2016 (LFL +1.1pp). Reported operating profit included a number of one-off costs and income during the year resulting in a net overheads year-on-year benefit of 3.5 million.
The Group's adjusted operating cash conversion was in line with our expectations with 75% (2016: 113%) of adjusted operating profit being converted into cash. This was lower than usual due to increased capital expenditure for the capacity expansion programme at Millbrook, resulting in an overall Group capital expenditure of 73.1 million. After allowing for the proceeds from the divestment of Microscan, net debt stood at 50.5 million at the year end, around 0.2 times the full-year adjusted EBITDA.
The Board is proposing to pay a final dividend of 37.5 pence per share which, combined with the interim dividend of 19.0 pence, gives a total of 56.5 pence per share for the year, an increase of 9%. This is consistent with our policy of making progressive dividend payments based upon affordability and sustainability. The dividend will be paid on 29 June 2018 to shareholders on the register at the close of business on 25 May 2018. The ex-dividend date is 24 May.
Following the sale of Microscan in October 2017, post-tax cash proceeds of 91.9 million have been received. The Board has, therefore, approved a share buy-back programme of 100 million to take place during 2018 and this will commence as soon as possible. The Group has considerable financial flexibility and will continue to target acquisitions in support of its strategy.
Positioning ourselves to deliver our solutions strategy
Our strategy is evolving towards the provision of complete solutions to our customers, based on our deep application and technical expertise, and we made good progress in broadening our software and services offerings to customers.
Corporate development
We completed a number of bolt-on acquisitions in 2017. Setpoint brings conditioning monitoring hardware and software solutions for rotating and reciprocating machinery, allowing online condition monitoring analysis and machinery diagnostics, and has been integrated into Brel & KjrVibro to enhance its product offering. Omnicon provides a range of services and software to help its customers analyse and improve product reliability and safety, particularly in aerospace, automotive, transportation and defence. The combination of Omnicon's expertise in reliability design and testing with HBM Prenscia's software and services will enable us to provide customers with a broader range of reliability-improvement solutions.
We further strengthened the Millbrook business in the UK with the acquisition of the CSA Leyland Technical Centre, an automotive test facility in Lancashire which adds further capacity as well as a complementary customer base and services. In addition, we invested 25.5 million at Millbrook predominantly on new capacity, such as the 4WD climatic emissions chassis dynamometer cell which we commissioned in the year, and additional indoor testing capacity in Finland, which is due to be commissioned in the third quarter of 2018.
We will also be adding capability through the joint venture agreement we signed with Macquarie Capital in which they have agreed to acquire a 50% interest in our environmental monitoring business,
EMS Brel & Kjr. It is expected to close in the second quarter of 2018, subject to regulatory approvals in China, the European Union and South Korea. This partnership, with a world-leading infrastructure adviser and investor, should benefit the new joint venture in its next stage of development as we jointly invest organically and inorganically to collaborate on our remote monitoring and analytics offering for environmental monitoring. The combination of our expertise in environmental monitoring solutions and Macquarie Capital's significant presence in infrastructure markets will accelerate the growth of the business.
In January 2018, we acquired Concept Life Sciences, which provides integrated drug discovery, development, analytical testing and environmental consultancy services, mainly in the pharmaceutical, biotechnology, agrochemical and environmental sectors. Additionally, it carries out development and analytical services for the food, consumer and environmental industries. Concept Life Sciences is a
high-quality services business which further strengthens our portfolio, has strong synergies with the activities of Malvern Panalytical and enhances our ability to provide customers within the pharmaceutical, life sciences and advanced materials sectors with a combined product and service proposition.
Strategic initiatives
In order to drive our strategic initiatives, we have made a number of investments including new central leadership appointments in lean, supply chain, software and digital. Ensuring we have best-in-class processes and capabilities will be key to our continued success and these new roles will be pivotal in developing best practice and driving performance enhancement across the Group. This will be supported by our new central HR function with its talent management and organisational capability programme.
Across the Group, delivery of our strategy has meant more collaboration between our operating companies. Automotive is a key end-market focus and here we have strengthened our key account management approach and provided a more collaborative offering. This is based on our expertise in four key areas - durability, propulsion, safety and refinement - in order to cross-sell our products, software and services from Brel & Kjr Sound & Vibration, HBM and Millbrook.
At Malvern Panalytical, which we merged at the start of the year, there is now one management team and a combined sales and marketing team. Their collaboration has led to numerous cross-selling opportunities and, together with a more value-based approach to providing customer solutions, the combined business has made good progress during the year.
We have also been reviewing our digital-led customer applications, with the potential for more cross-group solutions by leveraging existing operating company technologies, competencies and end-market expertise to more broadly serve our customers' needs. New product development and our combination of hardware and software is focused on simplifying the integration of customer-generated data with remote data analytics services and in January 2018, we launched Spectris Advance to showcase this digital offering to customers.
We decided to divest our machine vision technology business, Microscan, as we believe its next stage of development can be better fulfilled under new ownership. The Group completed the sale to
Omron Corporation in October, resulting in post-tax cash proceeds of 91.9 million. Our balance sheet remains strong and provides the opportunity for us to redeploy capital to add further software and services capability.
Project Uplift - Phase 1 underway, more cautious approach to Phase 2
Project Uplift continues to make progress, with Phase 1 fully underway. The majority of the Phase 1 savings will be derived from leveraging theGroup's scale, for instance through securing improved terms for procurement of goods and services, both direct and indirect. We made progress on this on a number of fronts during 2017; for example, we implemented new global freight contracts and are well advanced in the process of transitioning to new suppliers for a number of key product components.
In 2017, the cost of 15.8 million and gross recurring benefit of 2.8 million were both lower than originally expected, and included an additional 1 million of spend on the Phase 2 shared service centre project. As we started to implement the initiatives during 2017, it became evident that the IT implementation is more complex to deliver than we had anticipated and we have therefore revised the scope of the programme, resulting in a change in the magnitude and phasing of benefits and costs from those originally expected. As a result, for Phase 1, we now expect annualised recurring savings of 25 million and a total cost to achieve these of 35 million by the end of 2019, with more coming from procurement activities and less from IT. This compares to previous expectations of 35 million of savings and 45 million of costs. In 2018, the net benefit for Phase 1 is now expected to be 3 million. Work is again underway to affirm the potential benefits and costs of the shared service centre project in Phase 2 and we will provide further details on this later in 2018. Costs of 3-4 million related to this work will be incurred during 2018.
As well as delivering the projected savings, the programme will further support our customer-focused solutions strategy, freeing up resources to facilitate the delivery of our strategy by identifying and capitalising on cross-group opportunities and making it easier for our customers to do business with us.
Our people deliver the strategy
Ensuring we have the right people in place to deliver the strategy will continue to be a key focus. As our business evolves and there is more co-ordination across operating companies, it is critical that we retain the factors that have driven our success, preserving the entrepreneurial and dynamic nature of the Group, as well as continuing to promote our strong ethical culture and values. In 2017, there has been a notable step forward in our leadership talent management process and this will continue to be a key focus linked to our future strategy and operating model.
Summary and outlook
Our performance in 2017 was good with LFL increases in both sales and profit as we executed on our strategy, and helped by a recovery in the USA and certain key end markets. In 2018, we expect to see the benefit of organic sales growth, partly offset by the investment in our strategic growth initiatives and foreign currency exchange headwinds.
We remain focused on increasing productivity and reducing complexity through Project Uplift. The magnitude and phasing of the benefits and costs from this programme have varied from those originally envisaged, primarily due to a re-scoping of the IT project. As a result, we now expect Phase 1 to deliver annual savings of 25 million at a total cost of 35 million over the period to the end of 2019.
Our key priority remains the implementation of the strategy to provide a broader offering to our customers. Our balance sheet remains strong and we will continue to make acquisitions to support this strategy as we expand our software and services capability.
OPERATING REVIEW
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Reported sales (m)
464.9
418.9
487.3
404.5
310.9
275.6
262.5
246.8
1,525.6
1,345.8
LFL growth (%) vs prior year
7%
6%
6%
6%
6%
Adjusted operating profit before
Project Uplift costs (m)
87.3
77.1
74.2
63.0
36.0
41.8
41.8
22.1
239.3
204.0
LFL adjusted operating profit change before Project Uplift costs (%)
12%
8%
(12%)
96%
14%
Project Uplift costs (m)
(4.2)
(0.9)
(5.3)
(1.2)
(2.8)
(0.6)
(3.5)
(0.5)
(15.8)
(3.2)
Adjusted operating profit (m)
83.1
76.2
68.9
61.8
33.2
41.2
38.3
21.6
223.5
200.8
Reported operating profit (m)
68.6
66.2
55.6
26.7
29.5
37.6
28.7
(92.2)
182.4
38.3
Adjusted operating margin before Project Uplift costs (%)
18.8%
18.4%
15.2%
15.6%
11.6%
15.2%
15.9%
9.0%
15.7%
15.2%
LFL adjusted operating margin change before Project Uplift costs (pp)
0.9pp
0.4pp
(2.6pp)
7.4pp
1.1pp
Adjusted operating margin (%)
17.9%
18.2%
14.1%
15.3%
10.7%
15.0%
14.6%
8.7%
14.7%
14.9%
Reported operating margin (%)
14.8%
15.8%
11.4%
6.6%
9.5%
13.6%
10.9%
(37.4%)
12.0%
2.8%
% of Group sales
31%
31%
32%
30%
20%
21%
17%
18%
100%
100%
Aftermarket sales1 (%)
32%
32%
28%
23%
43%
44%
3%
1%
28%
26%
1 Aftermarket sales comprise service revenues and sales of consumables and spare parts.
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. In 2017, the two operating companies in this segment were Malvern Panalytical and
Particle Measuring Systems ('PMS'). In January 2018, Concept Life Sciences was acquired and has become a new operating company within this segment.
Segment performance
2017
2016
Change
Like-for-like
change
Reported sales (m)
464.9
418.9
11%
7%
Adjusted operating profit before Project Uplift costs of 4.2m (2016: 0.9m) (m)
87.3
77.1
13%
12%
Adjusted operating margin before Project Uplift costs (%)
18.8%
18.4%
0.4pp
0.9pp
Reported operating profit (m)
68.6
66.2
4%
Reported operating margin (%)
14.8%
15.8%
(1.0pp)
Reported sales increased 11%, reflecting a 7% increase in LFL sales, a 0.2% contribution from acquisitions and a 4% positive impact from foreign currency exchange movements. Sales growth for the year was driven primarily by Asia, particularly in China, South Korea and India. In North America, LFL sales increased, with a notable swing from a first half decline to a very strong second half. On a LFL basis, before Project Uplift costs, adjusted operating profit increased 12% and adjusted operating margins increased by 0.9pp, reflecting the higher LFL sales, slightly reduced gross margin from adverse product mix, and lower net overhead costs, with the rise in merger-related costs being partly mitigated by good cost control and the benefit of an insurance settlement. Reported operating profit increased 4% to 68.6 million.
Malvern Panalytical continued to bring the two teams together as a single operating company. The business has now been organised around key market sectors - Advanced Materials, Pharma and Food, Raw and Bulk Materials - with a focus on value-based selling by the newly cross-trained sales and marketing teams. Numerous opportunities to promote the Malvern product line to customers of the former PANalytical brand and vice versa have translated into incremental orders and revenue, with an increasing list of opportunities being actively pursued. For example, a global cement company which was an existing PANalytical customer bought a Malvern Mastersizer for the first time alongside a PANalytical XRD/XRF system.
New products have been launched during the year; for example, the Epsilon 1 Meso, a version of the
Epsilon 1 XRF spectrometer which combines hardware and software to enable small spot elemental analysis. In February, the MicroCal PEAQ-DSC differential scanning calorimeter was launched. This instrument is used to assess the developability and shelf-life of biological products and for comparing biopharmaceuticals and their biosimilar counterparts. This product is the only such DSC system with software compliance for the regulated environment, positioning Malvern Panalytical well with biopharmaceutical customers. Additionally, in this area, Malvern Panalytical is leading an industrial and academic consortium which was awarded an Innovate UK grant. This will fund a project seeking to address the specific analytical challenges associated with biopharmaceutical stability, in order to ensure the delivery of safe and cost-effective drugs in the future. Malvern Panalytical also announced a partnership with TetraScience to develop applications for smart laboratories, which will increase efficiency in the pharma industry, enabling researchers to better manage their equipment and make swift, data-driven decisions.
Sales to the pharmaceuticals and fine chemicals industries rose on a LFL basis with Asia seeing particularly strong growth, notably in China and Japan. As the middle class in this region expands, the number of people who are able to pay for healthcare increases and they are demanding better government provision. In China in particular, state funding on healthcare is increasing notably. North America saw an increase in LFL sales and Europe was up slightly year-on-year. At PMS, there has been a continued drive to provide our high-level consulting services to existing hardware customers following the acquisition of CAS Clean Air Service AG in 2016. For example, an American pharmaceutical corporation, which already had our air particle sensors installed at their largest US site, requested consultancy support for particle and microbiological contamination in their filling lines, which then led to a request for further equipment at their site. Demand for these services is motivated by regulatory compliance, which is becoming more stringent. This means demand continues to be strong, particularly in the area of aseptic pharma. PMS is focused on providing complete sterility assurance solutions to the life sciences industry and the customer proposition was further enhanced by a global partnership with Novatek International, a leader in regulatory compliant data management software. This provides a fully integrated software and hardware solution for environmental monitoring in controlled manufacturing processes, helping companies ensure cleanliness in their manufacturing environment whilst automatically collecting much of the information necessary for batch release and regulatory compliance.
The metals, minerals and mining sector reversed its 2016 sales decline, with a strong performance in all major regions, particularly in the second half of the year. Minerals and mining saw a strong recovery, whilst LFL sales increased more modestly in the metals space, although in North America and Europe, LFL sales were down slightly. There is a cautiously improving investment climate, and as a result, increased market activity as well as demand from a focus on safety and productivity.
Sales (LFL) to academic research were notably weak in 2017, although they improved in the second half after a slow start to the year. The decline was prevalent across all regions with only India and the UK seeing any growth, with the former recovering from a weak 2016 as funding levels improved. In the USA, there has been little change under the new administration, with 2017 spending at most agencies at 2016 levels, which has generally prevented them from starting major new programmes. Similarly, political uncertainty in parts of Europe has meant that expenditure has remained subdued or delayed, with LFL sales into Germany notably weak until the latter part of the year as funds were released late. In Asia, Japanese academic budgets have also been under pressure and although LFL sales were down in China for the year, the government's new 'Double First Class' initiative to develop world-class universities is already impacting positively.
Sales (LFL) to the semiconductor, electronics and telecoms industry continued to grow strongly during 2017, particularly in Asia (China and South Korea, notably) and in North America. This has been driven by a significant increase in semiconductor capital spending as the demand for consumer electronics and IIoT applications rises. Our customers are also driven by yield enhancement, which can be improved by ensuring ultra-clean manufacturing environments and therefore the ability to measure ever smaller particles is a key demand driver for our products, alongside the need to meet regulatory requirements. PMS has had success with its market-leading products that measure 20 nanometre particles in ultra-pure water and ultra-pure chemicals.
Segment outlook
We expect continued growth in R&D expenditure by pharma and biotechnology companies with increasing investment in biopharmaceuticals and innovative drugs in western markets. In Asian markets, we expect continued growth in the development of generics as incomes increase and demand for access to healthcare products rises.
Within pharmaceuticals, we expect a continued increase in the regulatory scrutiny of manufacturing processes, driving demand for our material characterisation and cleanroom products as well as for related services, as customers seek complete solutions for regulatory compliance such as sterility assurance and good manufacturing practices.
We have seen an improving backdrop in the mining sector which has led to improved demand for equipment and services. However, the growth in capital investment budgets for larger-scale greenfield investments may be more modest.
We expect growth in the academic research market to be muted, although demand in China should be better as government initiatives to drive quality across their university system are boosting funding.
Within the semiconductor and telecoms industry, we expect to see continued growth in semiconductor investment, driven by the growing demand for consumer electronics, IIoT applications and autonomous vehicles, albeit at more muted rates than in 2017.
TEST AND MEASUREMENT
Our Test and Measurement operating companies supply test, measurement and analysis equipment, software and services for product design optimisation, manufacturing control, microseismic monitoring and environmental noise monitoring. The operating companies in this segment are Brel & Kjr Sound & Vibration ('BKSV'), ESG Solutions ('ESG'), HBM and Millbrook.
Segment performance
2017
2016
Change
Like-for-like
change
Reported sales (m)
487.3
404.5
20%
6%
Adjusted operating profit before Project Uplift costs of 5.3m (2016: 1.2m) (m)
74.2
63.0
18%
8%
Adjusted operating margin before Project Uplift costs (%)
15.2%
15.6%
(0.4pp)
0.4pp
Reported operating profit (m)
55.6
26.7
108%
Reported operating margin (%)
11.4%
6.6%
4.8pp
Reported sales increased 20%, including a 9% contribution from acquisitions, predominantly related to Millbrook, and a 5% positive impact from foreign currency exchange movements. LFL sales increased by 6%. By region, North America, Europe and Asia delivered similar levels of LFL sales growth, with a decline in the Rest of the world. Adjusted operating profit before Project Uplift costs increased 8% on a LFL basis and LFL operating margins before Project Uplift costs increased by 0.4pp, primarily reflecting the higher sales volumes and gross margin improvement due to cost-of-sales efficiencies. Reported operating profit increased to 55.6 million from the 26.7 million recorded in 2016 which included a non-cash impairment charge of 20.9 million relating to a write-down of goodwill and other intangibles associated with ESG.
In October, the acquisition of The Omnicon Group, Inc. ('Omnicon') was completed for a final consideration of 23.8 million. Omnicon provides a range of services to help its customers analyse and improve product reliability and safety. Key industries served include aerospace, automotive, transportation and defence and its services strongly complement the existing capability within the reliability and durability software and services portfolio in this segment, enabling us to offer a broader range of reliability-improvement solutions.
Within the automotive sector, LFL sales grew strongly during the year with the UK, Germany, North America and China being the main contributors. In China, we benefited from strong growth in torque sales, driven by investment in electrical drivetrains. At Millbrook, we expanded our testing capacity and capability with the acquisition of a commercial vehicle test facility in Lancashire in the UK and, organically, through further capital investment in the UK and for additional indoor testing capacity in Finland. For example, we expanded our powertrain testing capabilities with the opening of a new engine test cell to test premium and performance engines, commissioned a state-of-the-art climatic emissions chassis dynamometer to help develop lower emission vehicles and completed the first phase of investment in battery test capabilities to support electric vehicle development. We are also supporting the development of autonomous vehicles and were selected by the UK government to develop an innovative controlled urban environment for connected and autonomous vehicle testing and have been working with several companies developing driverless cars. At BKSV, our noise, vibration and harshness ('NVH') offering into the automotive space was enhanced by the release of the latest version of the Sonoscout, an ultra-portable, multi-channel NVH system used, for example, to record vehicle intake and exhaust noise levels for benchmarking competitor vehicles, and VSound, a vehicle sound-generating system that enables virtual NVH prototype evaluation in the context of a real vehicle, without the need for a PC in the vehicle.
In machine manufacturing, a significant portion of which represents sales into the automotive supply chain, LFL sales were flat year-on-year. LFL sales into the two key regions, Europe and Asia, rose but declined in North America. Germany saw modest growth with a continued increase in exports. China, in particular, saw strong growth in demand, driven by the economic backdrop as well as the general trend from volume to quality.
In the aerospace and defence sector, LFL sales reversed the decline seen in 2016, though this is typically a project business and sales can be lumpy. Overall, we have seen more aerospace opportunities, especially driven by stronger demand and funding of aircraft, helicopter and spacecraft makers in the USA and China, and we were able to maintain our leading position in structural testing including a number of new customer wins. There was very strong growth in both Europe and North America, and although lower in Asia overall, China saw good growth. A reorganised sales team and key account programme has delivered new sales opportunities with a number of notable contracts signed. For example, an agreement was signed with
BAE Systems to deliver a hull vibration monitoring system for the UK Royal Navy and contracts were signed with two major North American aerospace manufacturers.
Sales (LFL) to our consumer electronics and telecoms customers increased in 2017, primarily reflecting the launch of new products by our customers. We again saw strong growth in China where we are working with a number of mobile phone manufacturers. During the year, a new high-frequency head and torso simulator was launched - a mannequin with built-in ear and mouth simulators that provide a realistic reproduction of the acoustic properties of an average adult human head and torso.It is designed for in-situ electro-acoustics tests on smartphones, headsets, and microphones. We are working closely with Sony on headphone development using this product and have also secured orders with leading acoustics and social media companies.
Sales (LFL) of our environmental noise monitoring services increased during the year, particularly in Asia, where sales are approaching similar levels to Europe. Our strategy to widen our market reach for noise monitoring equipment and services has continued to see an increase of orders for urban monitoring.
In December, an agreement was signed with Macquarie Capital to form a joint venture with our environmental monitoring business (now named EMS Brel & Kjr). Macquarie Capital will acquire 50% of the business for a total cash consideration of AUD76.6 million. It is expected to close in the second quarter of 2018, subject to regulatory approvals in China, the European Union and South Korea. Both parties are committed to an accelerated investment programme to help create additional solutions and services to enable asset owners to monitor and manage their resources more effectively. The venture will benefit from Macquarie Capital's unrivalled expertise as a world-leading infrastructure adviser and investor.
As with the Materials Analysis segment, LFL sales to academic research institutes declined, with weakness in demand seen in all regions.
Improved conditions in the oil and gas and mining markets in 2017 resulted in an increase in LFL sales in these end markets, particularly in North America. Demand for microseismic monitoring solutions increased markedly in North America and we saw a higher level of activity for our downhole hydraulic fracture mapping and monitoring activities as both the US rig count and production rose throughout the year. We continue to target opportunities in other markets and are making progress in this regard in Latin America and the Middle East. As markets recover, ESG is looking to work more closely with its customers for productivity-enhancing solutions  for example, it has developed a microseismic analysis approach that helps operators better diagnose and improve fracturing effectiveness.
Segment outlook
We expect the automotive and aerospace sectors to benefit from further growth in demand for engineering software applications. The growth in hybrid and electric vehicles is expected to drive demand for our market-leading torque and eDrive solutions and test services. We are also seeing growth in sound and vibration applications in automotive.
In aerospace, as well as improved reliability and availability of engines, driven by safety and maintenance cost requirements, quieter engines and airframes (exterior noise) are also an area of focus. However, overall demand will be driven by new development programmes.
The underlying trends in the consumer electronics market remain healthy in our view, with strong consumer demand for smartphones, audio quality and innovative features, particularly in China and India.
The improving market conditions in the oil and gas industry are expected to create increased demand for our microseismic solutions with expectations for both production and capex in the industry to be higher in 2018.
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 Brel & Kjr Vibro, BTG,
NDC Technologies ('NDCT') and Servomex.
Segment performance
2017
2016
Change
Like-for-like
change
Reported sales (m)
310.9
275.6
13%
6%
Adjusted operating profit before Project Uplift costs of 2.8m (2016: 0.6m) (m)
36.0
41.8
(14%)
(12%)
Adjusted operating margin before Project Uplift costs (%)
11.6%
15.2%
(3.6pp)
(2.6pp)
Reported operating profit (m)
29.5
37.6
(22%)
Reported operating margin (%)
9.5%
13.6%
(4.1pp)
Reported sales increased 13%, reflecting a LFL sales increase of 6%, a 5% positive impact from foreign currency exchange movements and a 2% contribution from acquisitions. On a regional basis, LFL sales were up in all regions, with a good performance in Europe and Asia, particularly in the first half of the year. This reflected good growth in industrial production and a recovery in capital expenditure across many process industries globally. Excluding Project Uplift costs, LFLadjusted operating profit declined 12% and
LFL adjusted operating margins were 2.6pp lower year-on-year. This resulted from adverse mix and an increase in overheads driven by higher employee costs, plus costs of 4.3 million relating to restructuring and costs following the closure of a business centre in Europe. This also led to reported operating profit decreasing, from 37.6 million to 29.5 million.
In the pulp and paper markets, LFL sales increased modestly compared with 2016, with growth in pulping and tissue offsetting the continued structural decline in the coating segment. We continue to diversify towards the tissue, pulp and packaging markets, including digital solutions to meet 'mill-of-the-future' needs. Solutions tailored to drive gains in business performance at our customer sites continue to be the theme of many of the projects that the pulp and paper industry is looking for, including a more widespread use of automation and real-time monitoring of site-wide operating conditions. To address this, we have formed a new Process Solutions business unit. For example, a global pulp and paper producer deployed BTG's instruments and Capstone MACS process control software in combination to automate their bleaching unit operation. Several pulp and paper producers implemented BTG's dataPARC decision support and analysis software in order to access and visualise real-time data from multiple sources, enabling them to have a more comprehensive and intuitive means of leveraging their operational data. The data analytics offering also continues to be deployed in several other industries, including power generation, chemical, wastewater and ethanol.
In the energy and utilities market, LFL sales rose, reflecting the improved global oil and gas markets.
Both the industrial gases business and the hydrocarbon processing sector continue to recover globally and along with the strengthened sales and marketing organisation at Servomex, we have been able to capitalise on this. Growth was also helped by the launch of a number of new flagship products: for example, the
Servopro MultiExact 4100, a high-performance multi-gas analyser offering up to four simultaneous digital gas stream measurements and configurable to a wide range of industrial applications. Gases measured include oxygen, nitrogen, methane, carbon monoxide, carbon dioxide, argon and helium, delivering a new level of performance that further optimises processes, improves product yields, ensures high product quality for our customers and helps meet regulatory and safety requirements.
During the year, we acquired Setpoint, a leading provider of vibration and condition monitoring solutions to process industries. It has become an integrated product line of Brel & Kjr Vibro, growing our presence in the condition monitoring market. Setpoint is primarily focused on the oil and gas and power generation sectors and its technology enables customers to improve machinery availability, productivity and reliability by delivering accurate condition information. In August, the first shipments of Setpoint systems from
Brel & Kjr Vibro were delivered for the thermal power generation market in the Philippines. Since acquisition, we have also delivered new orders to two major South American oil and gas companies and
a US power generation company, amongst others, and in December, we received the largest-ever order for Setpoint systems for a large petrochemical complex being built in Russia.
In the wind energy sector, we are continuing to see growth and have further expanded the number of wind farm owners and operators to whom we provide turbine monitoring services. In total, we have now sold more than 18,000 systems into the wind power industry. Brel & Kjr Vibro has supplied for the first time condition monitoring systems to a US utility company under a five-year 'systems-as-a-service' contract. Simultaneously, Brel & Kjr Vibro's systems are now considered fleet-wide standard for wind turbines used by three utility companies: one each in Canada, the USA and Central America.
In our other end markets, sales (LFL) to the cable and tube (C&T) and food and bulk (F&B) markets increased during 2017 with strong performances in North America, Europe and Japan. C&T sales were up strongly on improved sales coverage, particularly in Europe and China. F&B sales were up strongly as a result of targeting key growth markets in this segment, including savoury snacks. Film extrusion and converting sales were especially strong in North America. NDCT continues to develop its technology partnerships and products. It has worked closely with RAM GmbH, a web inspection business, since a business co-operation agreement was signed in March. Customers will benefit from simplified service support with one organisation handling both gauging and inspection. During the year, NDCT delivered several new products to the market, including the new BenchMike Pro offline diameter and ovality metrology instrument which offers the highest accuracy in the industry. The instrument also offers faster communications processing and easy integration into production networks to support customers' IIoT programmes. Restructuring activities at NDCT continued during the year and transfer and consolidation of the manufacturing and administrative functions from California into the Ohio facility is on track for completion in 2018. The California facility has become the new film extrusion and converting solutions technical centre of excellence.
Segment outlook
The mix in our pulp and paper business is expected to continue to improve during 2018 with our new focus on complete solutions, including digital capabilities, aimed at the growing tissue, pulp and packaging markets. We also expect to continue to benefit from the combination of Capstone's software tools with BTG's instruments to capture new opportunities with the Process Solutions business unit.
With an improved environment in global oil and gas markets and with a partial revival of activity in greenfield projects as well as brownfield expansions, we expect growth from the energy and utilities sector to continue into 2018. The addition of Setpoint offers the potential to further grow the machine protection/condition monitoring solution business in this segment. The wind energy sector remains healthy and offers the potential for additional capabilities beyond vibration to encompass other condition monitoring in order to provide more predictive analysis and offer a full-service wind farm optimisation programme.
Opportunities in the film extrusion, web converting and food and bulk materials markets are expected to increase as customers develop new products which require advanced in-line measurement solutions. Quality requirements, particularly in the food segment, and food packaging continue to be more stringent globally and therefore drive demand for in-line solutions.
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'). Microscan was divested in October 2017.
Segment performance
2017
2016
Change
Like-for-like
change1
Reported sales (m)
262.5
246.8
6%
6%
Adjusted operating profit before Project Uplift costs of 3.5m (2016: 0.5m) (m)
41.8
22.1
89%
96%
Adjusted operating margin before Project Uplift costs (%)
15.9%
9.0%
6.9pp
7.4pp
Reported operating profit (m)
28.7
(92.2)
>100%
Reported operating margin (%)
10.9%
(37.4%)
48.3pp
1 The 2017 reported results reflect the contribution for the nine-month period to end-September, whilst the 2016 reported results represent a full year contribution from Microscan. LFL results are based on the inclusion of nine months trading by Microscan in both years.
Reported sales rose 6%. After adjusting for Microscan, LFL sales increased by 6% and there was a favourable impact of 6% from foreign currency exchange movements. With the segment's high exposure to
North America (c.70%), it was encouraging to see an increase in LFL sales in this region for the first time since 2014. Asia recorded strong growth in LFL sales, particularly at Omega. In Europe, overall segment sales were higher on a LFL basis, with growth in both our industrial networking business and in process measurement and control products. Reported operating profit increased to 28.7 million from the loss of 92.2 million recorded in 2016 which included a non-cash impairment charge of 94.4 million relating to a write-down of the balance sheet goodwill and other intangibles associated with Omega.
Adjusted operating profit (LFL) before Project Uplift costs increased by 96% and LFL operating margins before Project Uplift costs improved by 7.4pp, following the significant improvement in gross margin at Omega as well as the effects of operating leverage. This reflected improved product mix and pricing and lower overheads. There was a restructuring charge of 2.1 million as we continue to improve the performance of Omega.
The operational improvements at Omega were reflected in a good sales performance and higher gross margins. Omega derives the majority of sales from the USA and the improving industrial environment saw an increase in demand for its products. The internationalisation programme continued to deliver good sales growth in all major markets outside the USA, with particular strength in Asia, notably in China. A focus on lean operations, tighter inventory management and the consolidation of distribution centres globally have all contributed to this performance. Other performance improvement initiatives have focused on marketing, including a shift from higher cost print marketing to precisely-targeted digital marketing campaigns. These campaigns highlight new products and real-life use applications  for example, for the Omega Enterprise Gateway, a software tool in Omega's portfolio designed to link sensor data and monitor a variety of products from a single platform. Rapid adoption resulted from the targeted digital marketing promotion and expansion of Omega's easily configured pressure transducer product line in aerospace, military and transportation markets. Examples of these applications include temperature sensors for pre-flight applications and automated data collection systems for robust asset monitoring.
The increasing trend towards the IIoT, driven by the need for smarter, more interconnected operations, is benefiting our industrial automation and networking business as organisations seek easy-to-use solutions to connect and expand the capabilities of legacy equipment within existing facilities. To better service this need, Red Lion reorganised its sales teams to focus on opportunities in certain key vertical markets. For example, in Asia, a targeted focus in energy and water resulted in sales to a large wind turbine manufacturer and a number of water projects in China. In India, Red Lion won a project to enable Azure Power to efficiently analyse previously installed solar power systems for energy consumption.
During the year, Red Lion launched a new generation of human machine interface products ('HMIs') which provide enhanced functionality for remote monitoring and control. These HMIs allow customers to interconnect devices from a variety of leading manufacturers more easily. New additions of Red Lion's industrial Ethernet switches were also launched. The new models are designed for industrial, transportation and intelligent traffic applications requiring high reliability and the ability to function in extreme environmental conditions to help maximise network uptime and prevent lost production, downtime or a safety risk.
In October, the Group completed the sale of the Microscan Systems, Inc. business ('Microscan') to
Omron Corporation, resulting in post-tax cash proceeds of 91.9 million. Microscan is a global provider of world-class machine vision technology and solutions for critical identification, inspection and verification applications. However, in light of the Group's more focused strategic direction, we believed that its next stage of development could be better fulfilled elsewhere.
Segment outlook
The performance of this segment will continue to depend on US industrial markets. The growth recorded in 2017 is expected to continue into 2018, although order visibility is very low.
At Omega, the restructuring activities, organisational changes and enhanced marketing approach are producing better results and we expect this improvement to continue in 2018.
In the medium term, the demand for industrial companies to drive productivity and operational efficiencies by enabling effortless and secure access to their manufacturing information is expected to increase. Industrial customers who are implementing cloud-based analytics applications will drive further demand for best-in-class networking and connectivity solutions for stranded assets and disparate plant systems. Spectris has focused efforts to be well positioned to take full advantage of these opportunities.
FINANCIAL REVIEW
Introduction
Spectris uses alternative performance measures in addition to those reported under IFRS, as management believe these measures enable them to assess the underlying trading performance of the businesses. Alternative measures exclude certain non-operational items which management has defined in Note 2 to the Financial Statements. A reconciliation of reported and adjusted measures is provided in Note 2 to the Financial Statements.
Operating performance
Reported sales increased by 13.4% to 1,525.6 million (2016: 1,345.8 million). After adjusting 2016 sales for the disposal of Microscan by 11.3 million (-0.8%), the increase in sales compared to 2016 comprised of a contribution from acquisitions of 44.2 million (+3.3%), favourable foreign exchange movements of
64.2 million (+4.8%) and a LFL sales increase of 82.7 million (+6.2%).
In 2017, reported operating profit increased from 38.3 million in 2016 to 182.4 million, with operating profit in 2016 principally impacted by an impairment charge of 115.3 million related to goodwill and other acquisition-related intangibles of which 94.4 million related to Omega and 20.9 million to ESG. Reported operating profit included a number of one-off costs and income during the year resulting in a net overheads year-on-year benefit of 3.5 million. Reported operating margins of 12.0% were 9.2pp higher than prior year mainly arising from the impairment charge of 115.3 million in 2016 which reduced the operating margin in 2016 by 8.6pp.
Adjusted operating profit increased by 22.7 million (+11.3%) to 223.5 million in 2017. After reducing the 2016 operating profit by 1.7 million to reflect the sale of Microscan, LFL adjusted operating profit before Project Uplift costs increased by 29.1 million (+14.4%). Acquisitions and foreign exchange contributed
2.0 million and 5.9 million respectively, to the growth in adjusted operating profit, whilst the net increase in Project Uplift costs amounted to 12.6 million.
Adjusted operating margins declined by 0.2pp, whilst LFL operating margins increased by 1.1pp, with the difference being explained mainly by the year-on-year increase in Project Uplift costs and the dilutive effects of acquisitions and foreign exchange. The improvement in the LFL operating margin consists of a 0.8pp LFL gross margin increase to 57.3% in 2017 (2016: 56.5%) combined with a 0.3pp decrease in LFL overhead costs as a percentage of sales. The improvement in gross margin was substantially driven by Industrial Controls which benefited from a turnaround in performance from Omega and the non-recurrence of the 9 million inventory charge recorded in 2016, partly offset by a weaker gross margin in the In-line Instrumentation segment, reflecting adverse product mix. LFL overheads were up 5.2%, reflecting increased headcount and inflation combined with the costs of implementation of strategic initiatives.
We continued to invest in our R&D programmes, with a reported R&D expense of 105.1 million or 6.9% of sales, (2016: 98.6 million or 7.3% of sales). The R&D expense was in line with 2016 on a LFL basis.
Net finance costs decreased by 1.9 million to 4.5 million (2016: 6.4 million), with adjusted net finance costs for the year slightly higher at 5.1 million (2016: 5.0 million). Reported profit before tax increased from 31.9 million in 2016 to 278.4 million in 2017. Reported profit before tax in 2016 was impacted by the 115.3 million impairment charge relating to goodwill and other acquisition-related intangibles, whilst 2017 benefited from the 100.5 million profit on disposal of Microscan. Adjusted profit before tax increased by 11.5% to 218.4 million.
Acquisitions
The Group completed four acquisitions during the year. The total cost of acquisitions was
34.6 million (2016: 174.2 million), including 0.8 million (2016: 6.9 million) for cash acquired and
1.4 million (2016: 7.6 million) attributable to the fair value of deferred and contingent consideration which is expected to be paid in future years. A net 4.1 million (2016: 1.2 million) was paid in respect of prior year acquisitions, making the net cash outflow in the year 36.5 million (2016: 160.9 million). Furthermore, an amount of 2.8 million (2016: 5.4 million) was spent on acquisition-related legal and professional fees, which makes the total acquisition-related cash outflow for the year 39.3 million (2016: 166.3 million). Acquisitions contributed 44.2 million of incremental sales and 2.0 million of incremental operating profit during the year.
Disposals
In October 2017, the Group completed the disposal of Microscan for net cash proceeds of 110.9 million which, after paying cash taxes of 19.0 million, resulted in a net cash inflow of 91.9 million. The post-tax profit on disposal was 81.5 million. Sales of 32.9 million and operating profit of 4.5 million relating to Microscan were included in the reported and adjusted results for the nine month period of ownership prior to its disposal on 2 October 2017.
ProjectUplift
One-off costs incurred in 2017 of 15.8 million principally related to Phase 1 of the programme (which is focused on IT, procurement and footprint) resulting in cumulative costs to date of 19.0 million. Gross recurring savings of 2.8 million were realised during 2017. The net impact on operating profit relating to Project Uplift in 2017 amounted to 13.0 million which, although in line with expectations at a net level, was as a result of reductions in both expected benefits and costs. This was as a consequence of slowing down Phase 1 of the programme and putting Phase 2 on pause for approximately four months. Annualised recurring savings of 25 million and a total cost to achieve these of 35 million by the end of 2019 are now expected, with more coming from procurement activities and less from IT. This compares to previous expectations of 35 million of savings and 45 million of costs.
Taxation
The effective tax rate on adjusted profit before tax was 20.8% (2016: 22.4%), a decrease of 1.6pp primarily due to the favourable settlement of certain tax audits. On a statutory basis, the weighted average expected tax rate was 28.6% (2016: -13.8%), an increase of 42.4pp largely due to disposal gains arising in the USA
(a higher tax jurisdiction) compared to a decrease in the USA in 2016 arising from the impairment of goodwill. In 2018, the Group expects a reduction in its effective tax rate of around 2pp as a result of US tax reform.
This year, the Audit and Risk Committee approved the Group tax strategy for publication, which sets out the Group's approach to tax matters. In compliance with the Finance Act 2016, this has been made available on our website, www.spectris.com/sustainability/tax-strategy.
Earnings per share
Adjusted earnings per share increased by 13.8% from 127.5p to 145.1p, reflecting the net impact of the 11.5% increase in adjusted profit before tax, the reduction in the effective tax rate and the increase in the weighted average number of shares from 119.1 million in 2016 to 119.2 million in 2017.
Reported basic earnings per share increased from 8.6p to 197.0p, with the difference between the two measures shown in the following table.
2017
pence
2016
pence
Reported basic earnings per share
197.0
8.6
Impairment of goodwill and other acquisition-related intangible assets
-
96.8
Amortisation and impairment of acquisition-related intangible assets
35.1
31.0
Net acquisition-related costs and fair value adjustments
0.3
8.5
Depreciation of acquisition-related fair value adjustments to tangible assets
0.6
0.2
Profit on disposal of business
(84.3)
-
Net (gain)/loss on retranslation of short-term inter-company loan balances
(1.1)
0.7
Bargain purchase on acquisition
(1.6)
-
Unwinding of discount factor on deferred and contingent consideration
0.6
0.5
Tax effect of the above and other non-recurring items
(1.5)
(18.8)
Adjusted earnings per share
145.1
127.5
Cash flow
Adjusted operating cash flow
2017
m
2016
m
Adjusted operating profit
223.5
200.8
Adjusted depreciation and software amortisation1
30.5
28.3
Working capital and other non-cash movements
(13.1)
27.4
Capital expenditure, net of grants
(73.1)
(28.7)
Adjusted operating cash flow
167.8
227.8
Adjusted operating cash flow conversion
75%
113%
1Adjusted depreciation and software amortisation represents depreciation of property, plant and equipment and software amortisation, adjusted for depreciation of acquisition-related fair value adjustments to property, plant and equipment.
Adjusted operating cash flow generation of 167.8 million during the year was in line with expectations and impacted by increased capital expenditure following the first full year of the inclusion of the Millbrook business. The adjusted operating cash flow conversion rate was 75% compared with 113% in 2016, primarily due to the increased capital expenditure and higher working capital.
Average trade working capital (the monthly average of the sum of inventory, trade receivables, trade payables and other current trading net assets), expressed as a percentage of sales, decreased by 2.3pp to 11.9% (2016: 14.2%). Excluding acquisitions, disposals and foreign exchange, the LFL reduction in average trade working capital was 2.1pp, with improvements across all segments. Most notably in the Industrial Controls segment, Omega showed strong progress in inventory management and supplier payments following operational issues in 2016; in the Materials Analysis segment there was improved inventory management; and in In-line Instrumentation, Servomex improved both inventory levels and cash collections for receivables during the year. The year-end trade working capital to sales ratio decreased from 15.9% in 2016 to 14.0% in 2017, a 1.9pp decrease.
Capital expenditure (net of grants) on property, plant and equipment during the year of 73.1 million
(2016: 28.7 million) equated to 4.8% of sales (2016: 2.1%) and was 240% of adjusted depreciation and software amortisation (2016: 101%), partly due to the inclusion of the first full year of the recently-acquired Millbrook business with an incremental spend of 21.2 million as well as continued investments in property and infrastructure at Malvern Panalytical, HBM and Omega. Planned capital expenditure on a cash basis in 2018 is anticipated to be at around 80 million, primarily related to expansion opportunities at Millbrook, as well as a continuation of a number of projects at Malvern Panalytical and Omega.
Non-operating cash flow
2017
m
2016
m
Tax paid
(47.0)
(29.8)
Net interest paid
(4.1)
(4.1)
Dividends paid
(63.2)
(59.8)
Acquisition of businesses, net of cash acquired
(36.5)
(160.9)
Acquisition-related costs paid
(2.8)
(5.4)
Proceeds from disposal of business, net of tax paid of 19.0 million
91.9
-
Exercise of share options
0.5
0.2
Foreign exchange
(6.2)
(20.3)
Total non-operating cash flow
(67.4)
(280.1)
Adjusted operating cash flow
167.8
227.8
Decrease/(increase) in net debt
100.4
(52.3)
Financing and treasury
The Group finances its operations from both retained earnings and third-party borrowings, with the majority of the year-end gross debt balance being at fixed rates of interest.
As at 31 December 2017, the Group had 593.7 million of committed facilities denominated in different currencies, consisting of a five-year $550 million (406.5 million) revolving credit facility maturing in
October 2019, a seven-year 94.8 million (84.1 million) term loan maturing in October 2020, and a
seven-year 116.2 million (103.1 million) term loan maturing in September 2022. The revolving credit facility was undrawn at the year end. In addition, the Group had a year-end cash balance of 138.0 million, bank overdrafts of 1.3 million and various uncommitted facilities available.
At the year end, the Group's borrowings amounted to 188.5 million, 99% of which was at fixed interest rates (2016: 77%). The ageing profile at the year-end showed that 1% (2016: 5%) of year-end borrowings is due to mature within one year, 99% between two and five years (2016: 52%) and nil in more than five years
(2016: 43%).
Overall, net debt decreased by 100.4 million (2016: increase of 52.3 million) from 150.9 million
to 50.5 million. Net bank interest costs were covered by adjusted operating profit 52.0 times
(2016: 43.7 times).
Currency
The Group has both translational and transactional currency exposures. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase invoices differs from the functional currency in which each company prepares its local accounts. The transactional exposures include situations where foreign currency denominated trade receivables, trade payables and cash balances are held.
After matching the currency of revenue with the currency of costs wherever practical, forward exchange contracts are used to hedge a proportion of the remaining forecast net transaction flows where there is reasonable certainty of an exposure. At 31 December 2017, approximately 61% of the estimated net Euro,
US Dollar and Japanese Yen exposures for 2018 were hedged using forward exchange contracts, mainly against the Swiss Franc, Sterling, the Euro and the Danish Krone.
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.
2017
(average)
2016
(average)
Change
2017
(closing)
2016
(closing)
Change
US Dollar (USD)
1.29
1.35
(4%)
1.35
1.23
10%
Euro (EUR)
1.14
1.22
(7%)
1.13
1.16
(3%)
Japanese Yen (JPY)
145
147
(1%)
152
144
6%
Swiss Franc (CHF)
1.27
1.33
(5%)
1.32
1.25
6%
During the year, the translational foreign exchange gain on operating profit of 5.9 million
(2016: 22.6 million gain), arising from the weakness of Sterling, was partly offset by a transactional foreign exchange loss of 1.1 million (2016: 7.8 million loss).
Dividends and Annual Report
The Board is proposing to pay a final dividend of 37.5 pence per share which, combined with the interim dividend of 19.0 pence per share, gives a total dividend of 56.5 pence per share for the year, an increase
of 9%. The dividend is covered 2.6 times by adjusted earnings and is consistent with our policy of making progressive dividend payments, based upon affordability and sustainability. In determining the level of dividend in any year, the Board considers a number of factors that influence the proposed dividend, including the level of distributable reserves in the Parent Company, future cash commitments and investment needs to sustain the long-term growth prospects of the Group and the level of dividend cover.
The Annual Report will be made available to shareholders on 28 March 2018, either by post or online, and will be available to the general public on the Company's website at www.spectris.com or on written request to the registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD.
Events after the balance sheet date
On 26 January 2018, the Group acquired 100% of the share capital of Concept Life Sciences (Holding) Limited, for a consideration of 163 million, on a debt and cash-free basis. This acquisition adds to the Group's capabilities in test services in the Materials Analysis segment.
2018 OUTLOOK
In 2018, we expect overhead costs growth to be similar to that in 2017, reflecting higher depreciation and inflationary pressures together with the annualisation of the costs of our strategic initiatives.
The contribution from Concept Life Sciences and the 2017 acquisitions is expected to be 60-70 million in sales and adjusted operating profit of 7-8 million.
For Project Uplift Phase 1, we now expect annualised recurring savings of 25 million and a total cost to achieve these of 35 million by the end of 2019. This compares to previous expectations of 35 million of savings and 45 million of costs. In 2018, the net benefit for Phase 1 is now expected to be 3 million and there will be a cost of 3-4 million in relation to the shared service centre design study for Phase 2.
The Group has both translational and transactional currency exposures, with a proportion (up to 75%) of net transactional exposures for the next 12 months being hedged. Translational exposures are not hedged and the Group's sensitivity to translational gains or losses for sales and operating profit in respect of two of our major currency exposures is as estimated below:
Impact of 1 cent change versus GBP of the average FX rate in 2018 compared to 2017
2018 FY reported sales
m
2018 FY adjusted operating profit m
EUR
3.0
0.5
USD
4.0
0.5
The net interest charge is expected to be 6.5-7.0 million.
In 2018, the Group expects a reduction in its effective tax rate of around 2pp to around 20% as a result of US tax reform.
Planned capital expenditure on a cash basis in 2018 is expected to be around 80 million, of which
45 million is growth capex, primarily related to expansion opportunities at Millbrook.
Clive Watson
Group Finance Director
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2017
2017
2016
Continuing operations
Note
m
m
Revenue
3
1,525.6
1,345.8
Cost of sales
(658.1)
(585.3)
Gross profit
867.5
760.5
Indirect production and engineering expenses
(116.8)
(108.9)
Sales and marketing expenses
(336.4)
(320.1)
Administrative expenses
(231.9)
(177.9)
Impairment of goodwill and other acquisition-related intangible assets
-
(115.3)
Adjusted operating profit
2
223.5
200.8
Net acquisition-related costs and fair value adjustments
2
(0.4)
(10.1)
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
2
(0.7)
(0.2)
Amortisation of acquisition-related intangible assets
2
(41.9)
(36.9)
Bargain purchase on acquisition
2
1.9
-
Impairment of goodwill and other acquisition-related intangible assets
2
-
(115.3)
Operating profit
2,3
182.4
38.3
Profit on disposal of business
4
100.5
-
Financial income
5
1.9
0.5
Finance costs
5
(6.4)
(6.9)
Profit before tax
278.4
31.9
Taxation charge
6
(43.6)
(21.6)
Profit after tax for the year from continuing operations attributable to owners of the Parent Company
234.8
10.3
Basic earnings per share
8
197.0p
8.6p
Diluted earnings per share
8
196.1p
8.6p
Interim dividends paid and final dividends proposed for the year (per share)
7
56.5p
52.0p
Dividends paid during the year (per share)
7
53.0p
50.2p
Consolidated statement OF COMPREHENSIVE INCOME
For the year ended 31 December 2017
2017
2016
m
m
Profit for the year attributable to owners of the Parent Company
234.8
10.3
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
5.9
(12.6)
Tax on items above
(1.4)
3.0
4.5
(9.6)
Items that are or may be reclassified subsequently to the Consolidated Income Statement:
Net gain/(loss) on effective portion of changes in fair value of forward exchange contracts on cash flow hedges
4.0
(3.1)
Foreign exchange movements on translation of overseas operations
(44.7)
160.4
Currency translation differences transferred to profit on disposal of business
(4.4)
-
Tax on items above
(0.7)
0.7
(45.8)
158.0
Total comprehensive income for the year attributable to owners of the Parent Company
193.5
158.7
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2017
Share capital
Share premium
Retained earnings
Translation reserve
Hedging reserve
Merger reserve
Capital redemption reserve
Total equity
m
m
m
m
m
m
m
m
Balance at 1 January 2017
6.2
231.4
638.3
193.4
(5.3)
3.1
0.3
1,067.4
Profit for the year
-
-
234.8
-
-
-
-
234.8
Other comprehensive income:
Net gain on effective portion of changes in fair value of forward exchange contracts, net of tax
-
-
-
-
3.3
-
-
3.3
Foreign exchange movements on translation of overseas operations
-
-
-
(44.7)
-
-
-
(44.7)
Foreign exchange gain on disposal of business taken to Consolidated Income Statement
-
-
-
(4.4)
-
-
-
(4.4)
Re-measurement of net defined benefit obligation, net of foreign exchange and tax
-
-
4.5
-
-
-
-
4.5
Total comprehensive income for the year
-
-
239.3
(49.1)
3.3
-
-
193.5
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company
-
-
(63.2)
-
-
-
-
(63.2)
Share-based payments, net of tax
-
-
5.9
-
-
-
-
5.9
Utilisation of treasury shares
-
-
0.5
-
-
-
-
0.5
Balance at 31 December 2017
6.2
231.4
820.8
144.3
(2.0)
3.1
0.3
1,204.1
Share capital
Share premium
Retained earnings
Translation reserve
Hedging reserve
Merger reserve
Capital redemption reserve
Total equity
m
m
m
m
m
m
m
m
Balance at 1 January 2016
6.2
231.4
694.9
33.0
(2.9)
3.1
0.3
966.0
Profit for the year
-
-
10.3
-
-
-
-
10.3
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax
-
-
-
-
(2.4)
-
-
(2.4)
Foreign exchange movements on translation of overseas operations
-
-
-
160.4
-
-
-
160.4
Re-measurement of net defined benefit liability, net of foreign exchange and tax
-
-
(9.6)
-
-
-
-
(9.6)
Total comprehensive income for the year
-
-
0.7
160.4
(2.4)
-
-
158.7
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company
-
-
(59.8)
-
-
-
-
(59.8)
Share-based payments, net of tax
-
-
2.3
-
-
-
-
2.3
Utilisation of treasury shares
-
-
0.2
-
-
-
-
0.2
Balance at 31 December 2016
6.2
231.4
638.3
193.4
(5.3)
3.1
0.3
1,067.4
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2017
2017
2016
Note
m
m
ASSETS
Non-current assets
Intangible assets:
Goodwill
627.5
654.3
Other intangible assets
209.9
245.2
837.4
899.5
Property, plant and equipment
275.8
238.8
Deferred tax assets
10.5
13.4
1,123.7
1,151.7
Current assets
Inventories
176.0
187.8
Current tax assets
3.5
2.4
Trade and other receivables
323.9
306.6
Derivative financial instruments
1.4
-
Cash and cash equivalents
137.9
83.5
642.7
580.3
Assets held for sale
10
32.5
-
Total assets
1,798.9
1,732.0
LIABILITIES
Current liabilities
Borrowings
(1.3)
(12.3)
Derivative financial instruments
(0.5)
(4.2)
Trade and other payables
(272.5)
(259.2)
Current tax liabilities
(23.6)
(36.8)
Provisions
(25.2)
(19.5)
(323.1)
(332.0)
Net current assets
319.6
248.3
Non-current liabilities
Borrowings
(187.2)
(222.1)
Other payables
(20.7)
(29.0)
Retirement benefit obligations
(34.0)
(40.3)
Deferred tax liabilities
(25.0)
(41.2)
(266.9)
(332.6)
Liabilities directly associated with the assets held for sale
10
(4.8)
-
Total liabilities
(594.8)
(664.6)
Net assets
1,204.1
1,067.4
EQUITY
Share capital
6.2
6.2
Share premium
231.4
231.4
Retained earnings
820.8
638.3
Translation reserve
144.3
193.4
Hedging reserve
(2.0)
(5.3)
Merger reserve
3.1
3.1
Capital redemption reserve
0.3
0.3
Total equity attributable to equity holders of the Parent Company
1,204.1
1,067.4
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2017
2017
2016
Note
m
m
Cash flows from operating activities
Profit after tax
234.8
10.3
Adjustments for:
Taxation charge
6
43.6
21.6
Profit on disposal of business
(100.5)
-
Finance costs
5
6.4
6.9
Financial income
5
(1.9)
(0.5)
Depreciation
25.6
23.0
Amortisation of intangible assets
47.5
42.4
Impairment of goodwill and other acquisition-related intangible assets
-
115.3
Bargain purchase on acquisition
(1.9)
-
Acquisition-related fair value adjustments
(3.0)
5.6
Loss/(profit) on sale of property, plant and equipment
0.1
(1.2)
Equity-settled share-based payment expense
5.4
2.1
Operating cash flow before changes in working capital and provisions
256.1
225.5
Increase in trade and other receivables
(34.3)
(7.1)
(Increase)/decrease in inventories
(0.6)
25.4
Increase in trade and other payables
17.5
8.2
Decrease in provisions and retirement benefits
(1.1)
(6.3)
Cash generated from operations
237.6
245.7
Net income taxes paid
(47.0)
(29.8)
Net cash inflow from operating activities
190.6
215.9
Cash flows from investing activities
Purchase of property, plant and equipment and software
(74.3)
(28.7)
Proceeds from disposal of property, plant and equipment and software
0.5
5.4
Acquisition of businesses, net of cash acquired
9
(36.5)
(160.9)
Proceeds from disposal of business, net of tax paid of 19m
91.9
-
Proceeds from government grants
1.2
-
Interest received
0.6
0.5
Net cash flows used in investing activities
(16.6)
(183.7)
Cash flows from financing activities
Interest paid
(4.7)
(4.6)
Dividends paid
(63.2)
(59.8)
Proceeds from exercise of share options
0.5
0.2
Proceeds from borrowings
-
41.0
Repayment of borrowings
(41.0)
-
Net cash flows used in financing activities
(108.4)
(23.2)
Net increase in cash and cash equivalents
65.6
9.0
Cash and cash equivalents at beginning of year
71.2
56.5
Effect of foreign exchange rate changes
(0.1)
5.7
Cash and cash equivalents at end of year
136.7
71.2
Reconciliation of changes in cash and cash equivalents to movements in net debt
2017
m
2016
m
Net increase in cash and cash equivalents
65.6
9.0
Proceeds from borrowings
-
(41.0)
Repayment of borrowings
41.0
-
Effect of foreign exchange rate changes
(6.2)
(20.3)
Movement in net debt
100.4
(52.3)
Net debt at start of year
(150.9)
(98.6)
Net debt at end of year
(50.5)
(150.9)
NOTES TO THE ACCOUNTS
1. Basis of preparation and accounting policies
The Consolidated Financial Statements have been prepared on a historical cost basis except for items that are required by IFRS to be measured atfair value, principally certain financial instruments. The Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board ('IASB') and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, as adopted by the European Union ('adopted IFRS'), and in accordance with the provisions of the Companies Act2006. The Consolidated Financial Statements have been prepared on a going concern basis. The full year results announcement is presented in millions of pounds Sterling rounded to the nearest one decimal place, which is the Group's presentational currency.
The Consolidated Financial Statements have been prepared using consistent accounting policies with those of the previous financial year. No new accounting pronouncements or revisions to adopted IFRS that became effective in 2017 had a material impact on the Group's results or financial position.
The financial information included in the full year results announcement does not constitute statutory accounts of the Company for the years ended 31 December 2017 and 2016. Statutory accounts for the year ended 31 December 2016 have been reported on by the Company's auditor and delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2017 have been audited and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The report of the auditors for both years was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
These results were approved by the Board of Directors on 19 February 2018.
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 assess the underlying trading performance of the businesses as they exclude certain non-operational items, foreign exchange movements and the impact of acquisitions and disposals.
The adjusted 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 use 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. On this basis adjusted figures exclude certain non-operational items that are predominantly acquisition- or disposal-related items which management have defined as:
2. Alternative performance measures (continued)
- Amortisation and impairment of acquisition-related goodwill and other intangible assets;
- Bargain purchase on acquisition;
- Depreciation of acquisition-related fair value adjustments to property, plant and equipment;
- Acquisition-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 6).
LFL measures 
The Board reviews and compares current and prior year segmental sales and adjusted profit at constant exchange rates and excludes the impact of acquisitions and disposals during the year. In addition, Project Uplift programme implementation costs are excluded from adjusted profit to better reflect year-on-year operating performance.
The constant exchange rate comparison uses the current year reported segmental information, stated in each entity's functional currency, and translates the results into its presentation currency using prior years' 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, we have 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 Microscan business was disposed of on 2 October 2017 and the segmental sales and adjusted profit for 2016 exclude the trading results of the last three months of 2016.
The LFL measure is presented as a means of eliminating the effects of exchange rate fluctuations on the period-on-period reported 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 reported figures as follows:
Income statement measures
a) LFL and adjusted sales by segment
Materials
Test and
In-line
Industrial
2017
Analysis
Measurement
Instrumentation
Controls
Total
Sales by segment
m
m
m
m
m
Reported sales
464.9
487.3
310.9
262.5
1,525.6
Constant exchange rate adjustment
(16.8)
(21.5)
(12.8)
(13.1)
(64.2)
Acquisitions
(0.9)
(38.2)
(5.1)
-
(44.2)
LFL adjusted sales
447.2
427.6
293.0
249.4
1,417.2
Materials
Test and
In-line
Industrial
2016
Analysis
Measurement
Instrumentation
Controls
Total
Sales by segment
m
m
m
m
m
Reported sales
418.9
404.5
275.6
246.8
1,345.8
Disposal of business
-
-
-
(11.3)
(11.3)
LFL adjusted sales
418.9
404.5
275.6
235.5
1,334.5
2. Alternative performance measures (continued)
b) LFL and adjusted operating profit by segment and EBITDA
Materials
Test and
In-line
Industrial
2017
Adjusted operating profit by segment
Analysis
Measurement
Instrumentation
Controls
Total
m
m
m
m
m
Reported operating profit
68.6
55.6
29.5
28.7
182.4
Net acquisition-related costs and fair value adjustments
1.8
(0.1)
0.4
(1.7)
0.4
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
-
0.7
-
-
0.7
Amortisation of acquisition-related intangible assets
12.7
14.6
3.3
11.3
41.9
Bargain purchase on acquisition
-
(1.9)
-
-
(1.9)
Adjusted operating profit
83.1
68.9
33.2
38.3
223.5
Project Uplift costs
4.2
5.3
2.8
3.5
15.8
Adjusted operating profit before Project Uplift costs
87.3
74.2
36.0
41.8
239.3
Constant exchange rate adjustment
(1.0)
(2.1)
(1.1)
(1.7)
(5.9)
Acquisitions
(0.1)
(3.9)
2.0
-
(2.0)
LFL adjusted operating profit before Project Uplift costs
86.2
68.2
36.9
40.1
231.4
Materials
Test and
In-line
Industrial
2016
Adjusted operating profit by segment
Analysis
Measurement
Instrumentation
Controls
Total
m
m
m
m
m
Reported operating profit
66.2
26.7
37.6
(92.2)
38.3
Net acquisition-related costs and fair value adjustments
0.2
2.1
0.3
7.5
10.1
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
-
0.2
-
-
0.2
Amortisation of acquisition-related intangible assets
9.8
11.9
3.3
11.9
36.9
Impairment of goodwill and other acquisition-related intangible assets
-
20.9
-
94.4
115.3
Adjusted operating profit
76.2
61.8
41.2
21.6
200.8
Project Uplift costs
0.9
1.2
0.6
0.5
3.2
Adjusted operating profit before Project Uplift costs
77.1
63.0
41.8
22.1
204.0
Disposal of business
-
-
-
(1.7)
(1.7)
LFL adjusted operating profit before Project Uplift costs
77.1
63.0
41.8
20.4
202.3
Materials
Test and
In-line
Industrial
2017
Analysis
Measurement
Instrumentation
Controls
Total
Operating margin
%
%
%
%
%
Reported operating profit
14.8
11.4
9.5
10.9
12.0
Adjusted operating profit
17.9
14.1
10.7
14.6
14.7
LFL adjusted operating profit before Project Uplift costs
19.3
16.0
12.6
16.1
16.3
2. Alternative performance measures (continued)
b) LFL and adjusted operating profit by segment and EBITDA (continued)
Materials
Test and
In-line
Industrial
2016
Analysis
Measurement
Instrumentation
Controls
Total
Operating margin
%
%
%
%
%
Reported operating profit
15.8
6.6
13.6
(37.4)
2.8
Adjusted operating profit
18.2
15.3
15.0
8.7
14.9
LFL adjusted operating profit before Project Uplift costs
18.4
15.6
15.2
8.7
15.2
2017
2016
Adjusted EBITDA
m
m
Reported operating profit
182.4
38.3
Depreciation
25.6
23.0
Amortisation of intangible assets
47.5
42.4
Impairment of goodwill and other acquisition-related intangible assets
-
115.3
EBITDA
255.5
219.0
Net acquisition-related costs and fair value adjustments
0.4
10.1
Bargain purchase on acquisition
(1.9)
-
Adjusted EBITDA
254.0
229.1
c) Adjusted net finance costs
2017
2016
m
m
Reported net finance costs
(4.5)
(6.4)
Net (gain)/loss on retranslation of short-term inter-company loan balances
(1.3)
0.8
Unwinding of discount factor on deferred and contingent consideration
0.7
0.6
Adjusted net finance costs
(5.1)
(5.0)
d) Adjusted profit before taxation
2017
2016
m
m
Adjusted operating profit
223.5
200.8
Adjusted net finance costs
(5.1)
(5.0)
Adjusted profit before taxation
218.4
195.8
e) Adjusted earnings per share
2017
2016
Adjusted earnings
m
m
Reported profit after tax
234.8
10.3
Adjusted for:
Net acquisition-related costs and fair value adjustments
0.4
10.1
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
0.7
0.2
Amortisation of acquisition-related intangible assets
41.9
36.9
Bargain purchase on acquisition
(1.9)
-
Impairment of goodwill and other acquisition-related intangible assets
-
115.3
Profit on disposal of business
(100.5)
-
Net (gain)/loss on retranslation of short-term inter-company loan balances
(1.3)
0.8
Unwinding of discount factor on deferred and contingent consideration
0.7
0.6
Tax effect of the above and other non-recurring items
(1.8)
(22.3)
Adjusted earnings
173.0
151.9
2. Alternative performance measures (continued)
e) Adjusted earnings per share (continued)
Adjusted earnings per share
2017
2016
Weighted average number of shares outstanding (millions)
119.2
119.1
Adjusted earnings per share (pence)
145.1
127.5
Adjusted diluted earnings per share
2017
2016
Diluted weighted average number of shares outstanding (millions)
119.7
119.6
Adjusted diluted earnings per share (pence)
144.5
127.0
Basic and diluted earnings per share in accordance with IAS 33 'Earnings Per Share' are disclosed in Note 8.
Financial position measures
f) Net debt
2017
2016
m
m
Bank overdrafts
1.3
12.3
Bank loans - unsecured
187.2
222.1
Total borrowings
188.5
234.4
Cash and cash equivalents including held for sale
(138.0)
(83.5)
Net debt
50.5
150.9
Cash flow measures
g) Adjusted operating cash flow
2017
2016
m
m
Net cash inflow from operating activities
190.6
215.9
Acquisition-related costs paid
2.8
5.4
Net income taxes paid
47.0
29.8
Purchase of property, plant and equipment and software
(73.1)
(28.7)
Proceeds from disposal of property, plant and equipment and software
0.5
5.4
Adjusted operating cash flow
167.8
227.8
Adjusted operating cash flow conversion1
75%
113%
1 Adjusted operating cash flow conversion is calculated as adjusted operating cash flow as a proportion of adjusted operating profit.
Net acquisition-related costs and fair value adjustments comprise acquisition costs of 3.4m (2016: 4.5m) that have been recognised in the Consolidated Income Statement under IFRS 3 (Revised) 'Business Combinations' and other fair value adjustments relating to deferred and contingent consideration comprising of a credit of 3.0m (2016: debit of 5.6m). Net acquisition-related costs and fair value adjustments are included within administrative expenses. Acquisition-related costs have been excluded from the adjusted operating profit and acquisition costs paid of 2.8m (2016: 5.4m) have been excluded from the adjusted operating cash flow.
3. Operating segments
The Group has four reportable segments, as described below, 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.
3. Operating segments (continued)
Materials
Test and
In-line
Industrial
2017
Analysis
Measurement
Instrumentation
Controls
Total
Information about reportable segments
m
m
m
m
m
Segment revenues
465.2
487.5
311.1
262.9
1,526.7
Inter-segment revenue
(0.3)
(0.2)
(0.2)
(0.4)
(1.1)
External revenue
464.9
487.3
310.9
262.5
1,525.6
Operating profit
68.6
55.6
29.5
28.7
182.4
Profit on disposal of business1
100.5
Financial income1
1.9
Finance costs1
(6.4)
Profit before tax1
278.4
Tax1
(43.6)
Profit after tax1
234.8
1 Not allocated to reportable segments
Materials
Test and
In-line
Industrial
2016
Analysis
Measurement
Instrumentation
Controls
Total
m
m
m
m
m
Segment revenues
419.0
404.7
275.6
247.5
1,346.8
Inter-segment revenue
(0.1)
(0.2)
-
(0.7)
(1.0)
External revenue
418.9
404.5
275.6
246.8
1,345.8
Operating profit
66.2
26.7
37.6
(92.2)
38.3
Financial income1
0.5
Finance costs1
(6.9)
Profit before tax1
31.9
Tax1
(21.6)
Profit after tax1
10.3
1 Not allocated to reportable segments
Geographical segments
The Group's operating segments are each located in several geographical locations and sell to external customers in all parts of the world. No individual country amounts to more than 3% of revenue by location of customer, other than those noted below. The following is an analysis of revenue by geographical destination.
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
2017
Total
m
m
m
m
m
UK
14.6
62.0
7.5
7.6
91.7
Germany
24.7
82.5
25.4
11.3
143.9
France
15.1
20.6
7.4
3.1
46.2
Rest of Europe
73.2
76.5
51.4
11.2
212.3
USA
97.6
89.2
89.3
169.0
445.1
Rest of North America
13.6
11.7
12.6
13.3
51.2
Japan
33.7
28.3
15.4
3.3
80.7
China
72.8
63.4
43.6
21.8
201.6
South Korea
21.7
14.0
7.9
6.7
50.3
Rest of Asia
61.5
24.3
29.1
11.3
126.2
Rest of the world
36.4
14.8
21.3
3.9
76.4
464.9
487.3
310.9
262.5
1,525.6
3. Operating segments (continued)
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
2016
Total
m
m
m
m
m
UK
15.1
26.4
6.7
7.2
55.4
Germany
26.6
67.3
20.8
11.1
125.8
France
13.4
20.1
7.3
2.6
43.4
Rest of Europe
63.6
66.9
44.8
11.6
186.9
USA
88.5
80.7
80.7
159.9
409.8
Rest of North America
13.9
9.5
10.7
11.9
46.0
Japan
30.8
26.2
13.5
3.1
73.6
China
62.4
55.0
40.6
18.3
176.3
South Korea
16.4
14.6
6.9
5.5
43.4
Rest of Asia
54.9
21.4
25.6
11.8
113.7
Rest of the world
33.3
16.4
18.0
3.8
71.5
418.9
404.5
275.6
246.8
1,345.8
4. Profit on disposal of business
The profit on disposal of business wholly relates to the disposal of 100% of Microscan on 2 October 2017.
2017
m
Goodwill and other intangible assets
5.5
Property, plant and equipment
0.8
Deferred tax assets
2.0
Inventory
5.9
Trade and other receivables
7.0
Cash and cash equivalents
0.4
Trade and other payables
(4.0)
Provisions
(0.1)
Net assets disposed
17.5
Consideration received, satisfied in cash
114.6
Cash disposed of
(0.4)
Transaction expenses
(3.3)
Net proceeds from disposal of business
110.9
Contingent consideration
2.3
Cash disposed of
0.4
Net assets disposed of
(17.5)
Currency translation differences transferred from translation reserve
4.4
Profit on disposal of business
100.5
The sale of Microscan did not meet the definition of a discontinued operation given in IFRS 5 'Non-Current Assets Held for Sale and Discontinued Operations' and, therefore, no disclosures in relation to discontinued operations have been made.
The Group did not divest of any businesses during 2016.
5. Financial income and finance costs
2017
2016
Financial income
m
m
Interest receivable
0.6
0.5
Net gains on retranslation of short-term inter-company loan balances
1.3
-
1.9
0.5
2017
2016
Finance costs
m
m
Interest payable on loans and overdrafts
4.9
5.1
Unwinding of discount factor on deferred and contingent consideration
0.7
0.6
Net losses on retranslation of short-term inter-company loan balances
-
0.8
Net interest cost on pension plan obligations
0.7
0.3
Other finance costs
0.1
0.1
6.4
6.9
Net finance costs
4.5
6.4
6. Taxation
2017
2016
UK
Overseas
Total
UK
Overseas
Total
m
m
m
m
m
m
Current tax charge
6.3
58.3
64.6
5.9
32.0
37.9
Adjustments in respect of current tax of prior years
(1.0)
(4.8)
(5.8)
0.7
(3.6)
(2.9)
Deferred tax - origination and reversal of temporary differences
(1.1)
(5.3)
(6.4)
(2.2)
(11.2)
(13.4)
Deferred tax - changes in tax rate
-
(8.8)
(8.8)
-
-
-
Taxation charge
4.2
39.4
43.6
4.4
17.2
21.6
The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the Group's profits, is 28.6% (2016: -13.8%). The tax charge for the year is lower (2016: higher) than the standard rate of corporation tax for the reasons set out in the following reconciliation.
2017
2016
m
m
Profit before taxation
278.4
31.9
Corporation tax charge/(credit) at standard rate of 28.6% (2016: -13.8%)
79.6
(4.4)
Profit on disposal of business taxed at lower rate
(17.1)
-
Net impact of US tax reform measures
(8.0)
-
Non-deductible goodwill impairment losses
-
33.8
Effect of intra-group financing
(5.4)
(4.1)
Other non-deductible expenditure
3.8
3.6
Movements on unrecognised deferred tax assets
-
0.7
Tax credits and incentives
(5.0)
(4.4)
Change in tax rates (excluding US)
-
(0.4)
Adjustments relating to prior year acquisitions
-
(3.1)
Adjustments to prior year current and deferred tax charges
(4.3)
(0.1)
Taxation charge
43.6
21.6
'Net impact of US tax reform measures' above refers to the impact of the US Tax Cuts and Jobs Act and comprises a credit of 8.8m arising from the re-measurement of deferred tax liabilities at a lower rate, net of a one-off charge of 0.8m arising on accumulated foreign profits of the Group's US subsidiaries.
'Tax credits and incentives' above refers principally to research and development tax credits and other reliefs for innovation such as the UK Patent Box regime and Dutch innovation box regime, as well as tax reliefs available for manufacturing activities located in the USA.
6. Taxation (continued)
The following tax (credits)/charges relate to items of income and expense that are excluded from the Group's adjusted performance measures.
2017
m
2016
m
Tax credit on amortisation of acquisition-related intangible assets
(12.9)
(12.3)
Tax credit on depreciation of acquisition-related fair value adjustments to property, plant and equipment
(0.1)
-
Tax credit arising from net impact of US tax reform measures
(8.0)
-
Tax credit on impairment of goodwill and other acquisition-related intangible assets
-
(5.1)
Tax credit on net acquisition-related costs and fair value adjustments
(0.1)
(1.7)
Tax charge on retranslation of short-term inter-company loan balances
0.3
0.2
Tax credit on unwinding of discount factor on deferred and contingent consideration
-
(0.3)
Tax charge on profit on disposal of business
19.0
-
Tax credit relating to prior year acquisitions
-
(3.1)
Total tax credit
(1.8)
(22.3)
The effective adjusted tax rate for the year was 20.8% (2016: 22.4%) as set out in the reconciliation below:
Reconciliation of the reported taxation charge to the adjusted taxation charge
2017
m
2016
m
Reported taxation charge
43.6
21.6
Tax credit on items of income and expense that are excluded from the Group's adjusted profit before tax
1.8
22.3
Adjusted taxation charge
45.4
43.9
7. Dividends
Amounts recognised and paid as distributions to owners of the Parent Company in the year
2017
m
2016
m
Final dividend for the year ended 31 December 2016 of 34.0p (2015: 32.2p) per share
40.5
38.4
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
22.7
21.4
63.2
59.8
Amounts arising in respect of the year
2017
m
2016
m
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
22.7
21.4
Proposed final dividend for the year ended 31 December 2017 of 37.5p (2016: 34.0p) per share
44.7
40.5
67.4
61.9
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 25 May 2018 and has not been included as a liability in these Financial Statements.
8. Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (excluding treasury shares).
Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year but adjusted for the effects of dilutive options.
Basic earnings per share
2017
2016
Profit after tax (m)
234.8
10.3
Weighted average number of shares outstanding (millions)
119.2
119.1
Basic earnings per share (pence)
197.0
8.6
Diluted earnings per share
2017
2016
Profit after tax (m)
234.8
10.3
Basic weighted average number of shares outstanding (millions)
119.2
119.1
Weighted average number of dilutive 5p ordinary shares under option (millions)
0.9
0.8
Weighted average number of 5p ordinary shares that would have been issued at average market value from proceeds of dilutive share options (millions)
(0.4)
(0.3)
Diluted weighted average number of shares outstanding (millions)
119.7
119.6
Diluted earnings per share (pence)
196.1
8.6
9. Acquisitions
On 6 February 2017, the Group acquired 99% of the share capital of Pixirad Imaging Counters S.r.l. (Pixirad), a supplier based in Italy, for a total consideration of 2.8m. The company develops and distributes high performance X-ray detectors. The excess of the fair value of the consideration paid over the fair value of net tangible assets acquired is represented by the following intangible assets: technology and goodwill of 1.1m and 1.7m, respectively. The goodwill arising is attributable to the acquired workforce and synergies from leveraging the customer base to optimise the sales potential of Pixirad and Spectris products. Goodwill includes an amount of 0.3m representing the requirement to recognise a net deferred tax liability on the fair value adjustments. The business is being integrated into the Materials Analysis segment. The remaining 1% of share capital was purchased on 24 July 2017.
On 15 May 2017, the Group acquired the trade and certain assets of Setpoint, a US business, for a total consideration of 8.0m. This extends the Group's capabilities in the condition monitoring market. The excess of the fair value of the consideration paid over the fair value of net tangible assets acquired is represented by the following intangible assets: customer-related (customer relations), technology and goodwill of 0.3m, 2.4m and 4.6m, respectively. The goodwill arising is attributable to the acquired workforce, opportunities expected from the extension of the Group's product offerings leveraging its stronger position in the vibration and condition monitoring solutions, and sharing capabilities and technologies in value-added solutions. The business is being integrated into the In-line Instrumentation.
On 1 July 2017, the Group acquired the trade and certain assets of CSA Leyland, a UK business, for no consideration. This extends the Group's capabilities in the automotive testing services market. The excess of the fair value of net tangible assets acquired has resulted in a gain on purchase as a consequence of buying the business in a trouble state amounting to 1.9m and is disclosed in the Consolidated Income Statement. The business is being integrated into the Test and Measurement segment.
On 2 October 2017, the Group acquired the shares of Omnicon Group Inc. a US company, for a total consideration of 23.8m including 1.4m deferred consideration. This extends the Group's capabilities in engineering services to support the design of reliability electronic and software systems. The excess of the fair value of the consideration paid over the fair value of net tangible assets acquired is represented by the following intangible assets: customer related (customer relations), contractual rights, trade name and goodwill of 7.6m, 2.1m, 2.4m and 10.5m, respectively. The goodwill arising is attributable to the acquired workforce and synergies from leveraging the customer base to optimise the sales potential of Omnicon and Spectris services. The business is being integrated into the Test and Measurement segment.
9. Acquisitions (continued)
The assets and liabilities acquired with the above acquisitions, together with the total purchase consideration, are summarised in the table below. The revenue and operating profit contribution from the acquisitions in the year to the Group's results for the year were 6.6m and (3.5m), respectively. Group revenue and operating profit would have been 1,534.9m and 182.1m, respectively (adjusted operating profit: 222.6m), had each of these acquisitions taken place on the first day of the financial year.
The following fair value table is provisional, reflecting the timing of the acquisitions, and is expected to be finalised within 12 months of the acquisition date:
2017
Provisional
fair value
Net assets acquired under 2017 acquisitions
m
Intangible assets
15.9
Property, plant and equipment
3.1
Inventories
0.1
Trade and other receivables
1.9
Cash and cash equivalents
0.8
Trade and other payables
(1.8)
Deferred tax liabilities
(0.3)
Net assets acquired
19.7
Goodwill
16.8
Bargain purchase on acquisition
(1.9)
Total consideration in respect of 2017 acquisitions
34.6
Total consideration
34.6
Adjustment for cash acquired
(0.8)
Total consideration in respect of 2017 acquisitions
33.8
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2017 acquisitions
34.6
Adjustment for net cash acquired on 2017 acquisitions
 (0.8)
Deferred and contingent consideration on 2017 acquisitions to be paid in future years
 (1.4)
Cash paid in 2017 in respect of 2017 acquisitions
32.4
Acquisitions prior to 2017
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2016
4.1
Cash paid in 2017 in respect of prior years' acquisitions
4.1
Net cash outflow relating to acquisitions
36.5
There are no material contingent liabilities recognised in accordance with IFRS 3 (Revised).
10. Assets held for sale and liabilities directly associated with assets held for sale
On 14 December 2017, the Group signed an agreement with Macquarie Corporate Holdings Pty Limited for them to acquire 50% of the Group's environmental monitoring business, EMS Brel & Kjr, for a total cash consideration of AUD76.6m, subject to closing adjustments. The sale is expected to close in the second quarter of 2018, subject to regulatory approvals in China, the European Union and South Korea. The net proceeds from the sale will be used to reduce net debt, thereby increasing the Group's financial flexibility for future capital deployment. As at 31 December 2017, assets and liabilities of this business are presented in the Group's Financial Statements as held for sale and are stated at the lower of their carrying amount and fair value less cost to sell. There was no gain or loss as a result of the classification as held for sale. This business is part of the Test and Measurement segment.
2017
Assets held for sale
m
Goodwill and other intangible assets
24.0
Property, plant and equipment
1.4
Inventory
0.9
Trade and other receivables
5.7
Deferred tax assets
0.4
Cash and cash equivalents
0.1
32.5
Liabilities directly associated with assets held for sale
Trade and other payables
4.0
Current tax liabilities
0.8
4.8
11. Events after the balance sheet date
On 26 January 2018, the Group acquired 100% of the share capital of Concept Life Sciences (Holdings) Limited for a consideration of 163m, on a debt and cash-free basis. This acquisition adds to the Group's capabilities in test services in the Materials Analysis segment.

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