Annual Financial Report

RNS Number : 0976J

Spectris PLC

27 March 2018

 

Spectris plc: Annual Report and Accounts 2017

The Company's Annual Report and Accounts for the year ended 31 December 2017 (the "Annual Report") and the Notice of Annual General Meeting to be held on 25 May 2018 (the "Notice of Meeting") have been published on the Company's website at www.spectris.com and have been posted to shareholders who have elected to receive hard copy communications.

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

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

The final results for the year ended 31 December 2017, released by the Company on 19 February 2018, include the information required pursuant to Rules 4.1 and 6.3.5 of the UK Disclosure Guidance and Transparency Rules, excepting publication of the responsibility statement of the Directors in respect of the 2017 Accounts, and a description of the principal risks and uncertainties facing the Company, which are detailed below:

Directors Responsibility Statement

We confirm that to the best of our knowledge:

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

• the Strategic Report on pages 1 to 47 and the Directors' Report on pages 48 to 83 include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation, taken as a whole, together with a description of the principal risks and uncertainties that they face.

John O'Higgins - Chief Executive

Clive Watson - Group Finance Director

Principal Risks and Uncertainties

Fluctuation in exchange rates We have operations which sell and purchase goods in foreign currencies and whose results we record in a variety of different currencies. We are therefore exposed to any significant changes in exchange rates.
Link to Strategy:	Innovative solutions, Market presence
Risk Appetite:	Moderate
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Unexpected variations in the Company's results. - Reduced profitability and cash flow.
Mitigation	- Forward foreign exchange contracts cover up to 75% of forecast transactional exposures up to 18 months ahead. - Natural hedging strategy, matching invoicing and purchasing currencies where practical. - Foreign currency investments hedged with borrowings in the same currency wherever possible. - Regular monitoring, including sensitivity analyses to understand the impact of exchange rate movements on the Group's reporting.
2017 update	- On average, Sterling weakened relative to most other currencies over the year, which had a positive impact on our reported results from a translational perspective, albeit to a lesser extent than in 2016. - Our hedging policy continued to provide certainty and reduce volatility to the Group's cash flows.

Compliance with laws and regulations We operate in a large number of jurisdictions and, consequently, are subject to wide-ranging laws and regulations. Any failure by the Group or its representatives to comply with relevant laws and regulations could result in civil or criminal liabilities, leading to significant fines and penalties or the disqualification of the Group from participation in government-related contracts for a period of time. In the event of a failure to comply with export control regulations, the Group could also be exposed to restrictions being placed upon its ability to trade.
Link to Strategy:	Expanding globally, Operational excellence
Risk Appetite:	Very low
Assessment:	Low
Change in Risk Level:	Same
Impact	- Reduced sales, profitability and cash flow. - Reputational damage. - Diversion of management resources resulting in lost opportunities. - Penalties arising from breach of laws and regulations. - Inability to attract and retain talent.
Mitigation	- Strong culture, internal control framework and policies. - Ethics training provided to all employees. - Formal export controls compliance procedures in place, including strict product classification and transaction screening protocols. - Comprehensive insurance covers all standard categories of insurable risk. - Contract review and approval processes mitigate exposure to contractual liability.
2017 update	The Group continued to take a number of actions aimed at further mitigating this risk. These included formalisation and enhancement of the sales control framework in China, roll-out of conflicts of interest training and voluntary disclosure programme in China, Taiwan and South Korea, repeat anti-bribery and corruption reviews, deployment of anti-bribery and corruption as well as fair competition face-to-face workshops and introduction of alignment of values and incentives. We continue to ensure that we are responsive to issues raised through the Group's ethics hotline. For more details of our ethics programme see pages 46 to 47.

Information security As with most organisations of a similar size and complexity, our businesses face both internal and external information security risks, the nature and complexity of which are constantly changing, becoming more sophisticated and unpredictable. In addition, regulatory responsibilities in relation to data protection are becoming increasingly stringent, including the implementation of the General Data Protection Regulation ('GDPR') from May 2018.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Capital deployment
Risk Appetite:	Very low
Assessment:	Moderate
Change in Risk Level:	Higher
Impact	- Delay or impact on decision making through lack of available reliable data or disruption of service. - Loss of commercially sensitive or personal information. - Reduced service to customers due to poor information handling or interruption of business.
Mitigation	- Our businesses employ a number of physical and logical control measures designed to reduce the risk of a breach in information security arising. - Our systems are monitored against unauthorised access. - A programme of continuous improvement focusing on information security risks evaluates whether the Group's existing controls in this area would benefit from additional strengthening. - Employees receive online and face-to-face awareness training of information security risks and controls. - Cyber risk and security is reviewed regularly by the Board to address the evolving landscape
2017 update	The Group has appointed a Group Head of Information Risk Governance and a GDPR training programme is being rolled out to employees throughout the organisation.

Acquisitions Integration of the operations and personnel of acquired businesses can be a complex process. Potential risks therefore exist that the planned benefits from the acquisition may not be achieved as a result of problems encountered during integration of the acquired business, incorrect assumptions made in the business case, changing market conditions, or issues which were not identified during the due diligence process. Further, the Company could be exposed to past acts or omissions of the acquired business.
Link to Strategy:	Market presence, Expanding globally, Capital deployment
Risk Appetite:	Moderate
Assessment:	Low
Change in Risk Level:	Same
Impact	- Failure to attract sufficient numbers of high quality businesses to meet our growth targets. - Failure to achieve the benefits outlined in the business case. - Failure to identify new markets. - Reduced profitability and cash flow. - Unforeseen liabilities.
Mitigation	- Rigorous financial, commercial and legal assessment of target businesses involving external consultants as appropriate. - Strict authority levels which, subject to size, involve review by the Board for such transactions. - Comprehensive representations and warranties in purchase agreements. - Integration planning. - Regular review of the acquired businesses against the business case. - Post-acquisition control reviews.
2017 update	There continued to be a healthy level of acquisition activity in our marketplaces. We participated in this activity, making four bolt-on acquisitions, and we continue to look for additional opportunities. We have been careful to maintain our rigorous financial, commercial and legal due diligence and disciplines, which has meant that we have also excluded ourselves from a number of potential deals

Strategy execution The Group's strategic priorities are set out on pages 8 and 9. The Group considers that, as with any undertaking of this kind, there is necessarily inherent risk associated with the successful execution and delivery of the Group's strategic priorities. The risks associated with some of the Group's strategic priorities are addressed in their own right - for example, how we develop new products and how we acquire other businesses. Other relevant components of the Group's strategy concern: - the Group's desire to transition the business to achieving a larger proportion of sales through the provision of services, software and solutions to customers, rather than products alone; and - during the year, the Group launched a comprehensive Group-wide productivity improvement programme, Project Uplift. Over the medium term, this programme will deliver improvements in productivity, both within and across our operating companies, reducing complexity where appropriate whilst preserving the entrepreneurial culture of our businesses. We will also evaluate potential structural improvements that can leverage Spectris' scale and optimise both efficiency and effectiveness.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Operational excellence, Capital deployment
Risk Appetite:	High
Assessment:	Low
Change in Risk Level:	Same
Impact	- Failure to realise the Group's plans for enhanced efficiency and profitability. - Failure to realise the Group's growth plans. - Reduced profitability and cash flow.
Mitigation	- Programme management disciplines, including a dedicated programme management office. - Independent assurance. - Talent management programme. - Dashboard reporting against key growth initiatives. - A measured approach over time is being targeted, rather than a radical change. - Enhanced risk management and reporting
2017 update	During 2017, we continued to make good strategic progress in transitioning our customer offering towards the provision of solutions encompassing hardware, software and services. Four small acquisitions were completed, adding further software, service and testing capability. The acquisition of Omnicon provides complementary software and service capability to our existing software business within HBM, and we were pleased to complete the first bolt-on for Millbrook. During the year, we completed the sale of Microscan to Omron, recognising that this business is not consistent with the Group strategy. In terms of the development of the data analytics strategy, we have entered into an agreement to put EMS into a joint venture with Macquarie Capital which will give this business access to the Macquarie Capital network with its market-leading environmental monitoring market offering. Similarly, progress has been made in respect of Project Uplift where a dedicated programme management office has been established, a detailed diagnostic and planning phase completed and a series of actionable plans created, with implementation of these beginning in 2017.

Competitive activity The nature of the markets in which we operate means that all of our businesses are exposed to risk from competitor activity
Link to Strategy:	Innovative solutions, Market presence
Risk Appetite:	Moderate
Assessment:	Very low
Change in Risk Level:	Same
Impact	- Loss of market share - Reduced financial performance arising from competitive threats both from third parties and customers bringing production in-house.
Mitigation	- Ongoing monitoring of competitor activity and trends in the markets in which we compete. - Maintain market-leading positions through strong customer relationships and significant investment in R&D. - Diversified portfolio of products and markets limits the overall risk from any single competitor. - Develop operational excellence initiatives that enable our businesses to react quickly to changes in customer and market demand.
2017 update	We maintained high levels of investment in R&D, investing £105 million (6.9% of sales), with our operating businesses bringing new products and solutions to market during the year to sustain and strengthen our strong customer relationships and competitive advantages.

People The Group needs to attract, develop, motivate and retain the right people to achieve our operational and strategic targets. Effective talent management is essential to deliver our current and future business requirements. Therefore, the Board has agreed to introduce people as a new principal risk. This is not reflective of deterioration in this risk but in recognition of the ongoing change programmes underway within the Group.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally
Risk Appetite:	Low
Assessment:	Low
Change in Risk Level:	New risk
Impact	Failure to recruit and retain key staff leading to reduced innovation and progress against the Group's strategic aims.
Mitigation	- During the first half of 2017, the Group appointed a Director of Human Resources and a number of initiatives designed to mitigate this risk have now taken place or are under development, including: - developing a cohesive recruitment brand centred around the use of LinkedIn; and - a detailed review of Board and Executive succession plans was undertaken by the Nomination Committee in December 2017.
2017 update	During 2017, we began a number of initiatives to mitigate this risk. These initiatives will be built on during 2018

Supply chain dependencies and disruption We are exposed to the risk that some of the components we source, particularly for custom-built items or ageing products, are provided by a single supplier and are therefore vulnerable to interruption of supply. Our businesses also manufacture components using proprietary technologies at a number of locations. Our ability to supply products to customers could be adversely impacted by a disaster or other disruptive event at any of these sites.
Link to Strategy:	Operational excellence
Risk Appetite:	Moderate
Assessment:	Low
Change in Risk Level:	Same
Impact	- Inability to fulfil customer orders, resulting in lost sales and reputational damage. - Increased costs reduce profitability. - Loss of market share.
Mitigation	- Strategic sourcing teams source cost-effective suppliers across a range of markets whilst validating suppliers' business processes, quality and standards. - Alternative sources of supply actively sought to reduce dependency upon single-source suppliers. - Safety stock levels established for critical components. - Business continuity plans and disaster prevention measures in place for all material manufacturing locations. - Business interruption insurance. - Strong contract review process.
2017 update	We continued to identify and qualify secondary sources of supply where key dependencies have been identified. During the year, a Group Vice President Supply Chain was appointed to support and drive the following: - Continued focus on the Group's critical suppliers based on specialist independent spend analysis. - Underpinning of indirect spend that has been afforded by Project Uplift. - Ongoing identification and delivery of cross-operating company savings potential.

Political and economic risks We operate in a range of end-user markets around the world and may be affected by political, economic or regulatory developments in any of these countries. Material adverse changes in the political and economic environments in the countries in which we operate have the potential to put at risk our ability to execute our strategy.
Link to Strategy:	Expanding globally, Market presence
Risk Appetite:	Low
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Reduced profitability and cash flow
Mitigation	- Maintain a broad spread of markets, products and customers to limit risks associated with any given territory. - Monitor market intelligence so that we can respond quickly to changing trading conditions. - Ensure we remain structured in a way that enables us to take prompt action in the event of a material change in the trading environment. - Ensure we maintain a strong balance sheet and financial position.
2017 update	The Group's balanced geographical mix, with similar exposure to North America, Europe and Asia/Rest of the world, enabled it to benefit from an improvement in trading conditions in each region. - The Group continues to monitor and control its exposure to those countries where continuing economic uncertainties exist and, in particular, we are evaluating carefully the implications for the Group arising from the result of the UK's decision to leave the European Union ('Brexit'). - As far as potential trading exposures are concerned, exports from the UK into the European Union represent less than 3% of Group sales, whilst imports into the UK from the European Union represent less than 1% of Group sales. The acquisition of Concept Life Sciences in January 2018 will not materially impact trading flows to and from the UK. Our cost base in the UK is largely Sterling denominated. - As a consequence, we believe that Brexit presents only limited short-term direct impact for the Group. The main near-term risk for the Group arising from Brexit stems from broader uncertainty which could inhibit investment and increase market volatility, ultimately hindering growth in the UK and beyond. A Brexit Risk Committee has been established and an evaluation of the potential costs of moving to World Trade Organisation rules has been performed. The impact on the Group is not expected to be significant and there are a number of mitigating actions which can be undertaken. The Group will continue to monitor carefully any additional exposure arising as the full implications of Brexit become clearer.

Intellectual property In support of the Group's business model to provide technologically-advanced solutions to its customers, the Group has continued to take a holistic approach towards intellectual property protection and management. The Group owns and registers patents and trademarks and maintains trade secrets, confidential information and copyright as well as exploiting intellectual property through licensing. The key risks are that the Group may inadvertently infringe third-party rights and that the Group may not hold sufficient rights to prevent competitors independently developing similar products. There are also risks that intellectual property may be lost through failure to implement controls to safeguard confidential information or actively manage registered intellectual property rights.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Capital deployment
Risk Appetite:	Low
Assessment:	Very low
Change in Risk Level:	Same
Impact	- Reduced profitability and cash flow. - Loss of market share. - Failure to recoup investment in innovation
Mitigation	- Policies and procedures in place requiring all of our businesses to - maintain a watching brief on new third-party patent applications and competitor activity; - ensure adequate protection for key intellectual property, including registration where appropriate; - undertake specific freedom-to-operate technical reviews prior to commencing new product development, acquisitions or licences; and - register intellectual property where appropriate. - Maintain a portfolio of intellectual property assets such that no single patent, trade secret or trademark is sufficiently important to present a material risk to the ongoing success of the Company.
2017 update	During the year, we continued a programme of intellectual property audits and also reviewed the management and safeguarding of confidential information. A programme of guidance and training in good information protection processes was implemented with an initial focus on higher risk jurisdictions.

New product development The development of new technologies and products necessarily involves risk, including: - the product being more expensive or taking longer to develop than originally planned; - the product failing to reach the commercialisation phase; and - the market for the product being smaller than originally envisaged.
Link to Strategy:	Innovative solutions
Risk Appetite:	Low
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Reduced profitability and cash flow. - Loss of market share. - Failure to recoup investment in innovation
Mitigation	- Regular strategic evaluations of product portfolios and the markets in which we compete, ensuring that our investment in new products is targeted so as to maximise the opportunity of success. - Project management disciplines are in place across our product development programmes and audits provide assurance that these disciplines are applied consistently. - Work closely with customers to ensure that we develop solutions tailored to their specific needs. - Maintain customer involvement throughout the life-cycle of product development to product launch through, for example, beta evaluations. - New product developments are based on standard platforms, customised through high added-value applications engineering.
2017 update	- Formal strategy reviews are conducted annually and are supplemented with regular updates with each operating company. - These reviews often result in targeted investment in new product platforms, upgrades to existing products and services and bolt-on acquisitions. - In 2017, several important new products were launched and further software, service and testing capability was added through our acquisition programme

Name of contact and telephone number for queries:

Rebecca Dunn

Deputy Company Secretary

01784 470 470

For and on behalf of Spectris plc

 

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