Annual Financial Report

RNS Number : 3267U

Spectris PLC

28 March 2019

 

Spectris plc: Annual Report and Accounts 2018

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

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

-      The Annual Report.

-      The Notice of Meeting.

-      Form of Proxy.

-      Notice of Availability for documents on the Company's website.

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

Directors Responsibility Statement

We confirm that to the best of our knowledge:

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

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

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

Andrew Heath - Chief Executive

Clive Watson - Group Finance Director

Principal Risks and Uncertainties

Fluctuations in exchange rates We have operations which sell and purchase goods in foreign currencies and whose results we record in a variety of different currencies. We are therefore exposed to any significant changes in exchange rates.
Link to Strategy:	Innovative solutions, Market presence
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Unexpected variations in the Company's results. - Reduced profitability and cash flow.
Mitigation	- Natural hedging strategy, matching invoicing and purchasing currencies where practical. - Forward foreign exchange contracts cover up to 75% of forecast transactional exposures up to 18 months ahead. - Foreign currency investments hedged with borrowings in the same currency wherever possible. - Regular monitoring, including sensitivity analyses to understand the impact of exchange rate movements on the Group's reporting.
2018 update	-  Implementation of new treasury management system in 2019 will improve monitoring and compliance with the Group's transactional hedging policy.

Compliance with laws and regulations We operate in a large number of jurisdictions and, consequently, are subject to wide-ranging laws and regulations. Any failure by the Group or its representatives to comply with relevant laws and regulations could result in civil or criminal liabilities, leading to significant fines and penalties or the disqualification of the Group from participation in government-related contracts for a period of time. In the event of a failure to comply with export control regulations, the Group could also be exposed to restrictions being placed upon its ability to trade.
Link to Strategy:	Expanding globally, Operational excellence
Risk Appetite:	Highly Cautious
Assessment:	High
Change in Risk Level:	Higher
Impact	- Reduced sales, profitability and cash flow. - Reputational damage. - Diversion of management resources resulting in lost opportunities. - Penalties arising from breach of laws and regulations. - Inability to attract and retain talent.
Mitigation	- Strong cultural alignment to the Spectris value of 'Absolute Integrity'. - Internal control framework and policies. - Ethics training provided to all employees. - Formal export controls compliance procedures in place, including strict product classification and transaction screening protocols. - Comprehensive insurance covers all standard categories of insurable risk. - Contract review and approval processes mitigate exposure to contractual liability.
2018 update	The compliance burden on the Group has heightened given our geographical concentration in areas that have seen an increase in regulatory risk during 2018.  An ethics and compliance enhancement programme was endorsed by the Audit and Risk Committee in October 2018 and is expected to deliver further mitigation strengthening over the next 24 months.  We continue to be responsive to issues raised through the Spectris hotline. For details of our ethics programme see page 39.

Information security As with most organisations of a similar size and complexity, our businesses face both internal and external information security risks, the nature and complexity of which are constantly changing, becoming more sophisticated and unpredictable. In addition, the introduction of regulatory requirements, such as the General Data Protection Regulation ('GDPR', which came into force in May 2018), requires that we continue to develop our processes and mitigations so that they remain effective and compliant.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Capital deployment
Risk Appetite:	Cautious
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Delay or impact on decision-making through lack of available reliable data or disruption of service. - Loss of commercially sensitive or personal information. - Reduced service to customers due to poor information handling or interruption of business.
Mitigation	- Our businesses employ a number of physical and logical control measures designed to reduce the risk of a breach in information security arising. - Our systems are monitored against unauthorised access. - A programme of continuous improvement focusing on information security risks evaluates whether the Group's existing controls in this area would benefit from additional strengthening. - Employees receive online and face-to-face awareness training of information security risks and controls. - Cyber risk and security is reviewed regularly by the Board to address the evolving landscape.
2018 update	The Group IT function continues to increase the maturity at our operating companies in respect of data classification, patch management and vulnerability management. A new Chief Information Officer joined Spectris in November 2018, who will continue to refine and drive both the ongoing risk assessment and the existing and planned mitigation activity. During 2018, the Group Head of Information Risk Governance filled three new positions in the Information Risk Governance team to add further strength. A Group IT Assurance Manager has also joined the Internal Audit function and will be a key third line of defence in 2019, delivering a plan of in-house assurance against the IT general controls in place across the Group and other risks associated with business systems and information security.

Acquisitions Integration of the operations and personnel of acquired businesses can be a complex process. Potential risks therefore exist that the planned benefits from the acquisition may not be achieved as a result of problems encountered during integration of the acquired business, incorrect assumptions made in the business case, changing market conditions, or issues which were not identified during the due diligence process. Further, the Company could be exposed to past acts or omissions of the acquired business.
Link to Strategy:	Market presence, Expanding globally, Capital deployment
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk Level:	Same
Impact	- Failure to successfully deliver the business plan. - Reduced profitability and cash flow. - Unforeseen liabilities.
Mitigation	- Rigorous financial, commercial and legal assessment of target businesses involving external consultants and advisers as appropriate. - Strict authority levels which, subject to size, involve review by the Board for such transactions. - Comprehensive representations and warranties in purchase agreements. - Integration planning. - Regular review of the acquired businesses against the business case. - Post-acquisition control reviews.
2018 update	Our acquisition activity during 2018 has included the expansion of test service capabilities for Materials Analysis and accessing new markets via the acquisition of Concept Life Sciences. We have been careful to maintain our financial, commercial and legal due diligence and disciplines, which has meant that we have also excluded ourselves from a number of potential acquisitions. We have recently recruited an Integration Manager to strengthen our capabilities with regard to integrating new acquisitions and merging operating companies within our Materials Analysis and Test and Measurement segments.

Strategy execution The Group is currently undertaking a strategic review. Progress and initial conclusions from the review are set out on page 10. The Group considers that there is inherent risk associated with the successful execution and delivery of the Group's strategic priorities, and that managing this risk is of increased importance during a period of strategic review and transition. Some of the specific risks and mitigations associated with the Group's strategic priorities are managed via their own principal risk, for example competitive activity, how we develop new products and how we acquire other businesses. Nevertheless, the Group recognises the importance and value of managing strategic execution risk in its own right.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Operational excellence, Capital deployment
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk Level:	Higher
Impact	- Failure to realise the Group's growth plans. - Failure to realise the Group's plans for enhanced profitability. - Reduced capital returns and cash flow.
Mitigation	- Greater focus on performance management, capital allocation and shareholder value creation. - Simplifying the business to focus on scalable platform businesses, strongly aligned to attractive high growth end markets with the strongest capabilities. - Independent support and assurance in the development of the strategy. - Drive profitability through the cycle via a strong focus on margin expansion:           - Profit improvement programme initiated.           - Operating leverage from organic revenue growth.           - Lean operating model and system. - Developing a clear strategy activation programme - aligning the organisation and culture with the new strategy programme. - Enabling the capabilities of our leaders and future leaders to drive successful execution.
2018 update	-  Strategic review initiated in the fourth quarter. -  New profit improvement programme initiated in the fourth quarter.

Competitive activity The nature of the markets in which we operate means that all of our businesses are exposed to risk from competitor activity.
Link to Strategy:	Innovative solutions, Market presence
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk Level:	Higher
Impact	- Loss of market share. - Reduced financial performance. - Price and/or volume erosion as a result of competitor activities.
Mitigation	- Ongoing monitoring of competitor activity and trends in the markets in which we compete. - Maintain market-leading positions through strong customer relationships and significant investment in R&D. - We have a diversified portfolio of products and markets that limits the overall risk from any single competitor.
2018 update	We maintained high levels of investment in R&D (typically 6-7% of sales), with our operating companies bringing new products and solutions to market during the year to sustain and strengthen our strong customer relationships and competitive advantages. While our assessment of this risk for 2018 has slightly increased, planned enhancements to activities in new product development, specifically in product management and the management of speed and agility of innovation, will further contribute to the mitigation of this risk.

People The Group needs to attract, develop, motivate and retain the right people to achieve our operational and strategic targets. Effective talent management is essential to successfully delivering our current business requirements and strategic goals, and to realising the full potential of our businesses. Therefore, failure to attract, retain or deploy talent could significantly impact the successful execution of our strategy.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally
Risk Appetite:	Cautious
Assessment:	Moderate
Change in Risk Level:	Higher
Impact	- Loss of knowledge / expertise. - Business disruption. - Lost investment in people.
Mitigation	- Structured recruitment process for senior and Group talent. - Organisational capability review processes in effect. - Group executive-level succession planning. - Staff turnover reporting.
2018 update	We recognise the heightened importance of managing people risk during a period of strategic review and transformation. As a consequence, we have raised our assessed risk level and the following additional mitigations were planned and introduced in 2018 with further rollout during 2019: - Group HR information system. - Enhancements to Group approval/governance process covering all senior hires. - Assurance over key implemented mitigations.

Supply chain dependencies and disruption We are exposed to the risk that some of the components we source, particularly for custom-built items or ageing products, are provided by a single supplier and are therefore vulnerable to interruption of supply. Our businesses also manufacture components using proprietary technologies at a number of locations. Our ability to supply products to customers could be adversely impacted by a significant disruptive event at any of these sites.
Link to Strategy:	Operational excellence
Risk Appetite:	Cautious
Assessment:	Low
Change in Risk 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. - Business interruption insurance. - Strong contract review process.
2018 update	We continued to identify and qualify secondary sources of supply where key dependencies have been identified. During the year, a Group Vice President Supply Chain (recruited in 2017) continues to drive the following: - Enhanced focus on the Group's critical suppliers based on specialist independent spend analysis. - Streamlining of previously fragmented vendor relationships into fewer, global, agreements. - Driving benefits out of the existing procurement projects.

Political and economic risks We operate in a range of end-user markets around the world and may be affected by political, economic or regulatory developments in any of these countries. Material adverse changes in the political and economic environments in the countries in which we operate have the potential to put at risk our ability to execute our strategy.
Link to Strategy:	Expanding globally, Market presence
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk Level:	Increased
Impact	- Reduced sales, profitability and cash flow.
Mitigation	- Maintain a broad spread of markets, products and customers to limit risks associated with any given territory. - Market monitoring so that we can respond quickly to changing trading conditions. - Ensure we maintain a strong balance sheet and financial position.
2018 update	While the Group's balanced geographical mix, with similar exposure to North America, Europe and Asia, enables it to benefit from an improvement in trading conditions in each region, two particular risk scenarios have increased in potential impact/likelihood: - Uncertainty as to the outcome of Brexit and the prospect of 'no-deal'. During 2018, the Group's focus has shifted towards the 'no-deal' scenario. The Group has identified an extensive list of potential risks. Their associated mitigations are being continuously monitored to ensure the effective management of risk during this dynamic period. Mitigations include amending provisions within our commercial contracts and seeking approvals from alternative regulatory authorities to continue to operate in the EU/UK. - Risk associated with the escalation of tariff measures between the USA and China has also required focused monitoring and mitigation. Working with each of the Group's businesses in China, an assessment has been made as to the annualised impact of the proposed tariffs. In addition, separate assessments have been made with respect to the anticipated impact of tariffs on US imports from China. Mitigations in place include the use of alternatives for US-based businesses with China-based suppliers, as well as proactive filing for exemptions from US tariff increases on imports.

Intellectual property In support of the Group's business model to provide technologically-advanced solutions to its customers, the Group has continued to take a holistic approach towards intellectual property protection and management. The Group owns and registers patents and trademarks and maintains trade secrets, confidential information and copyright as well as exploiting intellectual property through licensing. The key risks are that the Group may inadvertently infringe third-party rights and that the Group may not hold sufficient rights to prevent competitors independently developing similar products. There are also risks that intellectual property may be lost through failure to implement controls to safeguard confidential information or actively manage registered intellectual property rights.
Link to Strategy:	Innovative solutions, Market presence, Expanding globally, Capital deployment
Risk Appetite:	Cautious
Assessment:	Very low
Change in Risk 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.
2018 update	The Group continues to undertake intellectual property audits and facilitates operating company self-assessments with a view to monitoring mitigation and key risk indicators in governance, software, internal and external information protection.

New product development The development of new technologies and products necessarily involves risk, including: - the product being more expensive or taking longer to develop than originally planned; - the product failing to reach the commercialisation phase; and - not meeting market requirements or market requirements changing.
Link to Strategy:	Innovative solutions
Risk Appetite:	Balanced
Assessment:	Moderate
Change in Risk 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. - Project management disciplines are in place across our product development programmes and audits provide assurance that these disciplines are applied consistently. - Regular monitoring of project progress and performance against plan. - Working closely with customers to ensure that we develop solutions tailored to their specific needs.
2018 update	During 2018, the Group has enhanced its focus on value-driven product design, product portfolio management and project management. The latter has resulted in the establishment of a special interest group comprised of operating company and function representatives. The Group has already made progress in driving consistent and good practices in project management methodologies and tools. In addition, the Group has put in place a dashboard reporting process designed to monitor key performance and risk indicators, such as return on innovation and speed of innovation.

Name of contact and telephone number for queries:

Rebecca Dunn

Deputy Company Secretary

01784 470 470

28 March 2019

LEI Number: 213800Z4CO2CZO3M3T10

For and on behalf of Spectris plc

 

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