Spectris plc

2015 HALF YEAR RESULTS

30 July 2015 - Spectris plc, (SXS: LSE) the productivity-enhancing instrumentation and controls company, announces half year results for the six months ended 30 June 2015.

	H1 2015	H1 2014	Change	Change at CER**	Like-for-like change***
Sales £m	563.2	539.8	4%	5%	1%
Operating profit £m*	67.4	70.1	-4%	-2%	-8%
Return on sales*	12.0%	13.0%	-1.0pp
Profit before tax £m*	64.9	67.3	-4%
Earnings per share*	42.0p	43.4p	-3%
Dividend	17.3p	16.0p	+8%
Statutory
Sales £m	563.2	539.8	4%
Operating profit £m	49.4	58.2	-15%
Profit before tax £m	49.2	58.6	-16%
Basic earnings per share	33.9p	39.4p	-14%
*     These adjusted performance measures represent the statutory results excluding certain non-operational items. **   At constant exchange rates (CER). *** At constant exchange rates and excluding acquisitions.

 

Highlights

·     5% sales growth at constant exchange rates, with acquisitions contributing 4 percentage points and like-for-like ('LFL') sales growth of 1%

·     LFL sales growth of 4% in Materials Analysis, offset by an average LFL decline in sales of 1% across Test and Measurement, In-line Instrumentation and Industrial Controls

·     Two bolt-on acquisitions completed in H1

·     Robust operating cash conversion of 85%

·     Dividend per share increased by 8%

 

Commenting on the results, John O'Higgins, Chief Executive, said: "Constant currency sales growth of 5% during the first half benefitted from a 4 percentage point contribution from acquisitions. Organic constant currency sales growth of 1% was impacted by weak trading conditions in China and the US. New product launches and recent acquisitions are expected to benefit performance in the second half and, in addition, we have taken cost reduction measures to improve future profitability. Given the challenging near term trading environment and the net effect of these cost reduction measures, full year adjusted operating profit is anticipated to be around the low end of market expectations¹, before the impact of foreign exchange translation in the second half. Our broad end market exposures, continuing investments in new products, strong cash flow and robust financial position underpin the Board's view that the company is well positioned to deliver on its growth strategy."

Notes:

 

1 Company-compiled range of analyst forecasts for adjusted operating profit: £200.0m - £223.4m.

 

 

Contacts:

 

Spectris plc

 

John O'Higgins, Chief Executive

+44 1784 470 470

 

Clive Watson, Group Finance Director

+44 1784 470 470

 

Matt Jones, Head of Corporate Affairs

+44 1784 470 470

 

 

FTI Consulting

 

Richard Mountain / Susanne Yule

+44 203 727 1340

 

 

A meeting with analysts will be held at 10:30am BST today. 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 8,300 people located in more than 30 countries. For more information, visit www.spectris.com.

 

CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT

 

Results overview¹

In the first half, reported sales grew by 4% to £563.2 million (H1 2014: £539.8 million). This increase comprised a four percentage point contribution from acquisitions (£22.9 million), an adverse impact of one percentage point from foreign exchange currency movements and, consequently, one percentage point of sales growth on an organic constant currency (like-for-like, 'LFL') basis.

Regionally, sales to North America declined by 2%, representing a marked change to the strong performance from this region in 2014. Sales to China declined by 4% in the first half and, together with a 5% sales decline in Japan, these geographies partially offset a good performance from India and South East Asia, resulting in overall sales growth in Asia Pacific of 1% in the period. After a strong start to the year, sales growth in Europe moderated as the period progressed, resulting in 4% sales growth in the first half. Growth in Europe was broad-based by industry but was held back by Germany, where sales growth was 1%.

There was good sales growth to the pharmaceutical sector during the first half, and within the metals, minerals and mining sector there was growth in both the metals and minerals segments, which more than offset the subdued mining segment. Sales to the academic research sector declined, remaining constrained by fiscal pressures in many of the geographies we serve. Within the energy and utilities sector we saw continued strong growth in the wind energy market and in the downstream petrochemicals industries, particularly in Asia Pacific where there remains a strong focus on emissions control. Together, these more than compensated for weakness in the upstream oil and gas sector. Within transport, sales to the aerospace market grew, despite the effect of economic sanctions on Russia, whilst sales to the automotive market declined slightly as compared to a strong prior-year period. Sales to the pulp and paper market declined due to on-going weakness in the graphic coated paper market, which was only partially compensated for by growth in the pulp, packaging and tissue markets. Sales to the electronics, semiconductor and telecom sector were broadly flat, with growth in the semiconductor segment but lower sales to the consumer electronics segment, due to the absence of major product development activity by customers that benefitted the prior-year period.

Operating profit declined by 4% to £67.4 million (H1 2014: £70.1 million) and operating margins declined by 1.0 percentage point to 12.0%. On a LFL basis, operating profit decreased by 8%, as 1% LFL sales growth was insufficient to offset overhead cost inflation and investments in growth initiatives. Given the weak trading conditions, we initiated a number of cost reduction measures, including selective restructuring in certain businesses, in order to improve future profitability. These measures resulted in a net cost of £0.4 million being charged against operating profit in the first half, with an additional net cost of around £3 million expected to be incurred in the second half. The annualised benefits arising from these measures are anticipated to be around £6 million.

 

Net finance costs at £2.5 million were slightly lower than in the same period last year despite a higher average net debt level, due to a reduction in the weighted average interest rate on debt following the re-financing of the revolving credit facility in October 2014. Profit before tax decreased by 4% to £64.9 million.

 

Financial position and dividend

Operating cash flow was strong, with 85% of operating profit being converted into cash. Cash outflows in respect of dividends, tax and acquisitions exceeded operating cash flow, resulting in net debt increasing by £23.1 million during the period. At 30 June 2015, net debt stood at £148.7 million, around 0.7 times the 12-month trailing EBITDA of £218.4 million.

The Board has declared an interim dividend of 17.3 pence per share, an increase of 8% over the same period last year (H1 2014: 16.0 pence per share). The dividend is covered 2.4 times by earnings per share. This is consistent with our policy of making progressive dividend payments based upon affordability and sustainability. The dividend will be paid on 13 November 2015 to shareholders on the register at the close of business on 16 October 2015.

Strategy

In April we held a Capital Markets Day where we announced an evolution of the Group's strategy with a renewed emphasis on growth, delivered by a greater focus on key strategic markets and disruptive technologies. The webcast of the event and associated presentations are available to view and download at http://www.spectris.com/investors/presentations-webcasts.

Our strategic objective is to deliver long-term and sustainable shareholder value by creating and providing productivity-enhancing solutions and services for our customers. Our strategy for delivering this objective now comprises the following five key elements:

Focus on innovative customer solutions: Innovation is at the heart of our business. Our understanding of our customers' businesses and the productivity challenges that they face enables us to enhance our offering to them, whether that involves the supply of improved equipment or a packaged solution involving the provision of services, software and related activities. Understanding and addressing these productivity challenges enable us to strengthen customer loyalty and increase both our sales to customers and the returns we earn on those sales.

Increase our presence in key strategic markets: We build leadership positions in attractive niche markets where we believe there are opportunities for technology-led productivity enhancement. These markets currently include segments within the life sciences and pharmaceuticals, energy, transport, basic materials and technology sectors, but we also review and actively pursue opportunities in new markets.

Expand business globally: In response to a customer base that is extending its international operations and becoming increasingly sophisticated we seek to expand our business globally, with particular emphasis on emerging markets such as China, India and Latin America.  Many of the businesses that we buy focus on one or two national markets, and we leverage our global footprint to accelerate their regional growth.

Accelerate operational excellence: We strive for continuous improvement in all aspects of our business operations, both to enhance customer experience and to generate efficiency and productivity gains.  We do this through a range of actions, including improvements in delivery performance, service responsiveness and speed-to-market of innovations, process efficiencies and enhancements to supply chain management by outsourcing non-critical activities. In addition, we seek to improve performance and profitability by driving synergistic opportunities within and between our operating businesses and across the Group as a whole.

Deploy capital for both platform and bolt-on M&A: We acquire businesses which materially strengthen our operating companies through broadening their customer offering, reaching new customer segments or expanding their geographical presence. We do so when we judge that the returns generated through acquisition are better than those achievable through organic expansion. In addition, we invest in new platform businesses in order to establish a presence in strategic markets or complementary capabilities.

During the first half we progressed all of these strategic elements, as detailed in the Operating Review that follows. For example, we increased our presence in several of the disruptive growth technologies we identified at the Capital Markets Day, securing a major contract with Novartis Biologics in the life science sector (see Materials Analysis operating review) and winning a significant order from a large US utility for industrial connectivity equipment to enable its 'smart grid' deployment (see Industrial Controls operating review). We also launched several innovative products, such as a new laser gas analyser, the MiniLaser (see In-line Instrumentation operating review) and a new X-ray spectrometer, the Zetium (see Materials Analysis operating review). We were awarded important contracts and expanded our presence in several emerging markets, notably India and Mexico, and completed two bolt-on acquisitions, including the purchase of ReliaSoft, which extends our existing presence in engineering application software (see Test and Measurement operating review).

Board composition

As previously announced, there were a number of changes to the composition of the Board of Spectris during the first half. With effect from 1 January 2015 Bill Seeger and Ulf Quellmann joined the Board as Non-executive Directors. Bill assumed the role of Chairman of the Audit and Risk Committee with effect from 27 February 2015.

After nine years of service, John Warren retired as a Non-executive Director of Spectris plc immediately following the Annual General Meeting on 24 April 2015. With effect from 1 January 2015, he stood down as Senior Independent Director and Russell King assumed this role in addition to his role as Chairman of the Remuneration Committee.

Summary and outlook

Constant currency sales growth of 5% during the first half benefitted from a 4 percentage point contribution from acquisitions. Organic constant currency sales growth of 1% was impacted by weak trading conditions in China and the US. New product launches and recent acquisitions are expected to benefit performance in the second half and, in addition, we have taken cost reduction measures to improve future profitability. Given the challenging near term trading environment and the net effect of these cost reduction measures, full year adjusted operating profit is anticipated to be around the low end of market expectations², before the impact of foreign exchange translation in the second half. Our broad end market exposures, continuing investments in new products, strong cash flow and robust financial position underpin the Board's view that the company is well positioned to deliver on its growth strategy.

1 Unless otherwise stated, figures quoted for operating profit, net interest, profit before tax, tax, earnings per share and operating cash flows are adjusted measures. For an explanation of adjusted figures and a reconciliation to the statutory reported figures, see Note 2 to the financial statements.

2 Company-compiled range of analyst forecasts for adjusted operating profit: £200.0m - £223.4m.

 

OPERATING REVIEW

 

	Materials Analysis		Test and Measurement		In-line Instrumentation		Industrial Controls		Total
	H1 2015	H1 2014	H1 2015	H1 2014	H1 2015	H1 2014	H1 2015	H1 2014	H1 2015	H1 2014
Sales (£m)	165.7	150.7	164.2	159.8	120.5	122.7	112.8	106.6	563.2	539.8
LFL growth	4%	-5%	-	5%	-1%	3%	-1%	4%	1%	1%
Operating profit* (£m)	14.6	13.2	18.7	19.4	13.8	17.3	20.3	20.2	67.4	70.1
Return on sales* (%)	8.8%	8.7%	11.4%	12.1%	11.4%	14.1%	18.0%	19.0%	12.0%	13.0%
% of Group sales	30%	28%	29%	29%	21%	23%	20%	20%
After sales (%)	33%	32%	20%	20%	44%	44%	1%	1%	25%	25%

 

* These adjusted performance measures represent the statutory results excluding certain non-operational items (see Note 2 to the financial statements for an explanation of adjusted figures and a reconciliation to the statutory reported figures).

 

MATERIALS ANALYSIS

Materials Analysis provides products and services that enable customers to determine structure, composition, quantity and quality of particles and materials, during their research and product development processes, when assessing materials before production or during the manufacturing process.  The operating companies in this segment are Malvern Instruments, PANalytical and Particle Measuring Systems.

Segment performance

	H1 2015	H1 2014	change	like-for-like change
Sales (£m)	165.7	150.7	10%	4%
Operating profit (£m)	14.6	13.2	11%	-10%
Return on sales (%)	8.8	8.7	+0.1pp	-1.1pp
% of Group sales	30	28	+2pp
After sales (%)	33	32	+1pp

 

Reported sales increased by 10%, including an eight percentage point contribution from acquisitions and a two percentage point adverse impact from foreign currency exchange movements. Consequently, LFL sales grew by 4% in the first half, benefitting from continued good growth from pharmaceutical and fine chemicals and semiconductor customers, particularly in North America. There was a return to growth in the metals, minerals and mining sector, driven principally by the metals and minerals segments, with mining demand remaining subdued. Sales to academic research customers declined compared to the same period last year as fiscal budgets remained constrained in many markets. Operating profit declined by 10% on a LFL basis, primarily due to the annualised effect of prior year headcount increases and the absence of a one-off R&D-related government grant that benefitted the prior-year period (H1 2014 benefit: £1.7 million, FY 2014 benefit: £3.0 million). Excluding the impact of this R&D grant, operating profit grew by 3% on a LFL basis. 

 

Sales to the pharmaceutical sector grew, with strong performances in North America, Germany and India helped by growing demand from biopharmaceutical and generic drug manufacturers. Our investment in the development of solutions focussed on the life science industry continued to yield results. We secured a major contract with Novartis Biologics ('NB') for our Viscosizer product, which will deliver substantial cost savings to NB by enabling more effective pre-screening of its therapeutic antibody candidates prior to them entering clinical trials. Following the acquisition of MicroCal last year, the business has expanded its product range with the launch of the next generation of calorimeters targetted specifically at the life science market, the MicroCal PEAQ-ITC. Within Asia Pacific, sales to Chinese pharmaceutical customers declined. As previously indicated, the passing of Good Manufacturing Practice regulations in China in March 2014 saw the end of a multi-year investment phase by Chinese pharmaceutical companies as they strove to achieve compliance with these regulations. This, therefore, had an impact on our growth in the first half, though we believe growth prospects remain good in this market over the medium term. Regulatory compliance is now a strong growth driver for our business in India, where the generic drug manufacturers are focussed on achieving the standards necessary to export to the US. Our particle measuring business won a significant order from Merck for a facility monitoring system together with a multi-year service contract.

 

After a difficult 2014, there was a resumption of growth in the metals, minerals and mining sectors in all major markets except China, where demand remains subdued in the face of over-capacity in mining and continued postponements and delays to large capital expenditure projects. Generally, the growth in this sector is primarily of an after sales nature, with customers preferring to repair and support existing equipment rather than replace or upgrade to a new solution. In contrast, there is good growth in the cement and building materials markets, particularly in the US, Europe and some developing markets such as Mexico, which is driving growth in our metals and minerals segments that is more than compensating for the weakness in mining. Our commitment to innovate and improve the productivity of our customers has been enhanced by a major new product launch in the period, the Zetium X-ray spectrometer. This is the first machine in the market that combines several X-ray techniques together in one machine with easy-to-use software, enabling customers to increase throughput and reduce processing time. Dedicated industry solutions are available to improve the versatility of the instrument for specific end-user groups. We also launched the CNA Pentos, a real-time cross-belt elemental analyser targetted at the cement industry and similar applications that can operate over a wide range of materials and compositions.

 

Sales to academic research institutes declined, as governments remained fiscally constrained and public funding programmes were either exhausted or awaiting renewal. Notably, the strong growth from the UK in recent years abated as a result of the uncertainty caused by the general election during the period.

 

Demand in the semiconductor sector continued the progress that began during the second half of 2014, reflecting more favourable market conditions and our new product introductions. Growth also benefitted from the acquisitions we made of the distributors for our particle measuring business in South Korea (in September 2014) and Taiwan (in March 2015). An important new product released to market in the period was the Ultra DI-20 Liquid Particle Counter, which counts and sizes contaminants as small as 20 nanometres.

 

Segment outlook

 

We expect this segment to continue to deliver robust sales growth in the second half, notably in the pharmaceutical and semiconductor sectors, boosted by new product launches and the impact of acquisitions. Demand from the mining sector is expected to remain weak and to be primarily of an after sales nature; however, the metals and minerals segment is expected to remain robust. We expect some release of EU funding of research and development budgets in the second half to lead to improved demand from the academic research sector. Cost reduction measures have been taken in order to improve future profitability. 

 

TEST AND MEASUREMENT

 

Test and Measurement supplies test, measurement and analysis equipment, software and services for product design optimisation, manufacturing control, microseismic monitoring and environmental monitoring systems. The operating companies in this segment are Brüel & Kjær Sound & Vibration, ESG Solutions and HBM.

Segment performance

	H1 2015	H1 2014	change	like-for-like change
Sales (£m)	164.2	159.8	3%	-
Operating profit (£m)	18.7	19.4	-4%	-6%
Return on sales (%)	11.4	12.1	-0.7pp	-0.7pp
% of Group sales	29	29	-
After sales (%)	20	20	-

 

Reported sales increased by 3%, comprising a seven percentage point contribution from acquisitions and a four percentage point adverse impact from foreign currency exchange movements. Consequently, LFL sales growth was flat in the period, impacted by fewer large orders compared to the prior-year period. LFL operating profit declined by 6% to £18.7 million, reflecting negative operating leverage.

 

Sales to the automotive sector declined slightly, mainly due to the lack of large orders from North American customers that we saw last year, which offset continued good growth in Japan and modest growth in Europe. The quality of the in-car infotainment and communications systems continues to be increasingly important to car manufacturers, whilst legislation is also driving interest in our full-vehicle simulators that allow more efficient development of noise, vibration and harshness targets, with Bentley placing a major order for this simulator with us during the period. We continued to launch important new updates to existing system families, such as the eight-channel universal amplifier MX840B, part of the QuantumX family of data acquisition systems, and a built-in GPS receiver to enable accurate synchronisation of multiple data acquisition systems that are distributed over a large physical area, enabling data to be measured and recorded without the requirement for it to be transferred between stations.

 

Sales to the aerospace industry increased despite the economic sanctions on Russia adversely impacting our exports of satellite vibration test systems to this end market. There was a strong performance in North America, where we secured a significant order from Lockheed Martin for PULSE software analysers to test sound and vibration in its satellite systems. Whilst there were continued project delays in China there was good growth elsewhere in Asia Pacific. Following a sizeable order last year, a major South Korean aerospace company placed a further large order with us during the period for satellite vibration test systems.  

 

Sales to the consumer electronics market were down significantly in the first half, reflecting a strong prior-year period when our major customers in this segment had particularly large projects in North America and China. Absent these large prior-year orders, the underlying business trends in this sector remain healthy as consumers increasingly demand enhanced audio quality from their electronic products.

 

There was strong growth in demand for our engineering software solutions in the first half, with customers increasingly seeking to use software to improve the quality, reliability and durability of their equipment and processes and shorten the time to market for key products. In January we strengthened our engineering software offering with the acquisition of ReliaSoft, a leading provider of reliability engineering software and services. Since the acquisition we have secured a number of significant contracts, notably an order worth around €600k from a major oil and gas producer in Asia Pacific for software to analyse system and field operational performance and identify opportunities to reduce planned and unplanned downtime.

 

Sales of our environmental noise monitoring services grew in the first half, driven by good growth in Europe. We continue to make progress diversifying this business away from its historical focus on airports, and during the period we won a major contract with the Italian government for exhaust monitoring in their vehicle inspection centres. We extended our relationship with AENA, the Spanish airports operator, to centralise our systems across the six airports we already serve and add new systems to further ones. In Australia, we have expanded our noise monitoring services with the Australian Department of Defence to a third military base.

 

In December 2014 we added a third operating company to this segment via the acquisition of ESG Solutions ('ESG'), a leader in the provision of microseismic monitoring equipment and analysis solutions to the unconventional oil and gas and mining sectors. The weakness in the oil and gas market experienced since last autumn is causing many unconventional oil and gas producers to delay their investment plans, which led to demand for ESG's solutions reducing as the period progressed. Nevertheless, ESG continued to secure several contract wins against its key competitors, including a multi-million dollar project in the Marcellus field in the US. We have also made good progress extending ESG's presence outside of North America, expanding ESG's resources in China and Australia and initiating the establishment of offices in the Middle East and Mexico.

 

Segment outlook

 

We expect the second half to benefit from robust market conditions in the automotive and aerospace sectors, further strong growth in engineering software and the contribution from acquisitions. Although consumer electronics has been prone to spikes in demand associated with the launch of new products, the market remains attractive and we see good opportunities for our sound quality testing applications. Whilst the microseismic monitoring market is likely to remain challenging through the remainder of 2015, the medium-term growth drivers for this business remain compelling given the need for unconventional oil and gas producers to make better use of technology and data analytics to improve productivity and profitability. Due to the uncertain nature of the outlook in certain markets, cost reduction measures have been taken in order to improve future profitability.

 

IN-LINE INSTRUMENTATION

In-line Instrumentation provides process analytical measurement, asset monitoring and online controls as well as associated consumables and services for both primary processing and the converting industries. The operating companies in this segment are Brüel & Kjær Vibro, BTG Group, NDC Technologies and Servomex.

Segment performance

	H1 2015	H1 2014	change	like-for-like change
Sales (£m)	120.5	122.7	-2%	-1%
Operating profit (£m)	13.8	17.3	-20%	-9%
Return on sales (%)	11.4	14.1	-2.7pp	-1.2pp
% of Group sales	21	23	-2pp
After sales (%)	44	44	-

 

Reported sales decreased by 2%, comprising an adverse foreign currency exchange movement of one percentage point and a LFL sales decline of 1%. This decline in LFL sales primarily reflected on-going weakness in the graphic paper and coated paperboard markets, particularly in China, offset by strong growth in both the downstream petrochemicals and wind energy markets. Operating margins for the period were down by 1.2 percentage points on a LFL basis, primarily as a consequence of an adverse mix in our pulp and paper and industrial gas businesses and negative operating leverage. 

In the energy and utilities market, sales were up strongly for the half year. This reflected good growth in two separate industries: the downstream petrochemicals market and the wind energy market. In downstream petrochemicals, there was good demand from China, where there remains a focus on the control and reduction of emissions, and from South East Asia, albeit the current uncertainty in the oil and gas market is leading to fewer large projects being progressed. We launched a major new product platform for the industrial gases market during the period, a laser gas analyser called the MiniLaser. This is more powerful, smaller and lighter than other products on the market, resulting in a significantly easier and lower-cost installation for customers. In January an oxygen variant was released to market, aimed at the petrochemicals industry, and in the second half we expect to launch an ammonia variant, targetted at the combustion and power markets.

 

Sales of wind turbine monitoring solutions to the renewables sector grew strongly, and we have now sold over 10,000 condition monitoring units to our global customer base since we began shipments 12 years ago. This success is being driven not only by increased sales to existing customers but also by significant wins with new customers. Following on from the contract win last year from EDP Renewables for the supply and retrofit installation of condition monitoring systems on wind turbines of different OEM brands, we have secured similar retrofit contracts, including multi-year service agreements, with Capstone Infrastructure in Canada and a major energy company in the US. During the period we also began offering an innovative new solution for customers, 'Condition Monitoring Systems (CMS) as a Service'. This is a complete retrofit CMS for wind turbines without customers needing to make an upfront capital investment or have in-house CMS expertise. Instead, customers lease CMS equipment from us and we then provide services such as fault detection and monitoring, diagnosis and maintenance during the duration of the contract. We also launched another innovative solution to the market, the Vibration Interface Module, a system that enables data and signals from any machine protection system to be processed, stored and analysed on a single CMS, allowing customers to view all the information about the status of their plant on one diagnostic system.

 

In the pulp and paper markets there were broadly similar trends in the first half as experienced during 2014. There was good growth from the tissue segment as more producers move to high performance creping blades and related services, and there was also growth within the pulp segment, reflecting a good reception to our new single-point control sensors, as exemplified by a significant order we received in Indonesia during the period for sensors and analysers. However, these positive trends continued to be more than offset by weak demand for coating blades in the graphic paper and coated paperboard markets, particularly in China where there remains excess capacity. Our new Phoenix coating blade technology, which provides better print quality and wear resistance than other products on the market, is gaining traction amongst our customer base.

 

Sales to the web and converting industries declined overall, primarily reflecting a lack of the large projects and orders in North America and Asia Pacific that benefitted the prior-year period, together with weaker demand across Europe. However, demand improved as the half progressed, in part reflecting the increase in new product development in 2015. For example, we launched the InControl extrusion line controller to strengthen our position in the medical tubing and automotive cable markets, and the InfraLab e-Series at-line meat analyser, which provides accurate and reliable measurement of fat, moisture, protein and collagen content in meat samples. Approximately one year after the creation of the new operating company, NDC Technologies, we have now aligned the combined sales forces around single industry verticals, which will give us more effective coverage in our markets and better support for our customers in the web, converting and metals industries.

Segment outlook

 

We are seeing good opportunities in the tissue industry for our consumable products, such as our creping blades, as well as for our process control instruments, as manufacturers continue to seek to improve their productivity. Despite the structural challenges in the graphic paper and coated paperboard markets, we expect our new products to enable us to deliver some modest growth in sales to the pulp and paper market in the second half. Demand from the energy and utilities sector is expected to remain strong, although growth rates are expected to moderate from the strong first-half level given a reduction in large projects in the downstream petrochemical industry. In the converting, web and packaging industries, we expect to see moderate but incremental benefits from the creation of single sales teams to service key industry verticals, together with the impact of new product launches. Cost reduction measures have been taken in certain businesses in order to improve future profitability.

 

INDUSTRIAL CONTROLS

 

Industrial Controls provides products and solutions that measure, monitor, control, inform, track and trace during the production process. The operating companies in this segment are Microscan, Omega Engineering and Red Lion Controls.

Segment performance

	H1 2015	H1 2014	change	like-for-like change
Sales (£m)	112.8	106.6	6%	-1%
Operating profit (£m)	20.3	20.2	1%	-7%
Return on sales (%)	18.0	19.0	-1.0pp	-1.2pp
% of Group sales	20	20	-
After sales (%)	1	1	-

 

Reported sales increased by 6%, with a favourable impact from foreign currency exchange movements of seven percentage points only partially offset by a LFL sales decline of 1%. The LFL sales decline primarily reflected a broad-based slowdown in North American industrial demand, together with the absence of major product development activity by consumer electronics customers that benefitted the prior-year period. Operating margins were down 1.2 percentage points on a LFL basis. This reflected negative operating leverage together with additional resource costs at Omega Engineering ('Omega') that were required to protect service levels during the launch of a new ERP system.

 

Investment in the internationalisation of the Omega business is delivering good results, with strong sales growth in Asia Pacific, led by Japan, where we have now been operating for over a year. Growth was also strong in Mexico and Brazil, and the expansion of Omega's European business is also progressing to plan. Omega's North American business, in contrast, faced more challenging market conditions, with a weak industrial manufacturing environment in the US during the period, as industrial production indicators fell to levels not seen since late 2013.

 

Now that this phase of Omega's geographic expansion is complete, the focus has been on enhancing Omega's digital marketing, product portfolio and business infrastructure. We launched a new mobile-compatible website for North America and established a technical learning section on all websites to enhance Omega's reputation as a technology leader. There has also been an increase in the rate of new product introductions in the period, both through private label and internal development. For example, in March we launched a major new series of temperature and process controllers, the most powerful and easy-to-use mid-range PID controller on the market. These controllers are targetted at customers in the laboratory and in factory automation and chemical industries.  After launching a new ERP system across Omega's organisation in late 2014 we went live with this system in the US, Canada and Asia Pacific in the first half. This system is now in place throughout the Omega business except in Europe and Mexico, where we expect to launch in the second half.

 

The downturn in the oil and gas market, particularly in North America, led to a decline in sales of our Graphite series of display panels to this market after a strong performance in 2014. In addition, the industrial ethernet business experienced fewer large orders from several other major industry verticals in the US, such as the automotive market, compared to the prior-year period, reflecting the increased uncertainty and broad-based decline in US industrial demand during the period. In contrast, our industrial cellular solutions continue to see good demand from the telecoms and utilities industries in North America, as well as more broadly across Europe. Following a significant order in 2014 from a major US telecoms service provider for cellular modems to enable its 'smart grid' deployment, we won a large industrial networking order during the first half from a major US utility company, also to assist in 'smart grid' deployment. During the period we enhanced our series of industrial cellular routers through the addition of SMS text messaging functionality to enable them to provide automatic alerts to operatives. In the UK a major food manufacturer has chosen Graphite display panels to improve data collection and operator productivity as part of its 'connected factory' initiatives, with the potential for this manufacturer to extend this order to its other plants outside the UK. Our Graphite display panels have now also received certification to allow them to be used in potentially hazardous environments in Europe, the Middle East, Africa and Asia Pacific, opening up opportunities in the oil and gas and mining industries outside North America for the first time.

 

After a strong finish to 2014, sales of our track, trace and control products declined in the first half, impacted by the widespread industrial slowdown in the US and by reduced demand from a major electronics customer and its supply chain, most of which is based in Asia Pacific. Notwithstanding the reduced demand relating to the timing of product cycles in electronics, underlying demand for our products in China remains strong, as more Chinese factories seek to increase the amount of automation in order to improve productivity.

 

Segment outlook

 

Progress for this segment in the second half will be largely determined by the industrial demand environment in the US, albeit we expect to see a beneficial impact from recent and upcoming new product launches and improved demand from the electronics sector. Nevertheless, we have taken cost reduction measures in certain businesses in order to improve future profitability. In the coming years the need for our customers to improve productivity and efficiency is expected to result in increased demand for factory automation and industrial networking products, particularly in China, where there is a drive to improve the return on previous capital investments. 

 

Financial Review

 

Introduction

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believes these measures enable them to assess the underlying trading performance of the businesses. Adjusted figures exclude certain non-operational items which management has defined in note 2 to the financial statements. Unless stated otherwise, figures quoted for operating profit, net interest, profit before tax, tax, earnings per share and operating cash flow are adjusted measures.

 

Reported sales in the first half increased by 4% from £539.8 million in 2014 to £563.2 million in 2015. The year-on-year contribution to sales from acquisitions was £22.9 million (+4%), and foreign exchange movements had an adverse impact of £3.2 million (-1%). Consequently, on an organic constant currency (like-for-like, 'LFL') basis, sales increased by 1% compared to the first half of 2014.

 

Reported gross margins were 0.5 percentage points lower than the prior-year period at 56.9% of sales. Excluding adverse foreign exchange movements (0.5 percentage points) and acquisitions (0.2 percentage points), LFL gross margins declined by 0.2 percentage points to 57.2%. The LFL decline reflected an adverse sales mix, primarily within the In-Line Instrumentation segment, and lower sales volumes, primarily within the Industrial Controls segment.

 

We continued to invest in our R&D programmes, with an R&D expense of £45.5 million for the period, representing growth of 5% on a LFL basis after adjusting for the £1.7 million R&D-related government grant that benefitted the prior-year period.

 

The combination of the low level of sales growth, the sustained investment in R&D and overhead cost inflation resulted in operating profit decreasing by 4% from £70.1 million to £67.4 million. Acquisitions contributed £4.2 million (+6%) to operating profit, whilst foreign currency exchange movements had an adverse impact of £1.4 million (-2%), with the result that LFL operating profit declined by 8% for the period. The operating margin decreased by 1.0 percentage point from 13.0% to 12.0%, and decreased by 1.1 percentage point to 11.9% on a LFL basis. Going forward, our key exchange rate sensitivities on a translation basis are Sterling:Euro and Sterling:US Dollar. For 2015, a 1 cent movement in the Sterling:Euro exchange rate is estimated to impact sales by £2.9 million and operating profit by £0.6 million, whilst a 1 cent movement in the Sterling:US Dollar exchange rate is estimated to impact sales by £2.8 million and operating profit by £0.4 million.

 

Given the weak trading conditions, we initiated a number of cost reduction measures, including selective restructuring in certain businesses, in order to improve future profitability. These measures resulted in a net cost of £0.4 million being charged against operating profit in the first half, with an additional net cost of around £3 million expected to be incurred in the second half. The annualised benefits arising from these measures are anticipated to be around £6 million.

 

Net finance costs decreased by £0.3 million from £2.8 million to £2.5 million. Although average net debt for the period was £51 million higher than the prior-year period, primarily as a result of the acquisitions made, net finance costs benefitted from a reduction in the weighted average interest rate on debt following the re-financing of the revolving credit facility in October 2014.

 

Profit before tax decreased by 4% from £67.3 million to £64.9 million. Based on the forecast for the full year, the effective tax rate for the half year is estimated at 23.0% (H1 2014: 23.5%). The combined effect of the lower operating profit, offset by the reduced interest and tax charges, resulted in earnings per share decreasing by 3% from 43.4 pence per share to 42.0 pence per share. 

 

Operating cash flow of £57.3 million (H1 2014: £60.3 million) represents an operating cash flow conversion rate of 85% (H1 2014: 86%). Net debt increased by £23.1 million (H1 2014: increase of £3.3 million) from £125.6 million at 31 December 2014 to £148.7 million at 30 June 2015 impacted by the acquisitions of ReliaSoft and Sunway Scientific Corporation, the payment of the 2014 final dividend and tax cash outflows.

 

Principal Risks and Uncertainties

The Group has in place processes for identifying, evaluating and managing the key risks which could have an impact upon the Group's performance.

The current risks, together with a description of how they relate to the Group's strategy and the approach to managing them, are set out in the 2014 Annual Report which is available on the Group's website at www.spectris.com. The Group has reviewed these risks and concluded that they will continue to remain relevant for the second half of the financial year. The potential impact of these risks on our strategy and financial performance, together with details of our specific mitigation actions, are set out in the 2014 Annual Report.

 

They comprise:

 

-    New product development

-    Intellectual property

-    Laws and regulations

-    Political and economic risks

-    Acquisitions

-    Competitive activity

-    Fluctuations in exchange rates

-    Supply chain dependencies and disruption

-    Information security

 

In addition, during the first half of the financial year the Group announced an evolution of its strategy, as described on page 4 of this report. A key component of the updated strategy relates to the Group's desire to increase the proportion of services, software and solutions in our sales mix. The Group considers that, as with any transition of this kind, there is necessarily inherent risk associated with the successful execution and delivery of the updated strategy. More details on this potential risk, and the mitigating actions put in place by the Group, will be given in the 2015 Annual Report.

 

The Group continues to monitor and control its exposure to those countries where continuing economic uncertainties exist and, in particular, we are carefully monitoring developments in Greece and the potential effect of Greece leaving the Eurozone. We believe that the broad spread of markets in which we operate substantially limits the risk associated with additional instability in any given territory. Whilst the Group had sales into Europe of £173 million in H1 2015 (31% of total group sales) sales into Greece represented approximately 0.2% (£0.4 million) of total sales in the period. The Group does not have any significant operations or supply chain dependencies within Greece, nor does it have any significant liquidity or funding risk in relation to this country.

 

Clive Watson

Group Finance Director

 

 

Responsibility statement of the Directors in respect of the Interim report

 

We confirm that to the best of our knowledge:

·     the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·     the interim management report includes a fair review of the information required by:

a)          DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)          DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

 

The Directors of Spectris plc are as listed in the 2014 Annual Report and Accounts with the exception of John Warren who retired as a Non-Executive Director after the Annual General Meeting on 24 April 2015.

 

By order of the Board

Dr John Hughes CBE

Chairman

30 July 2015

 

 

INDEPENDENT REVIEW REPORT TO SPECTRIS PLC 

Introduction 

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015 which comprises the Condensed Consolidated Statement of Income, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Cash Flows and the related explanatory notes.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").  Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 

Richard Broadbelt

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London

E14 5GL

 

30 July 2015

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2015

 

 

		2015	2014	2014
		Half year	Half year	Full year
	Note	£m	£m	£m
Continuing operations
Revenue	3	563.2	539.8	1,173.7
Cost of sales		(243.0)	(229.9)	(497.3)
Gross profit		320.2	309.9	676.4
Indirect production and engineering expenses		(49.7)	(46.9)	(93.2)
Sales and marketing expenses		(140.8)	(132.7)	(271.3)
Administrative expenses		(80.3)	(72.1)	(143.6)
Operating profit before acquisition-related items		67.4	70.1	198.1
Net acquisition-related costs and fair value adjustments	2	(1.4)	(0.8)	(3.9)
Amortisation of acquisition-related intangible assets	2	(16.6)	(11.1)	(25.9)
Operating profit	2,3	49.4	58.2	168.3
Profit on disposal of businesses		-	-	2.4
Financial income	4	2.8	3.3	6.3
Finance costs	4	(3.0)	(2.9)	(5.9)
Profit before tax		49.2	58.6	171.1
Taxation - UK	5	(1.1)	(1.4)	(2.0)
Taxation - Overseas	5	(7.7)	(10.4)	(34.0)
Profit after tax for the period from continuing operations attributable to owners of the Parent Company		40.4	46.8	135.1
Basic earnings per share (pence)	6	33.9p	39.4p	113.7p
Diluted earnings per share (pence)	6	33.9p	39.3p	113.4p
Dividends proposed for the period (per share)	7	17.3p	16.0p	46.5p
Dividends paid during the period (per share)	7	30.5p	28.0p	44.0p

 

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Reconciliations showing how the adjusted performance measures are derived from those reported under adopted IFRS are set out in Note 2.

CONDENSED Consolidated statement OF COMPREHENSIVE INCOME

For the six months ended 30 June 2015

 

 

 

		2015	2014	2014
		Half year	Half year	Full year
		£m	£m	£m
Profit for the period attributable to owners of the Parent Company		40.4	46.8	135.1
Other comprehensive income:
Items that will not be reclassified to the Consolidated Income Statement:
Re-measurement of net defined benefit liability, net of foreign exchange		(5.5)	(0.7)	(5.6)
Tax on items above		1.3	0.3	1.5
		(4.2)	(0.4)	(4.1)
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		2.7	(2.1)	(3.3)
Foreign exchange movements on translation of overseas operations		(36.2)	(26.7)	(5.5)
Tax on items above		(0.5)	0.4	0.5
		(34.0)	(28.4)	(8.3)
Total comprehensive income for the period attributable to owners of the Parent Company		2.2	18.0	122.7

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2015

 

 

 

	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 2015	6.2	231.4	643.1	34.9	(3.0)	3.1	0.3	916.0
Profit for the period	-	-	40.4	-	-	-	-	40.4
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	2.2	-	-	2.2
Foreign exchange movements on translation of overseas operations	-	-	-	(36.2)	-	-	-	(36.2)
Re-measurement of net defined benefit liability, net of foreign exchange and tax	-	-	(4.2)	-	-	-	-	(4.2)
Total comprehensive income for the period	-	-	36.2	(36.2)	2.2	-	-	2.2
Transactions with owners recorded directly in equity:	-	-	-	-	-	-	-	-
Equity dividends paid by the Company	-	-	(36.3)	-	-	-	-	(36.3)
Share-based payments, net of tax	-	-	2.1	-	-	-	-	2.1
Share options exercised from own shares (treasury) purchased	-	-	0.2	-	-	-	-	0.2
Balance at 30 June 2015	6.2	231.4	645.3	(1.3)	(0.8)	3.1	0.3	884.2

 

 

 

 

 

	Share capital	Share premium	Retained earnings	Translation reserve	Hedging reserve	Merger reserve	Capital redemption reserve	Total equity
For the six months ended 30 June 2014	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2014	6.2	231.4	562.9	40.4	(0.2)	3.1	0.3	844.1
Profit for the period	-	-	46.8	-	-	-	-	46.8
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	(1.7)	-	-	(1.7)
Foreign exchange movements on translation of overseas operations	-	-	-	(26.7)	-	-	-	(26.7)
Re-measurement of net defined benefit liability, net of foreign exchange and tax	-	-	(0.4)	-	-	-	-	(0.4)
Total comprehensive income for the period	-	-	46.4	(26.7)	(1.7)	-	-	18.0
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company	-	-	(33.3)	-	-	-	-	(33.3)
Share-based payments, net of tax	-	-	1.8	-	-	-	-	1.8
Balance at 30 June 2014	6.2	231.4	577.8	13.7	(1.9)	3.1	0.3	830.6

 

 

	Share capital	Share premium	Retained earnings	Translation reserve	Hedging reserve	Merger reserve	Capital redemption reserve	Total equity
For the year ended 31 December 2014	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2014	6.2	231.4	562.9	40.4	(0.2)	3.1	0.3	844.1
Profit for the year	-	-	135.1	-	-	-	-	135.1
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	(2.8)	-	-	(2.8)
Foreign exchange movements on translation of overseas operations	-	-	-	(5.5)	-	-	-	(5.5)
Re-measurement of net defined benefit liability, net of foreign exchange and tax	-	-	(4.1)	-	-	-	-	(4.1)
Total comprehensive income for the period	-	-	131.0	(5.5)	(2.8)	-	-	122.7
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company	-	-	(52.3)	-	-	-	-	(52.3)
Share-based payments, net of tax	-	-	1.2	-	-	-	-	1.2
Share options exercised from own shares (treasury) purchased	-	-	0.3	-	-	-	-	0.3
Balance at 31 December 2014	6.2	231.4	643.1	34.9	(3.0)	3.1	0.3	916.0

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2015

 

 

CONDENSED Consolidated statement OF cash flowS

For the six months ended 30 June 2015

 

 

 

 

NOTES TO THE INTERIM FINANCIAL STATEMENTS

 

1.  Basis of Preparation and Principal Accounting Policies

 

a)  Basis of accounting

The Condensed Consolidated Interim Financial Statements of the Company for the six months ended
30 June 2015 comprise the Company and its subsidiaries, together referred to as the 'Group'. These Condensed Consolidated Interim Financial Statements are presented in millions of Sterling rounded to the nearest one decimal place. The Consolidated Financial Statements of the Group for the year ended 31 December 2014 are available upon request from the Company's registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD, and on the Company's website at www.spectris.com.

 

These Condensed Consolidated Interim Financial Statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting', as adopted by the European Union. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 31 December 2014.

 

The Condensed Consolidated Interim Financial Statements for the six-month period ended 30 June 2015 are unaudited but have been subject to an independent review by the auditor. They do not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2014 are derived from the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The Report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

 

The Group's financial risk management objectives and policies are consistent with those disclosed in the Consolidated Financial Statements for the year ended 31 December 2014.

 

These Condensed Consolidated Interim Financial Statements were approved by the Board of Directors on 30 July 2015.

 

b)  Going concern

Having made enquiries and reviewed the Group's plans and available financial facilities, the Board has a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. For this reason, it continues to adopt the going concern basis in preparing the Condensed Consolidated Interim Financial Statements. There are no key sensitivities identified in relation to this conclusion.

 

c)  Seasonality of operations

As in prior years, the Group's revenue and operating profits are expected to be weighted towards the second half of the year.

 

d)  New standards and interpretations not yet adopted

There are a number of new standards, amendments to standards and interpretations that are not yet effective for the period ended 30 June 2015 and have, therefore, not been applied in preparing these Condensed Consolidated Interim Financial Statements. IFRS 15 'Revenue from contracts with customers' is effective for the 31 December 2018 year end. The adoption of this standard is not expected to have a significant impact on the Consolidated Income Statement or Consolidated Statement of Financial Position.

 

e)  Significant accounting judgements and estimates

The preparation of Interim Financial Statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements for the year ended 31 December 2014.

 

The Directors have considered the facts and circumstances as at 30 June 2015 and concluded that there are no indicators of impairments that require an impairment review to be undertaken on goodwill at the interim statement of financial position date. The annual impairment review will be undertaken later in 2015 consistent with the timing in previous years.

 

f)  Principal accounting policies

The accounting policies applied by the Group in these Condensed Consolidated Interim Financial Statements are the same as those applied by the Group in its Consolidated Financial Statements for the year ended 31 December 2014.

 

2.  Adjusted Performance Measures

 

Spectris plc uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believe these measures enable them to assess the underlying trading performance of the businesses. Adjusted figures exclude certain non-operational items which management has defined as amortisation and impairment of acquisition-related intangible assets, acquisition-related costs and contingent consideration fair value adjustments, acquisition-related fair value adjustments, profits or losses on termination or disposal of businesses, unrealised changes in the fair value of financial instruments, gains or losses on retranslation of short-term inter-company loan balances, unwinding of the discount factor on deferred  and contingent consideration, related tax effects and other tax items which do not form part of the underlying tax rate. 

 

The adjusted performance measures are derived from the reported figures under adopted IFRS as follows:

 

			2015	2014	2014
			Half year	Half year	Full year
Adjusted operating profit			£m	£m	£m
Operating profit as reported under adopted IFRS			49.4	58.2	168.3
Net acquisition-related costs and fair value adjustments			1.4	0.8	3.9
Amortisation of acquisition-related intangible assets			16.6	11.1	25.9
Adjusted operating profit			67.4	70.1	198.1

 

 

						2015
	Materials	Test and	In-line	Industrial		Half year
	Analysis	Measurement	Instrumentation	Controls		Total
Adjusted operating profit by segment - June 2015	£m	£m	£m	£m		£m
Operating profit as reported under adopted IFRS	9.7	12.9	12.5		14.3	49.4
Net acquisition-related costs and fair value adjustments	0.3	0.5	0.1		0.5	1.4
Amortisation of acquisition-related intangible assets	4.6	5.3	1.2		5.5	16.6
Adjusted operating profit: segment result	14.6	18.7	13.8		20.3	67.4

 

 

					2014
	Materials	Test and	In-line	Industrial	Half year
	Analysis	Measurement	Instrumentation	Controls	Total
Adjusted operating profit by segment - 2014 June	£m	£m	£m	£m	£m
Operating profit as reported under adopted IFRS	12.1	16.5	16.1	13.5	58.2
Net acquisition-related costs and fair value adjustments	(0.8)	-	-	1.6	0.8
Amortisation of acquisition-related intangible assets	1.9	2.9	1.2	5.1	11.1
Adjusted operating profit: segment result	13.2	19.4	17.3	20.2	70.1

 

 

 

 

 

 

Net acquisition-related costs and fair value adjustments comprises of acquisition costs of £1.0m (30 June 2014: £0.7m; 31 December 2014: £3.9m) that have been recognised in the Condensed Consolidated Income Statement under IFRS 3 (Revised) 'Business Combinations', fair value adjustments to inventory of £0.4m (30 June 2014: £nil: 31 December 2014: £0.6m) and other fair value adjustments of £nil (30 June 2014: £0.1m; 31 December 2014: £0.6m credit).  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 £1.7m (30 June 2014: £0.7m; 31 December 2014: £2.5m) have been excluded from the adjusted operating cash flow.

 

 

					2015
	Materials	Test and	In-line	Industrial	Half year
	Analysis	Measurement	Instrumentation	Controls	Total
Return on sales by segment - June 2015	%	%	%	%	%
Using operating profit as reported under adopted IFRS	5.9	7.9	10.4	12.7	8.8
Using adjusted operating profit	8.8	11.4	11.4	18.0	12.0

 

 

					2014
	Materials	Test and	In-line	Industrial	Half year
	Analysis	Measurement	Instrumentation	Controls	Total
Return on sales by segment - June 2014	%	%	%	%	%
Using operating profit as reported under adopted IFRS	8.0	10.3	13.1	12.7	10.8
Using adjusted operating profit	8.7	12.1	14.1	19.0	13.0

 

 

					2014
	Materials	Test and	In-line	Industrial	Full year
	Analysis	Measurement	Instrumentation	Controls	Total
Return on sales by segment - December 2014	%	%	%	%	%
Using operating profit as reported under adopted IFRS	13.8	13.3	17.4	13.1	14.3
Using adjusted operating profit	15.3	15.2	18.4	20.2	16.9

 

 

 

 

			2015	2014	2014
			Half year	Half year	Full year
Reconciliation to adjusted profit before tax and adjusted operating profit			£m	£m	£m
Profit before tax as reported under adopted IFRS			49.2	58.6	171.1
Add/(deduct):
Net acquisition-related costs and fair value adjustments			1.4	0.8	3.9
Amortisation of acquisition-related intangible assets			16.6	11.1	25.9
Profit on disposal of businesses			-	-	(2.4)
Net gain on retranslation of short-term inter-company loan balances			(2.6)	(3.2)	(6.0)
Unwinding of discount factor on deferred and contingent consideration			0.3	-	-
Adjusted profit before tax			64.9	67.3	192.5
Adjusted net finance costs (see below)			2.5	2.8	5.6
Adjusted operating profit			67.4	70.1	198.1

 

 

			2015	2014	2014
			Half year	Half year	Full year
Adjusted net finance costs			£m	£m	£m
Net finance (costs)/income as reported under adopted IFRS			(0.2)	0.4	0.4
Net gain on retranslation of short-term inter-company loan balances			(2.6)	(3.2)	(6.0)
Unwinding of discount factor on deferred and contingent consideration			0.3	-	-
Adjusted net finance costs			(2.5)	(2.8)	(5.6)

 

 

			2015	2014	2014
			Half year	Half year	Full year
Adjusted operating cash flow			£m	£m	£m
Net cash from operating activities under adopted IFRS			52.9	51.6	155.2
Acquisition-related costs paid			1.7	0.7	2.5
Net income taxes paid			14.4	20.2	43.0
Purchase of property, plant and equipment and software			(11.9)	(12.3)	(27.4)
Proceeds from sale of property, plant and equipment			0.2	0.1	2.4
Adjusted operating cash flow			57.3	60.3	175.7

 

 

 

			2015	2014	2014
			Half year	Half year	Full year
Adjusted earnings per share			£m	£m	£m
Profit after tax as reported under adopted IFRS			40.4	46.8	135.1
Adjusted for:
Net acquisition-related costs and fair value adjustments			1.4	0.8	3.9
Amortisation of acquisition-related intangible assets			16.6	11.1	25.9
Profit on disposal of businesses			-	-	(2.4)
Net gain on retranslation of short-term inter-company loan balances			(2.6)	(3.2)	(6.0)
Unwinding of discount factor on deferred and contingent consideration			0.3	-	-
Tax effect of the above and other non-recurring items			(6.1)	(4.0)	(8.7)
Adjusted earnings			50.0	51.5	147.8
Weighted average number of shares outstanding (millions)			119.0	118.7	118.8
Adjusted earnings per share (pence)			42.0	43.4	124.4

 

 

 

 

			2015	2014	2014
			Half year	Half year	Full year
Adjusted diluted earnings per share (pence)			£m	£m	£m
Diluted weighted average number of shares outstanding (millions)			119.3	119.1	119.1
Adjusted diluted earnings per share (pence)			41.9	43.2	124.1

 

Basic and diluted earnings per share in accordance with IAS 33 'Earnings Per Share' are disclosed in note 6.

 

 

			2015	2014	2014
			Half year	Half year	Full year
Analysis of net debt for management purposes			£m	£m	£m
Bank overdrafts			10.7	1.0	2.5
Bank loans - unsecured			170.4	132.9	157.9
Total borrowings			181.1	133.9	160.4
Cash balances			(32.4)	(26.5)	(34.8)
Net debt			148.7	107.4	125.6

 

 

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 focussed towards 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 allocation to each segment and to assess performance.  The segment results include an allocation of head office expenses. The following summary describes the operations in each of the Group's reportable segments.

 

·     Materials Analysis provides products and services that enable customers to determine structure, composition, quantity and quality of particles and materials, during their research and product development processes, when assessing materials before production or during the manufacturing process. The operating companies in this segment are Malvern Instruments, PANalytical and Particle Measuring Systems.

·     Test and Measurement supplies test, measurement and analysis equipment, software and services for product design optimisation, manufacturing control, microseismic monitoring and environmental noise monitoring systems. The operating companies in this segment are Brüel & Kjær Sound & Vibration, ESG Solutions and HBM.

·     In-line Instrumentation provides process analytical measurement, asset monitoring and online controls as well as associated consumables and services for both primary processing and the converting industries. The operating companies in this segment are Brüel & Kjær Vibro, BTG Group, NDC Technologies and Servomex.

·     Industrial Controls provides products and solutions that measure, monitor, control, inform, track and trace during the production process. The operating companies in this segment are Microscan, Omega Engineering and Red Lion Controls.

 

 

 

 

 

 

 

 

 

 

* Not allocated to reportable segments.

 

Reportable segment profit is consistent with that presented to the Chief Operating Decision Maker.  Inter-segment pricing is on an arm's length basis.  Segments are presented on the basis of actual inter-segment charges made.  A table of segmental assets and liabilities is not disclosed as there are no material changes compared to 31 December 2014.

 

Geographical segments

 

The Group's operating segments are each located in several geographical locations and sell on to external customers in all parts of the world.

No individual country amounts to more than 3% of turnover, other than those noted below.

The following is an analysis of revenue by geographical destination:

 

 

4.  Financial Income and Finance Costs

 

 

Net interest costs of £2.4m (30 June 2014: £2.8m; 31 December 2014: £5.4m) for the purposes of the calculation of interest cover comprise of bank interest receivable of £0.2m (30 June 2014: £0.1m;
31 December 2014: £0.3m), and interest payable on loans and overdrafts of £2.6m (30 June 2014: £2.9m; 31 December 2014: £5.7m).

 

 

5.  Tax on Profit on Ordinary Activities

 

The income tax charge for the six months to 30 June 2015 is based on an estimate of the effective rate of taxation for the current year. The effective rate of taxation applied to adjusted profit before tax for the period is 23.0% (30 June 2014: 23.5%; Year ended 31 December 2014: 23.2%).  A reconciliation of the tax charge on adjusted profit to the actual tax charge is presented below.

 

 

 

6.  Earnings per Share

 

Earnings per share and diluted earnings per share are calculated as follows:

 

 

Basic earnings per share amounts are calculated by dividing net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period (excluding treasury shares).

 

The calculation of diluted earnings per share of 33.9p (30 June 2014: 39.3p; 31 December 2014: 113.4p) is based on the Group profit after tax of £40.4m (30 June 2014: £46.8m; 31 December 2014: £135.1m) and on the diluted weighted average number of 5p ordinary shares in issue during the period of 119.3 million (30 June 2014: 119.1 million; 31 December 2014: 119.1 million).

 

7.  Dividends

 

The final 2014 dividend of 30.5p per share (2013 final dividend: 28.0p) was paid on 26 June 2015 to ordinary shareholders on the register at the close of business on 29 May 2015.

 

The interim 2015 dividend of 17.3p per share (2014 interim dividend: 16.0p) will be payable on 13 November 2015 to ordinary shareholders on the register at the close of business on 16 October 2015.

 

The estimated interim dividend to be paid is £20.6m and has not been recognised in these accounts.

 

 

8.  Fair Value of Financial Instruments

 

 

 

 

 

 

Included within the above carrying amount of financial instruments, is an amount of £11.9m (30 June 2014: £0.3m, 31 December 2014: £12.2m) relating to deferred and contingent consideration arising from acquisitions, of which £0.4m (30 June 2014: £nil, 31 December 2014: £11.6m) has arisen on acquisitions completed during the period and £0.3m (30 June 2014: £nil, 31 December 2014: £nil) relates to the unwinding of the discount factor on deferred and contingent consideration and has been charged to the Condensed Consolidated Income Statement during the period. £0.3m (30 June 2014: £0.2m, 31 December 2014: £0.3m) has been paid in respect of prior years acquisitions and a movement of £0.7m (30 June 2014: £0.1m, 31 December 2014: £0.3m) relates to foreign exchange.

 

There is no difference in the valuation techniques used or the fair value hierarchy under IFRS 7 'Financial Instruments: Disclosures' from that disclosed in the consolidated financial statements for the year ended 31 December 2014.

 

 

9.  Acquisitions

 

On 22 January 2015, the Group acquired 100% of the share capital of ReliaSoft Corporation, a company based in the USA, for a total consideration of £30.4m (£28.3m net of cash acquired). 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: contractual rights, customer-related (customer relations), trade names, technology and goodwill of £0.4m, £2.8m, £1.0m, £11.0m and £18.0m respectively. The company is a leading provider of reliability engineering software, education, consulting and related services to product manufacturers and maintenance organisations around the world. The goodwill arising is considered to represent the value of the acquired workforce, extension of the Group's product offering leveraging its stronger position in the reliability and durability markets, together with sharing capabilities and technologies in value added software solutions. Goodwill includes an amount of £5.6m representing the requirement to recognise a deferred tax liability on the fair value adjustments. The business is being integrated into the Test and Measurement segment.

 

On 2 March 2015 the Group acquired the trade and certain assets of Sunway Scientific Corporation, a Taiwanese distributor, for a total consideration of £2.2m including £0.4m contingent consideration which is based on 10% of annual sales over a threshold over the following three years, subject to a total cap of £1.9m on the total deferred and contingent consideration payable. The excess of the fair value of the consideration paid over the net fair value of tangible assets acquired is represented by the following intangible assets: customer-related, contractual rights and goodwill of £1.3m, £0.4m and £0.6m respectively. The goodwill arising is attributable to expected opportunities that will be generated from direct access to the Taiwanese market and benefits arising from utilising combined sales and support channels. Goodwill includes an amount of £0.2m representing the requirement to recognise a deferred tax liability on the fair value adjustments. The business is being integrated into the Materials Analysis segment.

 

The revenue and operating profit contribution from the acquisitions in the period to the Group's results for the period were £4.3m and £1.2m, respectively. Group revenue and operating profit would have been £564.4m and £49.5m (adjusted operating profit: £67.8m), respectively, had each of these acquisitions taken place on the first day of the financial year.

 

The assets and liabilities acquired during the period, together with the aggregate purchase consideration, are summarised below.  The fair values disclosed are provisional, reflecting the timing of the acquisition, and will be finalised within 12 months of the acquisition date.

 

			Book value	Adjustments	2015 Half year Fair value
Net assets acquired			£m	£m	£m
Intangible fixed assets			0.2	16.7	16.9
Tangible fixed assets			0.7	(0.1)	0.6
Deferred tax asset			0.6	-	0.6
Inventories			0.1	-	0.1
Trade and other receivables			1.6	-	1.6
Trade and other payables			(2.5)	0.6	(1.9)
Provisions			-	(0.2)	(0.2)
Deferred tax liabilities			-	(5.8)	(5.8)
Cash			2.1	-	2.1
Net assets acquired			2.8	11.2	14.0
Goodwill					18.6
Total cash paid					32.6
Total consideration					32.6
Adjustment for cash acquired					(2.1)
Net consideration in respect of 2015 acquisitions					30.5
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2015 acquisitions					32.6
Adjustment for cash acquired on 2015 acquisitions					(2.1)
Deferred and contingent consideration on 2015 acquisitions to be paid in future years					(0.4)
Cash paid in 2015 in respect of 2015 acquisitions					30.1
Acquisitions prior to 2015
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2014					0.3
Cash paid in 2015 in respect of prior years' acquisitions					0.3
Net cash outflow relating to acquisitions for the period					30.4

 

During 2014, the Group acquired the following businesses:

 

·     On 16 June 2014, the Group acquired the trade and certain assets of La Corporation Scientifique Claisse, a company based in Canada, which extended the Group's capabilities in sample preparation for atomic spectroscopy, including x-ray analysis.

·     On 22 July 2014, the Group acquired the trade and certain assets of Microcal, a US Business, which extended the Group's capabilities in life science analytical solutions.

·     On 23 July 2014, the Group acquired the trade and certain assets of Affinity Biosensors LLC, a US business, which extends the Group's capabilities in particle measurement within the life science sector.

·     On 4 September 2014, the Group acquired the trade and certain assets of Sudo Premium Engineering Company, a South Korean distributor.

·     On 1 October 2014, the Group acquired 100% of the share capital of Fibersensing-Sistemas Avancados de Monitorizacao S.A., a company based in Portugal, which extends the Group's capabilities in Fiber Bragg Grating measurement and monitoring systems for critical physical assets.

·     On 10 December 2014, the Group acquired 100% of the share capital of Engineering Seismology Group, a company based in Canada, which allows the Group to provide microseismic monitoring equipment and analysis solutions primarily to the oil, gas and mining industries.

 

10.  Treasury Shares

 

At 30 June 2015, the Group held 5,968,471 treasury shares (30 June 2014: 6,133,017; 31 December 2014: 6,054,835). During the period 86,364 of these shares were issued to satisfy options exercised by employees which were granted under the Group's share schemes (30 June 2014: 211,237; 31 December 2014: 289,419). No shares were repurchased by the Group during the period (30 June 2014: nil; 31 December 2014: nil) and no shares were cancelled during the period (30 June 2014: nil; 31 December 2014: nil).

 

11.  Related Parties

 

Key management personnel are defined for the purpose of IAS 24 'Related Party Disclosures' as members of the Board of Directors. It is the Board of Directors who have responsibility for planning, directing and controlling the activities of the Group.  The latest details of Directors' remuneration are included in the Directors' Remuneration Report in the 2014 Annual Reports and Accounts, which is available upon request from the Company's registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD, and on the Company's website at www.spectris.com.