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The directors present their report and accounts for the year ended 31 December 2005.
Spectris is engaged in the development and marketing of precision instrumentation and controls. For 2005 reporting purposes, the businesses were grouped into three sectors: electronic controls, in-line instrumentation and process technology. Further details of the trading companies can be found in the Chairman's and Chief Executive's review. Developments in the group's business activities are discussed in the Chairman's and Chief Executive's review and financial review.
During the year, a small, bolt-on acquisition was made, for which the consideration was £2.5 million, including expenses.
In February 2006, the company entered into an option agreement to sell the Arcom business to Eurotech S.p.A. Eurotech paid US$2 million in consideration for the option. Should the acquisition complete the total consideration (including the US$2 million already received) will be US$26 million.
During the year the company sold its remaining equity interest in Luxtron Corporation for £1.7 million net of legal expenses.
The issued share capital at the year end consisted of 124,624,405 5p ordinary shares.
At the 2006 Annual General Meeting resolutions will be proposed for the renewal of the authorities granted to the directors to allot shares, to allot shares on a non pre-emptive basis for cash and to purchase the company's own shares (either to be cancelled or to be held in treasury), all within specified limits.
At 7 March 2006 interests notified to the company in accordance with Part VI of the Companies Act 1985 comprised:
Aegon Asset Management
5,234,182 shares (4.20% material interest)
Standard Life Investments
4,940,303 shares (3.96% material interest)
Liberty Wanger Asset Management LP
4,120,000 shares (3.31% material interest)
Legal & General Investment Management Limited
4,088,072 shares (3.28% material interest)
Prudential plc
3,989,203 shares (3.20% material interest)
Results for the group are set out in the consolidated income statement and in the supporting notes. A final dividend of 11.2p per ordinary share is proposed for the year to 31 December 2005 (2004: 10.25p).With the interim dividend, this makes a total for the year of 15.8p (2004: 14.5p). The final dividend will be paid on 23 June 2006 to shareholders on the register on 2 June 2006.
The terms of the Spectris plc Employee Benefit Trust provide that dividends payable on shares held within the Trust are waived to 0.01p.
Expenditure committed to research and development is focused on new product development, applications engineering and process integration. Costs are expensed as incurred, except where the expenditure meets certain strict criteria for capitalisation. In the year to 31 December 2005, amounts expensed totalled £44.9 million (2004: £43.4 million), and no expenditure met the criteria for capitalisation (2004: £nil).
Whilst the market values of some properties differ from book values, the directors believe that the differences are not material.
The group's policy on payment of suppliers is to ensure that terms of payment accord with contractual and legal obligations. The company had £0.1 million of trade creditors at the year end (2004: £nil).
The directors of the company are named in the Board of directors. John O'Higgins and John Warren were appointed to the Board on 10 January 2006 and 7 March 2006 respectively. Hans Nilsson resigned from the Board on 25 May 2005. Martin Lamb and Leo Murray will retire from the Board following the 2006 AGM.
John O'Higgins and John Warren, having been appointed since the 2005 AGM, retire from the Board under the terms of the Articles of Association and, being eligible, offer themselves for election. All other directors of the company were either appointed or re-appointed at the 2004 or 2005 AGMs. Therefore, in accordance with Article 106 of the company's Articles of Association, approved at the 2005 AGM, no director is required to submit themselves for re-election at the 2006 AGM.
The directors' total remuneration for the year and their interests in the shares of the company and its subsidiaries at 31 December 2005 are disclosed in the Directors' Remuneration Report.
Separate resolutions to re-appoint KPMG Audit Plc as auditors and to authorise the directors to agree their remuneration will be proposed at the Annual General Meeting.
The Notice of Annual General Meeting to be held at the company's offices on Wednesday 17 May 2006 at 11.30 a.m. is contained in a separate letter from the Chairman accompanying this report.
Combined Code statement of compliance
Spectris plc is subject to the Combined Code on Corporate
Governance ("the Combined Code") that is appended to the
Listing Rules of the UK Listing Authority. The Combined
Code sets out principles and provisions relating to the good
governance of companies.
Corporate governance has been and remains the responsibility of the whole Board. This statement describes how the company applied the principles and complied with the provisions of the Combined Code during 2005.
The Board considers that it was throughout the year and continues to be in full compliance with the provisions set out in Section 1 of the Combined Code, save that:
Board composition and procedures
The Board meets formally around nine times each year to consider developments in relation to the company's strategy
and long-term objectives and to review trading results and
operational and business issues. In particular it deals with
those matters reserved to it for decision, including the
acquisition and disposal of businesses, major capital
expenditure, the appointment and, where necessary, removal
of directors and Board and senior management succession
planning. Usually, two meetings each year are held at
operating locations and encompass a detailed review of the
relevant business. Operational decisions are delegated by the
Board to senior management at trading company level over
which the Business Group Directors exercise supervision.
All directors receive detailed progress reports one week prior
to each Board meeting.
The Board currently comprises the Chairman, four executive directors and five non-executive directors. The Board considers all its non-executive directors (Andrew Given,Martin Lamb, Leo Murray, Anthony Reading and John Warren) to be independent. In normal circumstances, the positions of Chairman and Chief Executive, and that of senior independent director, are held by separate individuals and the Board has adopted written profiles for each of these. The non-executive directors have all had senior experience in other organisations and offer independent judgement on Board matters. The Chairman's other significant interests are as a non-executive director of Smaller Companies Value Trust plc and certain private companies. The Board believes that the Chairman's obligations to the company are unaffected by these directorships.
There are procedures for individual Board members to receive induction and training as appropriate and to solicit independent professional advice at the group's expense where specific expertise is required in the course of exercising their duties. All directors have access to the company secretary, who is responsible for ensuring compliance with appropriate statutes and regulations.
All directors are subject to re-election by shareholders at the first AGM after their appointment and thereafter at intervals of no more than three years.
The Board delegates specific responsibilities to Board committees, notably the nomination, remuneration and audit committees. The terms of reference of these committees are published on the company's website and the following additional documents are available to shareholders on application to the company secretary:
Board and committee meeting attendance 2005
| Board | Remuneration committee |
Audit committee |
Nomination committee |
|
|---|---|---|---|---|
| Total meetings during year | 13 | 9 | 3 | 1 |
| J W Poulter (Chairman) | 13 | N/A | 2 | 1 |
| A F Given (senior independent director) | 11 | 8 | 3 | 1 |
| M J Lamb | 11 | 8 | 3 | N/A |
| L G Murray | 10 | 9 | 3 | N/A |
| A J Reading | 12 | 9 | 3 | N/A |
| S Hare | 12 | N/A | N/A | N/A |
| S C Harris | 13 | N/A | N/A | N/A |
| J C Webster | 13 | N/A | N/A | N/A |
| H D Nilsson | 6 | N/A | N/A | N/A |
| H D Nilsson held office for part of the year only and attended all of the Board meetings he was eligible to attend. Mr Poulter attended all of the audit committee meetings he was eligible to attend before stepping down from that committee following the 2005 AGM. | ||||
Board appointments and performance evaluation
The nomination committee consists of the Chairman, the
senior independent director and the Chief Executive and is
chaired by the Chairman, save in the event of discussions
relating to his succession when the senior independent
director would take the chair.
Following a decision of the Board that the appointment of a new director is appropriate, the duty of the committee is to present for Board consideration suitably qualified candidate(s). In making such recommendations, the committee evaluates the balance of skills, knowledge and experience on the Board and develops a description of the role and required capabilities. Candidates are then identified for interview, external search consultants being engaged as part of this process. The committee also makes recommendations to the Board regarding the re-election and/or re-appointment of any director. Similar selection processes would apply for the appointment of a successor chairman.
The nomination committee meets as the need arises. Its terms of reference can be found on the company's website.
The operation of the Board and its committees is evaluated by the Board as a whole annually. The executive directors' and company secretary's performances are appraised annually against objectives established for the prior year. The contributions of the Chairman and non-executive directors are reviewed in advance of the conclusion of their initial three-year term, by the senior independent director and the Chairman respectively, prior to their being proposed to shareholders for re-election. Additionally, the Chairman holds periodic meetings with the non-executive directors only and, led by the senior independent director, the non-executives meet at least annually without the Chairman present.
An external moderator assisted the Board during 2005 in the evaluation of its operation and performance.
Shareholder relations
Spectris conducts regular dialogue with institutional shareholders and divulges such information as is permitted
within the guidelines of the Listing Rules. The content of
presentations made after results announcements may be
accessed by individual investors on the group website,
www.spectris.com.
All shareholders are invited to participate in the Annual General Meeting, where the Chairman, the Chief Executive and the chairmen of the audit, remuneration and nomination committees are available to answer questions. The results of proxy votes are declared at the Annual General Meeting after each resolution has been dealt with on a show of hands.
The Board is kept informed of the views of major shareholders through periodic reports from the Chief Executive, the company's broker Merrill Lynch and the company's shareholder relations adviser Makinson Cowell. The Chairman and non-executive directors have the opportunity to attend the bi-annual analyst presentations.
Shareholders representing in excess of 3% of the company's issued share capital receive a standing invitation to meet with the Chairman, the senior independent director or new non-executive directors. Such meetings would supplement if necessary, but not replace, the regular meetings with the Chief Executive and group finance director.
Audit committee
The audit committee comprises the non-executive directors
and is chaired by Andrew Given. Andrew Given and John
Warren both have recent and relevant financial experience
as the former group finance directors of Logica plc and
WH Smith PLC respectively. The committee meets at least
three times each year to consider the effectiveness of the
group's internal controls, policies and procedures, the process
of internal audit and the outcome of the external audit. Its
meetings are normally attended by the Chairman, the Chief
Executive, the group finance director, the company secretary
and the external auditor. The committee regularly confers with
the auditor without the attendance of executive directors. Its
terms of reference can be found on the company's website.
The committee is responsible for making recommendations to the Board in relation to the appointment of the external auditor and then for approving the external auditor's remuneration, terms of engagement and scope of work.
The committee has also adopted procedures governing and restricting the appointment of the external auditor for non-audit services. The following services are precluded:
A cumulative annual cap of £200,000 is established for all other non-audit services (save for acquisition due diligence and taxation services) above which all engagements are subject to prior approval by the audit committee.
The group employs an internal control and risk manager who performs internal control reviews across the group according to a work programme agreed by the committee. The group internal control and risk manager is assisted in this by an internal auditor and by other group finance personnel. The nature and scope of the group's internal control review resources is reviewed by the audit committee annually. The audit committee receives reports twice a year on the results of internal control reviews. The group internal control and risk manager has direct access to the chairman of the audit committee and may meet with him in the absence of executive management.
Internal controls
The Board is ultimately responsible for the group's system of internal controls and for reviewing its effectiveness. However,
such a system is designed to manage rather than eliminate
risk of failure to meet business objectives and can provide
only reasonable and not absolute assurance against material
misstatement or loss.
Following publication of the updated guidance for directors on internal control ("Internal Control: Guidance for Directors on the Combined Code"), the Board confirms that there is an ongoing process for identifying, evaluating and managing any significant risks faced by the group, that this has been in place for the year under review and up to the date of approval of the annual report and accounts, that this process has been reviewed by the Board during the year and that the group accords with the guidance. The Board affirms the importance it attaches to the continuous review and application of the guidance, the regular and systematic assessment of the risks facing the group and the value of embedding risk management and internal control systems within its business processes. To that end an experienced internal auditor was appointed during the year to assist the group internal control and risk manager and further such strengthening of the internal audit function is under consideration.
The processes which the Board and the audit committee have applied in reviewing the effectiveness of the group's system of internal controls are summarised as follows:
Having reviewed the group's plans and available financial facilities, the Board has a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. For this reason it continues to adopt the going concern basis in preparing the group's accounts.
The directors are responsible for preparing the annual report and the group and parent company financial statements, in accordance with applicable law and regulations.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards.
The group financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position and performance of the group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.
In preparing each of the group and parent company financial statements, the directors are required to:
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the Board
Roger Stephens
Secretary
7 March 2006