REG - Oxford Instruments - Half-year Report <Origin Href="QuoteRef">OXIG.L</Origin> - Part 3
14/11/2017 07:06
- Part 3: For the preceding part double click ID:nRSN3816Wb
0.1 0.1
Financial expenditure - - - (10.0) (10.0)
Loss before income tax from continuing operations 2.1 2.9 4.3 (9.9) (0.6)
Materials & Characterisation Research & Discovery Service & Healthcare Unallocated Group items Total
Year to 31 March 2017 £m £m £m £m £m
Operating profit for reportable segments from continuing operations 10.9 13.8 13.3 - 38.0
Acquisition related costs - (0.3) - - (0.3)
Restructuring costs - - (0.4) - (0.4)
Restructuring costs - relating to associate - (0.4) - - (0.4)
Impairment of capitalised development costs (0.7) - - - (0.7)
Loss on disposal of subsidiary - (0.4) - - (0.4)
Impairment of investment in associate - (8.0) - - (8.0)
Impairment of capitalised software costs - - - (2.2) (2.2)
Amortisation of acquired intangibles (2.9) (7.7) (1.9) - (12.5)
Impairment of acquired intangibles (22.6) - (11.2) - (33.8)
Financial income - - - 1.4 1.4
Financial expenditure - - - (6.9) (6.9)
Loss before income tax from continuing operations (15.3) (3.0) (0.2) (7.7) (26.2)
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2017 - unaudited
4 RESEARCH AND DEVELOPMENT
The total research and development spend by the Group is as follows:
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
£m £m £m
Research and development expense charged to the consolidated statement of income 11.4 12.1 24.3
Less: depreciation of R&D related fixed assets - - (0.1)
Add: amounts capitalised as fixed assets 0.1 0.1 0.2
Less: amortisation and impairment of R&D costs previously capitalised as intangibles (1.6) (2.2) (4.5)
Add: amounts capitalised as intangible assets 3.1 3.0 5.9
Total cash spent on research and development during the period 13.0 13.0 25.8
5 INVESTMENT IN ASSOCIATE
The Group's share of loss in its equity accounted associate, Scienta Scientific AB ("Scienta"), for the period was £0.3m
(2016/17 half year: £0.5m loss; full year: £1.2m loss). The Group did not receive any dividends from the associate in the
current or prior periods.
During the 6 months to 30 September 2017 the Group invested a further £2.1m in its equity accounted associate.
During the prior year the Group settled various claims totalling £0.4m relating to the disposal of its Omicron business
during 2015/16 and recognised an impairment charge of £8.0m in respect of its investment in Scienta.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2017 - unaudited
6 DISPOSAL OF SUBSIDIARY AND DISCONTINUED OPERATIONS
On 3 July 2017 the Group disposed of its Industrial Analysis business for a final consideration of £82.8m. On 17 November
2016 the Group disposed of its Superconducting Wire business for a final consideration of £14.0m.
Industrial Analysis Superconducting Wire
Effect of disposal on the financial position of the Group 2017/18 2016/17
£m £m
Goodwill (4.3) -
Acquired intangibles (0.1) -
Other intangibles (4.7) -
Property, plant and equipment (2.4) (3.1)
Inventory (11.3) (12.6)
Trade and other receivables (16.4) (6.5)
Cash and cash equivalents (6.0) (0.3)
Trade and other payables 14.9 6.6
Provisions 0.8 0.1
Tax balances (0.1) -
Net assets divested (29.6) (15.8)
Consideration receivable 82.8 14.0
Deferred consideration - (1.0)
Refund due in respect of finalisation of working capital adjustment 0.6 -
Consideration received, satisfied in cash 83.4 13.0
Cash disposed of (6.0) (0.3)
Transaction expenses (4.4) (0.5)
Net cash inflow 73.0 12.2
Carrying value of net assets disposed of (excluding cash and cash equivalents) (23.6) (15.5)
Deferred consideration - 1.0
Refund due in respect of finalisation of working capital adjustment (0.6) -
Recognition of provisions on disposal (2.8) (0.2)
Currency translation differences transferred from translation reserve 4.8 5.7
Gain on disposal 50.8 3.2
Tax (charge)/credit on gain on disposal (3.8) 0.9
Gain on disposal net of tax 47.0 4.1
Discontinued operations
In the period to 30 September 2017 the Group's Industrial Analysis business was classified as a discontinued operation; and
in the year to 31 March 2017 the Group's Superconducting Wire business was classified as a discontinued operation. They
were considered major classes of business on the basis that they were previously operating segments and referred to in the
Group Strategic Report.
The Group results have been re-presented to reflect the classification of the Group's Industrial Analysis and
Superconducting Wire businesses as discontinued operations.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2017 - unaudited
6 DISPOSAL OF SUBSIDIARY AND DISCONTINUED OPERATIONS continued
Industrial Superconducting
Results of discontinued operations - half year to 30 Sep 2017 Analysis Wire Total
£m £m £m
Revenue 16.8 - 16.8
Expenses (16.1) - (16.1)
Adjusted profit before tax 0.7 - 0.7
Income tax charge (0.4) - (0.4)
Adjusted profit after tax 0.3 - 0.3
Adjusting items:
Amortisation and impairment of acquired intangibles (0.1) - (0.1)
One off costs arising as a result of disposal (2.2) - (2.2)
Property sale costs - (0.2) (0.2)
Income tax on adjusting items 0.8 - 0.8
Loss after tax (1.2) (0.2) (1.4)
Gain on disposal 50.8 - 50.8
Tax on gain on disposal (3.8) - (3.8)
Profit/(loss) from discontinued operations after tax 45.8 (0.2) 45.6
The one off costs arising as a result of the disposal comprise a £1.8 million impairment of capitalised development costs
in respect of a project which was discontinued as a result of the sale of the Industrial Analysis division along with
related on-going costs incurred in the current year.
The property sale costs relate to the ongoing sale of a surplus freehold property.
Industrial Superconducting
Results of discontinued operations - half year to 30 Sep 2016 Analysis Wire Total
£m £m £m
Revenue 20.8 18.3 39.1
Expenses (19.3) (17.2) (36.5)
Adjusted profit before tax 1.5 1.1 2.6
Income tax charge (0.3) (0.4) (0.7)
Adjusted profit after tax 1.2 0.7 1.9
Adjusting items:
Amortisation and impairment of acquired intangibles (2.1) - (2.1)
Acquisition related costs (0.4) - (0.4)
Income tax on adjusting items 0.4 - 0.4
(Loss)/profit from discontinued operations after tax (0.9) 0.7 (0.2)
Industrial Superconducting Austin
Results of discontinued operations - full year to 31 Mar 2017 Analysis Wire Scientific Total
£m £m £m £m
Revenue 48.3 22.2 - 70.5
Expenses (43.8) (20.9) (0.2) (64.9)
Adjusted profit/(loss) before tax 4.5 1.3 (0.2) 5.6
Income tax charge (0.9) (0.4) - (1.3)
Adjusted profit/(loss) after tax 3.6 0.9 (0.2) 4.3
Adjusting items:
Amortisation and impairment of acquired intangibles (2.4) - - (2.4)
Acquisition related costs (1.2) - - (1.2)
Restructuring costs (0.2) - - (0.2)
Income tax on adjusting items 0.6 - - 0.6
Profit/(loss) after tax 0.4 0.9 (0.2) 1.1
Gain on disposal - 3.2 - 3.2
Tax on gain on disposal - 0.9 - 0.9
Profit/(loss) from discontinued operations after tax 0.4 5.0 (0.2) 5.2
Notes on the Half Year Financial Statements (continued)
Half year ended 30 september 2017 - unaudited
6 DISPOSAL OF SUBSIDIARY AND DISCONTINUED OPERATIONs continued
Earnings per share from discontinued operations
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
£m £m £m
Adjusted basic earnings per share 0.5 3.4 7.5
Adjusted diluted earnings per share 0.5 3.3 7.5
Total basic earnings per share 79.9 (0.4) 9.1
Total diluted earnings per share 79.5 (0.4) 9.1
Cash flows from discontinued operations
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
£m £m £m
Net cash generated from operating activities 2.4 1.9 6.1
Net cash used in investing activities (0.5) (1.3) (2.5)
Net cash used in financing activities - - -
Net cash flows 1.9 0.6 3.6
7 TAXATION
The total effective tax rate on profits for the half year is 21.3% (2016/17: 16.7%). The weighted average tax rate in
respect of adjusted profit before tax (see note 2) for the half year is 22.1% (2016/17: 21.4%). For the full year the
Group expects the tax rate in respect of adjusted profit before tax to be 23.0%.
8 earnings per share
a) Basic
The calculation of basic earnings per share is based on the profit or loss for the period after taxation and a weighted
average number of ordinary shares outstanding during the period, excluding shares held by the Employee Share Ownership
Trust, as follows:
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
Shares Shares Shares
million million million
Weighted average number of shares outstanding 57.3 57.3 57.3
Less: weighted average number of shares held by Employee Share Ownership Trust (0.2) (0.2) (0.2)
Weighted average number of shares used in calculation of earnings per share 57.1 57.1 57.1
Notes on the Half Year Financial Statements (continued)
Half year ended 30 september 2017 - unaudited
8 earnings per share continued
b) Diluted
The following table shows the effect of share options on the calculation of both adjusted and unadjusted diluted basic
earnings per share.
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
Shares Shares Shares
million million million
Number of ordinary shares per basic earnings per share calculations 57.1 57.1 57.1
Effect of shares under option 0.3 0.1 0.1
Number of ordinary shares per diluted earnings per share calculations 57.4 57.2 57.2
9 dividends per share
The following dividends per share were paid by the Group:
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
pence pence pence
Previous period interim dividend 3.70 3.70 3.70
Previous period final dividend - - 9.30
3.70 3.70 13.00
The following dividends per share were proposed by the Group in respect of each accounting period presented:
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2017 2016 2017
pence pence pence
Interim dividend 3.70 3.70 3.70
Final dividend - - 9.30
3.70 3.70 13.00
The final dividend for the year to 31 March 2017 was approved by shareholders at the Annual General Meeting held on 12
September 2017. Accordingly it is no longer at the discretion of the company and has been included as a liability as at 30
September 2017. It was paid on 19 October 2017.
The interim dividend for the year to 31 March 2017 of 3.70 pence was approved by the Board on 14 November 2017 and has not
been included as a liability as at 30 September 2017. The interim dividend will be paid on 6 April 2018 to shareholders on
the register at the close of business on 23 February 2018.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 september 2017 - unaudited
10 FAIR value of financial instruments
The fair values of financial assets and liabilities together with the carrying amounts shown in the Consolidated Statement
of Financial Position are as follows:
Fairvaluehierarchy Carryingamount30 Sept 2017£m Fairvalue 30 Sept2017£m Carryingamount30 Sept2016£m Fairvalue30 Sept2016£m Carryingamount31 March 2017£m Fairvalue31 March2017£m
Assets carried at amortised cost
Trade receivables 53.4 51.6 69.2 69.2 70.6 70.6
Other receivables 11.1 11.1 6.4 6.4 7.6 7.6
Cash and cash equivalents 14.3 14.3 20.9 20.9 27.2 27.2
Assets carried at fair value
Derivative financial instruments:
- Foreign currency contracts 2 2.3 2.3 - - 0.6 0.6
Liabilities carried at fair value
Derivative financial instruments:
- Foreign currency contracts 2 (1.0) (1.0) (10.9) (10.9) (5.0) (5.0)
Liabilities carried at amortised cost
Trade and other payables (54.1) (54.1) (55.9) (55.9) (82.4) (82.4)
Bank overdraft (0.6) (0.6) (1.8) (1.8) (1.4) (1.4)
Borrowings (59.2) (59.2) (160.2) (160.2) (148.6) (148.6)
The following summarises the major methods and assumptions used in estimating the fair values of financial instruments
reflected in the above table.
Derivative financial instruments
Derivative financial instruments are marked-to-market using market prices.
Fixed and floating rate borrowings
The fair value of fixed and floating rate borrowings is estimated by discounting the future contracted principal and
interest cash flows using the market rate of interest at the reporting date.
Trade and other receivables/payables
For receivables/payables with a remaining life of less than one year, the carrying amount is deemed to reflect the fair
value. All other receivables/payables are discounted to determine their fair value. Advances received are excluded from
other payables above as these are not considered to be financial liabilities.
Contingent consideration
The fair value of contingent consideration is estimated based on the forecast future performance of the acquired business
over a timeframe determined as part of the acquisition agreement, discounted as appropriate. Key assumptions include growth
rates, expected selling volumes and prices and direct costs during the period.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2017 - unaudited
10 FAIR value of financial instruments continued
Fair value hierarchy
The table above gives details of the valuation method used in arriving at the fair value of financial instruments. The
different levels have been identified as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: inputs for the asset or liability that are not based on observable market data.
There have been no transfers between levels during the year.
Contingent consideration relates to amounts payable in respect of acquisitions. It is reassessed at the end of each year to
its fair value.
Contingent consideration 30 Sep 2017£m 30 Sep 2016£m 31 Mar 2017£m
Balance brought forward at beginning of period - 6.6 6.6
Fair value of contingent consideration on acquisitions in the year - - -
Unwind of discount in respect of contingent consideration - - -
Contingent consideration paid - (6.5) (6.5)
Increase in contingent consideration - - -
Contingent consideration released to the consolidated statement of income - - -
Effect of movement in foreign exchange - (0.1) (0.1)
Balance carried forward at end of period - - -
11 RELATED PARTIES
All transactions with related parties are conducted on an arm's length basis and in accordance with normal business terms.
Transactions between related parties that are Group subsidiaries are eliminated on consolidation.
During the period, the Group supplied services and materials to its associate, Scienta Omicron Gmbh, on an arm's length
basis. The following transactions occurred during the period:
Half year to 30 September 2017 Revenue£m Receivables£m
Scienta Omicron GmbH - 3.6
Half year to 30 September 2016 Revenue£m Receivables£m
Scienta Omicron GmbH 0.1 3.6
Included in receivables is a non-current loan receivable of £2.1m (2016: £3.6m) and a current loan receivable of £1.5m
(2016: £nil). The loan is repayable at the end of May 2020. During the period the Group received interest charged on the
loan of £0.1m (2016: £0.1m).
Principal Risks and Uncertainties
The Group has in place a risk management structure and internal controls which are designed to identify, manage and
mitigate risk.
In common with all businesses, Oxford Instruments faces a number of risks and uncertainties which could have a material
impact on the Group's long term performance.
On pages 23 to 25 of its 2017 Annual Report and Accounts (a copy of which is available at www.oxford-instruments.com), the
Company set out what the Directors regarded as being the principal risks and uncertainties facing the Group's long term
performance and these are reproduced in the table below. Many of these risks are inherent to Oxford Instruments as a
global business and they remain valid as regards their potential impact during the remainder of the second half of the
year.
The impact of the economic and end market environments in which the Group's businesses operate are considered in the Half
Year Statement of this Half Year Report, together with an indication if management is aware of any likely change in this
situation.
ID Specific Risk Context Risk Possible Impact Control Mechanisms Mitigation
1 Technical Risk The Group provides high technology equipment and systems to its customers. Failure of the advanced technologies applied by the Group to produce commercial products, capable of being manufactured and sold profitably. Lower returns through loss of market share & reduced profitability. Negative impact on the Group's reputation. 'Voice of the Customer' approach to drive the product development road map; Formal new product development stage gate process to manage R&D Product lifecycle management Understanding customer needs / expectations and targeted new product
development programme to maintain and strengthen product positioning.
Stage gate process in product development to challenge commercial
business case and mitigate technical risks. Operational practices around
sales-production matching and inventory management to mitigate stock
obsolescence risks.
2 Routes to market In some instances the Group's products are components of higher level systems, sold by OEMs and thus the Group does not control its route to market. Backward vertical integration by OEMs Loss of a key route to market; new competitors; lower sales and profitability. Customer intimacy to match product performance to customer needs; Positioning of OI brand and marketing directly to end users Product differentiation to promote advantages of OI equipment &
solutions; Strategic marketing with OEMs to sell performance of the
combined system; Broadening the OEM customer base; Direct marketing to
end users
3 Economic environment Government expenditure may become constrained in key markets Reduction in global research funding Lower sales and profitability Market intimacy and identification of alternative markets Market diversification - increasing penetration into corporate customers
not dependent on external funding
4 Political risk The Group operates in global markets and can be required to secure export licences from governments. Geopolitical changes resulting in sanctions and bar on exports to specific countries or unfavourable changes in tariffs / other controls on exports Lower sales and profitability Contract review and protection against breach in the event that export licence is withheld Broad global customer base; contractual protection
5 Brexit related risks The UK will leave the EU Short-term decline in European research funding; Inflationary pressure on purchases and salaries; Possible changes to EU citizens' rights to work in UK impacting retention & recruitment. Lower sales and profitability Salary inflation; Increased input costs; Loss of key skills / increased recruitment / salary costs Market intimacy and identification of alternative markets Procurement strategy to reduce price volatility Product pricing strategy HR people strategy to facilitate recruitment & retention of staff with key skills Market diversification - increasing penetration into corporate customers
not dependent on external funding Long term pricing agreements for key
suppliers Margin focused sales targets to mitigate potential increases in
costs Renewal of UK work permit scheme to facilitate employment of non UK
/ EU nationals
6 Supply chain risk The Group operates a strategic make or buy policy and outsources a significant proportion of the costs of production to benefit from economies of scale and natural currency hedges. Supply chain disruption in particular for single source componentsleading to production delays and potentially lost revenue. Disruption to customers. Lower sales and profitability Negative impact on the Group's reputation. Procurement strategy to manage stock availability Buffer stocks of key components; Where possible, dual source supply is
sought
7 People A number of the Group's employees have business critical skills. Key employees leave and effective replacements are not recruited on a timely basis Lower sales and profitability HR people strategy for retention & recruitment of staff with key skills Succession management plans;Technical career paths;Renewal of UK work
permit scheme to facilitate employment of non UK / EU nationals
8 IT risk Elements of production, financial and other systems rely on IT availability Increasing risk of data loss / breach through cyber-attack, viruses or malware. "Zero-day" incidents, where new viruses or malware can spread before security vendors can respond represent a particularly high risk Loss of business critical data and / or financial loss IT security policy & associated standards and protection systems. Internal IT governance to maintain those protection systems and our incident response On-going evolution of security levels in consultation with IT security
partners to ensure changes are in-line with current threats. Inter alia,
we deliver user education, improved configuration, internal testing and
new tools where appropriate.
9 Operational risk Business units' production facilities are typically located at a single site Loss of all or part of a major production facility Delayed shipments leading to lower sales and profitability Business Continuity Plans in place Use of contractual protection to mitigate financial consequences of delayed delivery Principal sites have detailed BCPs which include plans to restore or
relocate production in the event of a major incident. Mechanisms such as
clauses for limitation of liability / liability caps / exclusion of
consequential losses in sales contracts
10 Pensions The Group's calculated pension deficit is sensitive to changes in the actuarial assumptions. Movements in the actuarial assumptions may have an appreciable effect on the reported pension deficit. Additional cash required by the Group to fund the deficit.Reduction in net assets. Regular review of investment strategy. Liability hedging programme to mitigate exposure to movements in interest rates and inflation The Group has closed its defined benefit pension schemes in the UK and US
to future accrual. The Group has a funding plan in place to reduce the
pension deficit over the short to medium term.
11 Foreign exchange
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