REG - Oxford Instruments - Half Yearly Report <Origin Href="QuoteRef">OXIG.L</Origin> - Part 2
10/11/2015 07:01
- Part 2: For the preceding part double click ID:nRSJ1112Fa
2015 2014 2015
£m £m £m
Profit/(loss) for the period from continuing operations 3.0 1.6 (6.2)
Adjustments for:
Income tax expense/(credit) 3.1 0.9 (3.4)
Net financial expense 3.6 5.6 13.0
Reversal of acquisition related fair value adjustments - 0.2 0.2
Acquisition related costs 0.8 0.9 2.2
Restructuring costs 0.8 - 9.9
Contingent consideration deemed no longer payable (3.2) (1.4) (1.4)
Contingent consideration - further amount deemed payable 0.7 - 6.8
Impairment loss of assets held for sale 2.8 - -
Amortisation of acquired intangibles 8.4 10.9 21.7
Depreciation of property, plant and equipment 3.1 2.5 5.5
Amortisation and impairment of capitalised development costs 1.6 1.7 4.7
Adjusted earnings before interest, tax, depreciation and amortisation 24.7 22.9 53.0
Loss on disposal of plant, property and equipment 0.1 0.1 0.2
Cost of equity settled employee share schemes 0.2 (0.2) (0.2)
Acquisition related costs paid (1.2) (1.3) (1.9)
Restructuring costs paid (3.5) - (1.2)
Cash payments to the pension scheme more than the charge to operating profit (3.3) (2.9) (5.9)
Operating cash flows before movements in working capital 17.0 18.6 44.0
Increase in inventories (6.7) (9.6) (3.3)
Decrease/(Increase) in receivables 7.6 (2.7) (5.3)
(Decrease)/increase in payables and provisions (9.4) (6.8) 1.6
Increase in customer deposits 3.2 4.0 1.9
Cash generated by operations 11.7 3.5 38.9
Interest paid (2.8) (2.4) (5.0)
Income taxes paid (1.4) (4.4) (9.1)
Net cash from operating activities 7.5 (3.3) 24.8
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (15.6) (0.8) (0.8)
Acquisition of property, plant and equipment (2.1) (3.3) (4.4)
Acquisition of intangible assets (0.2) - (1.0)
Capitalised development expenditure (3.3) (4.5) (8.0)
Net cash used in investing activities (21.2) (8.6) (14.2)
Cash flows from financing activities
Proceeds from issue of share capital - 0.1 0.2
Increase in long-term receivables (3.1) - -
Increase in borrowings 10.8 15.0 -
Repayment of borrowings - (15.5) (12.9)
Dividends paid (2.1) (1.9) (7.1)
Net cash generated from/(used in) financing activities 5.6 (2.3) (19.8)
Net decrease in cash and cash equivalents from continuing operations (8.1) (14.2) (9.2)
(Decrease)/increase in cash from discontinued operations (0.4) 0.1 (0.1)
Cash and cash equivalents at beginning of the period 25.1 32.6 32.6
Effect of exchange rate fluctuations on cash held (1.3) 0.4 1.8
Cash and cash equivalents at end of the period 15.3 18.9 25.1
Reconciliation of changes in cash and cash equivalents to movement in net (debt)/cash
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2015 2014 2015
£m £m £m
Decrease in cash and cash equivalents (8.5) (14.1) (9.3)
Effect of foreign exchange rate changes on cash and cash equivalents (1.3) 0.4 1.8
(9.8) (13.7) (7.5)
Cash inflow from increase in debt (10.8) (15.0) -
Cash outflow from decrease in debt - 15.5 12.9
Movement in net debt in the period (20.6) (13.2) 5.4
Net debt at start of the period (118.9) (124.3) (124.3)
Net debt at the end of the period (139.5) (137.5) (118.9)
Notes on the Half Year Financial Statements
Half year ended 30 September 2015 - unaudited
1 BASIS OF PREparATION OF ACCOUNTS
Reporting entity
Oxford Instruments plc (the Company) is a company incorporated in England and
Wales. The condensed consolidated half year financial statements consolidate
the results of the Company and its subsidiaries (together referred to as the
Group). They have been prepared and approved by the Directors in accordance
with International Financial Reporting Standard (IFRS) IAS 34 Interim
Financial Reporting as adopted by the EU. 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 March 2015.
The financial information contained herein is unaudited and does not
constitute statutory accounts as defined by Section 435 of the Companies Act
2006. The comparative figures for the financial year ended 31 March 2015 are
not the company's statutory accounts for that financial year. Those accounts
have been reported on by the company's auditors and delivered to the registrar
of companies. The report of the auditors was (i) unqualified, (ii) did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying their report, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
Significant accounting policies
As required by the Disclosure and Transparency Rules of the Financial Conduct
Authority, the condensed set of financial statements has been prepared
applying the accounting policies and presentation that were applied in the
preparation of the Company's published consolidated financial statements for
the year ended 31 March 2015, except as explained below.
Adoption of new and revised standards
The following standards and interpretations are applicable to the Group and
have been adopted as they are mandatory for the year ended 31 March 2016.
Amendments to IAS 19 Defined benefit plans - Employee contributions: The
amendments introduce a relief that will reduce the complexity and burden of
accounting for certain contributions from employees or third parties. The
Group has considered the impact of this amendment in future periods on profit,
earnings per share and net assets. The adoption of this standard has had no
significant impact.
At present, there are no other new standards, amendments to standards or
interpretations mandatory for the first time for the year ending 31 March
2016.
Estimates
The preparation of half year financial statements requires management to make
judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets and liabilities, income
and expense. Actual results may differ from these estimates.
In preparing these Half Year Financial Statements, the significant judgements
made by management in applying the group's accounting policies and key sources
of estimation uncertainty were the same as those that applied to the
Consolidated Financial Statements as at and for the year ended 31 March 2015.
Going concern
The condensed consolidated half year financial statements have been prepared
on a going concern basis, based on the Directors' opinion, after making
reasonable enquiries, that the Group has adequate resources to continue in
operational existence for the foreseeable future.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
1 BASIS OF PREparATION OF ACCOUNTS continued
Exchange rates
The principal exchange rates used to translate the Group's overseas results
were as follows:
Period end rates Half year to Half year to Year to
30 Sept 30 Sept 31 March
2015 2014 2015
US Dollar 1.51 1.62 1.48
Euro 1.36 1.28 1.38
Yen 181 178 178
Average translation rates US Dollar Euro Yen
Half year to 30 September 2015
April 1.50 1.37 180
May 1.52 1.37 186
June 1.55 1.40 192
July 1.57 1.41 194
August 1.55 1.39 190
September 1.53 1.36 184
Average translation rates 2015 US Dollar Euro Yen
April 1.68 1.21 172
May 1.68 1.22 172
June 1.69 1.24 172
July 1.69 1.25 173
August 1.67 1.26 173
September 1.64 1.27 175
October 1.61 1.28 179
November 1.58 1.27 183
December 1.56 1.27 186
January 1.53 1.31 182
February 1.52 1.35 181
March 1.51 1.38 181
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
2 NON-GAAP MEASURES
The Directors present the following non-GAAP measure as they believe it gives
a better indication of the underlying performance of the business.
RECONCILIATION BETWEEN PROFIT BEFORE INCOME TAX AND ADJUSTED PROFIT
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2015 2014 2015
£m £m £m
Profit/(loss) before income tax from continuing operations 6.1 2.5 (9.6)
Reversal of acquisition related fair value adjustments to inventory - 0.2 0.2
Acquisition related costs 0.8 0.9 2.2
Restructuring costs 0.8 - 9.9
Amortisation and impairment of acquired intangibles 8.4 10.9 21.7
Impairment loss on assets held for sale 2.8 - -
Contingent consideration - further amount deemed payable 0.7 - 6.8
Contingent consideration deemed no longer payable (3.2) (1.4) (1.4)
Unwind of discount in respect of deferred consideration 0.7 0.5 1.1
Mark to market (gain)/loss in respect of derivative financial instruments (0.8) 1.6 4.8
Adjusted profit before income tax from continuing operations 16.3 15.2 35.7
Share of taxation (3.9) (3.4) (8.1)
Adjusted profit from continuing operations 12.4 11.8 27.6
The reversal of acquisition related fair value adjustments to inventory are
excluded from adjusted profit to provide a measure that includes results from
acquired businesses on a consistent basis over time to assist comparison of
performance.
Acquisition related costs comprise professional fees incurred in relation to
mergers and acquisitions activity and any consideration which, under IFRS 3
(revised), falls to be treated as a post-acquisition employment expense.
In common with a number of other companies adjusted profit excludes the
non-cash amortisation and impairment of acquired intangible assets and the
unwind of discounts in respect of contingent consideration relating to
business combinations. At the end of the current period, management reassessed
the fair value of contingent consideration and as a result £3.2m was released
to other operating income in respect of the acquisition of Asylum Research
Inc.
Restructuring costs comprise the one off costs in respect of the cost
reduction programme begun in the prior year and the refocusing of the Plasma
business.
The Group has classified its Austin Scientific business as held for sale. At
30 September 2015 an impairment charge was taken to reduce the carrying value
of the net assets of the Austin Scientific Business to the fair value less
costs to sell.
In calculating the share of tax attributable to adjusted profit before tax in
2011 a one-off recognition of deferred tax assets relating to the Group's UK
businesses of £11.3m was excluded. At that time the Group announced its
intention to exclude the reversal of this deferred tax from the calculation of
the share of tax attributable to adjusted profit before tax in the years in
which it reverses. In the current period deferred tax of £0.4m (2014: £0.8m)
has reversed and consequently been excluded from the tax attributable to
adjusted profit before tax.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
2 NON-GAAP MEASURES continued
Under IAS 39, all derivative financial instruments are recognised initially at
fair value. Subsequent to initial recognition, they are also measured at fair
value. In respect of instruments used to hedge foreign exchange risk and
interest rate risk the Group does not take advantage of the hedge accounting
rules provided for in IAS 39 since that standard requires certain stringent
criteria to be met in order to hedge account, which, in the particular
circumstances of the Group, are considered by the Board not to bring any
significant economic benefit. Accordingly, the Group accounts for these
derivative financial instruments at fair value through profit or loss. To the
extent that instruments are hedges of future transactions, adjusted profit for
the year is stated before changes in the valuation of these instruments so
that the underlying performance of the Group can be more clearly seen.
3 SEGMENT Information
The Group has nine operating segments. These operating segments have been
combined into three aggregated operating segments to the extent that they have
similar economic characteristics, with relevance to products and services,
type and class of customer, methods of sale and distribution and the
regulatory environment in which they operate. Each of these three aggregated
operating segments is a reportable segment.
The Group's internal management structure and financial reporting systems
differentiate the three aggregated operating segments on the basis of the
economic characteristics discussed below:
· the Nanotechnology Tools segment contains a group of businesses
supplying similar products, characterised by a high degree of customisation
and high unit prices. These are the Group's highest technology products
serving research customers in both the public and private sectors;
· the Industrial Products segment contains a group of businesses
supplying high technology products and components manufactured in medium
volume for industrial customers; and
· the Service segment contains the Group's service business as well as
service revenues from other parts of the Group.
Reportable segment results include items directly attributable to a segment as
well as those which can be allocated on a reasonable basis. Inter-segment
pricing is determined on an arm's length basis. The operating results of each
are regularly reviewed by the Chief Operating Decision Maker, which is deemed
to be the Board of Directors. Discrete financial information is available for
each segment and used by the Board of Directors for decisions on resource
allocation and to assess performance. No asset information is presented below
as this information is not presented in reporting to the Group's Board of
Directors.
Half year to 30 September 2015
Nanotechnology Industrial
Tools Products Service Total
£m £m £m £m
External revenue 85.4 45.5 33.9 164.8
Inter-segment revenue - 0.5 -
Total segment revenue 85.4 46.0 33.9
Segment operating profit from continuing operations 9.5 1.7 8.8 20.0
Half year to 30 September 2014
Nanotechnology Industrial
Tools Products Service Total
£m £m £m £m
External revenue 92.7 51.8 30.5 175.0
Inter-segment revenue 0.1 0.4 -
Total segment revenue 92.8 52.2 30.5
Segment operating profit from continuing operations 6.6 5.3 6.8 18.7
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
3 SEGMENT Information continued
Year to 31 March 2015
Nanotechnology Industrial
Tools Products Service Total
£m £m £m £m
External revenue 210.9 103.0 66.2 380.1
Inter-segment revenue 0.3 1.1 -
Total segment revenue 211.2 104.1 66.2
Segment operating profit from continuing operations 20.7 6.4 15.7 42.8
Reconciliation of reportable segment profit from continuing operations
Half year to Half year to Year to
30 Sept 30 Sept 31 March
2015 2014 2015
£m £m £m
Operating profit for reportable segments from continuing operations 20.0 18.7 42.8
Reversal of acquisition related fair value adjustments to inventory - (0.2) (0.2)
Acquisition related costs (0.8) (0.9) (2.2)
Restructuring costs (0.8) - (9.9)
Amortisation of acquired intangibles (8.4) (10.9) (21.7)
Impairment loss on assets held for sale (2.8) - -
Contingent consideration - further amount deemed payable (0.7) - (6.8)
Contingent consideration deemed no longer payable 3.2 1.4 1.4
Financial income 1.0 0.1 0.1
Financial expenditure (4.6) (5.7) (13.1)
Profit before income tax from continuing operations 6.1 2.5 (9.6)
4 RESEARCH AND DEVELOPMENT
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
2015 2014 2015
£m £m £m
Research and development expense charged to the consolidated statement of income 11.8 14.2 30.5
Less: depreciation of R&D related fixed assets (0.4) (0.4) (0.8)
Add: amounts capitalised as fixed assets 0.4 1.7 2.2
Less: amortisation and impairment of R&D costs previously capitalised as intangibles (1.6) (1.7) (4.7)
Add: amounts capitalised as intangible assets 3.3 4.5 8.0
Total cash spent on research and development during the period 13.5 18.3 35.2
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
5 ACQUISITIONS
Medical Imaging Resources, Inc.
On 1 May 2015 the Group acquired 100% of the issued share capital of Medical
Imaging Resources, Inc. (MIR) for a net cash consideration of £8.7m. MIR
specialises in the build, lease and service of mobile medical imaging labs.
The book and fair values of the assets and liabilities acquired are given in
the table below. Fair value adjustments have been made to better align the
accounting policies of the acquired business with the Group accounting
policies and to reflect the fair value of assets and liabilities acquired. The
business has been acquired for the purpose of integrating into the Oxford
Instruments Healthcare business where it is believed that a number of
synergies can be obtained.
Book value£m Provisional Adjustments£m Provisional Fair value£m
Intangible fixed assets - 5.7 5.7
Tangible fixed assets 4.8 (0.2) 4.6
Inventories 0.4 0.2 0.6
Trade and other receivables 0.9 - 0.9
Trade and other payables (1.7) - (1.7)
Deferred tax - (2.2) (2.2)
Net debt (2.6) - (2.6)
Net assets acquired 1.8 3.5 5.3
Goodwill 7.5
Total consideration 12.8
Net debt acquired 2.6
Contingent consideration at acquisition (6.7)
Net cash outflow relating to the acquisition 8.7
The goodwill arising is not tax deductible and is considered to represent the
value of the acquired workforce and synergistic benefits expected to arise
from the acquisition. Further contingent consideration of up to £6.7m is
payable based on the performance of the Oxford Instruments Healthcare business
in the year to 31 March 2016.
The book value of receivables in the tables above represents the gross
contractual amounts receivable.
The acquisition above contributed revenue of £5.6m and a reported operating
profit of £1.6m to the Group's result for the period. Had the acquisition
taken place on 1 April 2015 the equivalent Group numbers would have been
revenue of £165.9m and a reported operating profit of £10.0m.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
6 DISPOSALS AND DISCONTINUED OPERATIONS
Disposals
On 27 May 2015 the Group entered into a strategic alliance with GD
Intressenter AB of Sweden (GDI) to create the world's largest company in the
highly specialised Ultra High Vacuum Surface Science field. The alliance
comprises Oxford Instruments' Omicron Nanotechnology GmbH ("Omicron") and
associated subsidiaries and GDI's Scienta Scientific AB ("Scienta") and
associated subsidiaries.
In consideration for new shares in Scienta, Oxford Instruments transferred all
of its shares in the capital of Omicron to Scienta. Oxford Instruments holds a
47% interest in the share capital of Scienta and GDI holds 53%. The investment
has been accounted for as an associate taking into account the following
factors:
- The Group holds substantial, but minority, voting rights (47%). All
other rights are controlled by a single shareholder;
- The Group has a minority number of non-executive board seats (two of
five), with the remaining seats held by representatives of GDI;
- Whilst the Group has certain veto rights in respect of key decisions, it
cannot unilaterally direct the activities of the Scienta Group.
The book value of the net assets disposed of was £14.6m. The value of the
shareholding acquired in Scienta was considered to be equal to the book value
of net assets disposed of, therefore there was no gain or loss arising on the
transaction.
Discontinued operations
At 30 September 2015 the Group's Austin Scientific business was classified as
held-for-sale and as a discontinued operation, given it was a major class of
business and highly probable that the sale will take place within 12 months of
the balance sheet date.
Half year to Half year to Year to
30 Sept 30 Sept 31 March
Results of discontinued operations 2015 2014 2015
£m £m £m
Revenue 1.7 3.5 5.5
Expenses (2.1) (3.3) (5.6)
(Loss)/profit from operating activities before tax (0.4) 0.2 (0.1)
Tax 0.1 (0.1) -
(Loss)/profit from operating activities after tax (0.3) 0.1 (0.1)
Basic (loss)/profit per share (pence) (0.5) 0.2 (0.2)
Diluted (loss)/profit per share (pence) (0.5) 0.2 (0.2)
Half year to Half year to Year to
30 Sept 30 Sept 31 March
Cash flows from discontinued operations 2015 2014 2015
£m £m £m
Net cash used in operating activities (0.4) 0.1 (0.1)
Net cash from investing activities - - -
Net cash from financing activities - - -
Net cash flows (0.4) 0.1 (0.1)
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - unaudited
6 DISPOSALS AND DISCONTINUED OPERATIONScontinued
The disposal group consists of the following assets and liabilities, held in
accordance with IFRS 5 at the lower of carrying value and fair value less
costs to sell:
Half year to
30 Sept
Assets of disposal group held for sale 2015
£m
Intangible assets -
Property, plant and equipment -
Inventory 0.5
Trade and other receivables 0.7
1.2
Half year to
30 Sept
Liabilities of disposal group held for sale 2015
£m
Trade and other payables (0.4)
(0.4)
An impairment loss of £2.8m has been recognised on the remeasurement of the
disposal group to the lower of its carrying amount and fair value less costs
to sell.
7 TAXATION
The total effective tax rate on profits for the half year is 35% (2014: 36%).
The weighted average tax rate in respect of adjusted profit before tax (see
note 2) for the half year is 24% (2014: 23%).
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
2015 2014 2015
Shares Shares Shares
million million million
Weighted average number of shares outstanding 57.3 57.1 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 56.9 57.1
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - 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
2015 2014 2015
Shares Shares Shares
million million million
Number of ordinary shares per basic earnings per share calculations 57.1 56.9 57.1
Effect of shares under option 0.2 0.4 0.2
Number of ordinary shares per diluted earnings per share calculations 57.3 57.3 57.3
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
2015 2014 2015
pence pence pence
Previous period interim dividend 3.70 3.36 3.36
Previous period final dividend - - 9.04
3.70 3.36 12.40
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
2015 2014 2015
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 2015 was approved by shareholders
at the Annual General Meeting held on 8 September 2015. Accordingly is it no
longer at the discretion of the company and has been included as a liability
as at 30 September 2015. It was paid on 19 October 2015.
The interim dividend for the year to 31 March 2016 of 3.70 pence was approved
by the Board on 10 November 2015, the same as the previous year and has not
been included as a liability as at 30 September 2015. The interim dividend
will be paid on 8 April 2016 to shareholders on the register at the close of
business on 11 March 2016.
Notes on the Half Year Financial Statements (continued)
Half year ended 30 September 2015 - 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 2015£m Fairvalue 30 Sept2015£m Carryingamount30 Sept2014£m Fairvalue30 Sept2014£m Carryingamount31 March 2015£m Fairvalue31 March2015£m
Assets carried at amortised cost
Trade receivables 58.4 58.4 66.6 66.6 75.8 75.8
Other receivables 5.7 5.7 5.7 5.7 5.0 5.0
Cash and cash equivalents 15.3 15.3 18.9 18.9 25.1 25.1
Assets carried at fair value
Derivative financial instruments:
- Copper hedging contracts (designated as an IAS 39 hedge) 2 0.2 0.2 - - 0.1 0.1
- Foreign currency contracts 2 2.1 2.1 3.9 3.9 3.3 3.3
2.3 2.3 3.9 3.9 3.4 3.4
Liabilities carried at fair value
Derivative financial instruments:
- Foreign currency contracts 2 (2.0) (2.0) (1.1) (1.1) (4.1) (4.1)
- Copper hedging contracts (designated as an IAS 39 hedge) 2 - - - - - -
Contingent consideration 3 (19.1) (19.1) (13.4) (13.4) (17.5) (17.5)
(21.1) (21.1) (14.5) (14.5) (21.6) (21.6)
Liabilities carried at amortised cost
Trade and other payables (69.5) (69.5) (69.8) (69.8) (86.9) (86.9)
Borrowings (154.8) (154.8) (156.4) (156.4) (144.0) (144.0)
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 2015 - 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.
30 Sep 2015£m 30 Sep 2014£m 31 March 2015£m
Balance brought forward 17.5 10.7 10.7
Fair value of contingent consideration on acquisitions in the year 6.7 - -
Unwind of discount in respect of contingent consideration 0.7 0.5 1.1
Contingent consideration paid (2.6) (0.8) (0.8)
Increase in contingent consideration 0.7 - 6.8
Contingent consideration released to the consolidated statement of income (3.2) (1.4) (1.4)
Effect of movement in foreign exchange (0.7) 0.3 1.1
Balance carried forward 19.1 9.3 17.5
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 14 and 15 of its 2015 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.
Specific Risk Context Risk Possible Impact Associated strategic priorities Mitigation
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 profitability and financial returns.Negative impact on the Group's reputation. 'Realising the Brand' 'Liberating Cash' The Group has moved away from large scale, single customer development programmes
towards more commercially orientated products. The New Product Introduction programme
that any new R&D projects must pass through provides a framework within which the
commercial viability of projects are scrutinised and assessed.
Economic Environment Government spend on R&D has been constrained. Demand for the Group's products may be lower than anticipated. Lower profitability and financial returns. 'Realising the Brand' 'Delivering Shareholder Value' The Group has a broad spread of customers, applications and geographical markets.
Acquisitions Part of the growth of Oxford Instruments is planned to come from acquisitions which provide the Group with complementary technologies. Appropriate acquisition targets may fail to provide the planned value. Lower profitability and financial returns.Management focus taken away from the core business in order to manage integration issues. 'Realising the Brand' 'Inventing the Future' 'Adding Personal Value' Extensive financial and technical due diligence is undertaken by the Group during any
acquisition programmes. Each transaction has a comprehensive post acquisition
integration plan which is monitored at the highest level.
Foreign exchange volatility A significant proportion of the Group's profit is made in foreign currencies. Most costs are in Sterling. The Group's profit levels are exposed to fluctuations in exchange rates. Lower profitability and financial returns 'Delivering Shareholder Value' 'Liberating Cash' The Group seeks to mitigate the exposure to transactional risk by the use of natural
hedges wherever possible. The remaining transactional foreign exchange risk in any
year is mitigated through the use of forward and non-premium based option exchange
contracts.
Political Risk The Group operates in global markets and can be required to secure export licences from government. Changes in political relations may affect the granting of licences. An inability to sell certain products to certain countries 'Delivering Shareholder Value' 'Liberating Cash' Maintain a diversified geographical customer base. Ensure low commitment to inventory
before attaining export licences
Customer Concentration The Group's Superconducting Wire business in reliant on a small number of MRI manufacturers as customers . These customers can exert significant customer power in terms of price and volume Lost sales, decreased margins 'Delivering Shareholder Value' 'Liberating Cash' Attempt to broaden customer base to include all OEMS Explore alternative applications
for superconducting wire
Outsourcing The Group's strategic plan includes the outsourcing of a significantly higher proportion of the costs of its products to benefit from economies of scale and natural currency hedges. Failures in the supply chain impacting sales. Disruption to customers.Negative impact on the Group's reputation. 'Liberating Cash' 'Realising the Brand' Relationships with outsourcing businesses are monitored closely and any potential
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