Interim Results

RNS Number : 1374F

Gooch & Housego PLC

12 June 2012

 



For immediate release

12 June 2012

Gooch & Housego PLC

INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2012

Gooch & Housego PLC ('G&H' or 'the Company'), the specialist manufacturer of optical components and systems, today announces its interim results for the six months ended 31 March 2012.

Financial highlights	H1 2012	H1 2011	Increase/ (decrease)	FY 2011
Revenue	£27.8m	£27.2m	2 %	£61.0m
Adjusted profit before tax1	£3.0m	£5.0m	(40)%	£10.8m
Adjusted earnings per share1	10.5p	17.1p	(40)%	38.0p
Reported profit before tax	£2.5m	£3.9m	(36)%	£8.8m
Basic earnings per share	8.7p	13.0p	(35)%	35.5p
Net borrowing at period end	£5.6m	£5.5m	2 %	£1.9m
Net Cash generated from operating activities	£1.9m	£5.5m	(65)%	£14.4m

¹ Adjusted for amortisation of acquired intangible assets, redundancy costs, acquisition costs, the impairment of goodwill and the write back of the EM4 earn out provision.

Operational highlights

·      Challenging trading conditions in first quarter

·      Improving order activity through second quarter and continuing into second half

·      Aerospace & Defence affected by delays but strong pipeline of near term opportunities

·      Industrial Laser market recovering and customer inventories normalising

·      Recent successes with Fibre-Q product

·      Management team strengthened and organisational changes introduced

·      Interim dividend of 2.0p per share declared.

Gareth Jones, Chief Executive of Gooch & Housego PLC, commented on the results:

"Despite the challenges experienced during the period we have remained focussed on positioning G&H to deliver sustainable long-term growth in our target markets. With a strong pipeline of opportunities and more favourable trading conditions we retain a cautiously optimistic outlook."

For further information please contact:

Gooch & Housego PLC	Gareth Jones / Andrew Boteler	01460 256 440
Buchanan	Tim Thompson / Nicola Cronk	020 7466 5000
Investec Banking plc (Nomad & Broker)	Patrick Robb	020 7597 5970

Operating & Financial Review

Performance Overview

Revenue for the six months ended 31 March 2012 was £27.8 million, up 2% from £27.2 million for the corresponding period last year.  After taking account of the acquisition of EM4 and Crystal Technology, and foreign exchange, like for like group revenue was down 23% over the same period.

REVENUE
Six months ended 31 March	2012			2011			2010
	£,000	% of total		£,000	% of total		£,000	% of total
Industrial	16,882	61%		15,555	57%		10,918	53%
Aerospace & Defence	6,754	24%		7,017	26%		5,257	26%
Life Sciences	2,566	9%		2,648	10%		1,752	9%
Scientific Research	1,598	6%		1,972	7%		2,446	12%
Group Revenue	27,800	100%		27,192	100%		20,373	100%

In sharp contrast to 2011, trading conditions in the first six months of our 2012 financial year were challenging as adverse macro-economic factors combined with a downturn in the semiconductor equipment and microelectronics sectors to create a difficult business environment. The impact was reduced demand for our products.  In the Aerospace & Defence sector there were delays in the placing of a number of large contracts. With revenue growth held back, we found it necessary to revise our earnings forecasts for the full year.

Trading conditions improved in the second quarter as customer call-offs resumed, their inventory levels began to normalise and order activity picked up in most sectors. Order intake in the second quarter was 64% higher than in the first quarter.

Trading conditions have continued to improve going into the second half of the year with good levels of order activity and an encouraging pipeline of near term opportunities. A number of these opportunities are in the Aerospace & Defence sector. Whilst defence budgets have come under great pressure we continue to be of the view that this sector provides significant growth potential for Gooch & Housego given both our current small market share and because priority spend is directed towards system upgrades that frequently require sophisticated photonic solutions to deliver performance enhancements.

The group's profit before tax was £2.5 million, 36% below the £3.9 million reported last year. This reflects the difficult trading conditions that we announced to the market in late February 2012.  In response to this the business undertook a programme of cost reduction measures which are expected to deliver net cost savings in the current financial year of £0.6 million.

Operational & Strategy Review

Products & Markets - Industrial

Gooch & Housego's principal industrial markets are industrial lasers, telecommunications, metrology/sensing and semiconductor manufacturing and inspection. Industrial lasers are used in a diverse range of precision manufacturing applications ranging from microelectronics to automotive.

The start of our financial year coincided with a slowdown in the industrial laser market. The effect of reduced underlying demand together with high levels of inventory at our customers resulted in a sharp drop in Q-switch shipments in the first quarter of this financial year. An upswing in the semiconductor manufacturing equipment sector during our second quarter was reflected in an increase in the level of Q-switch demand as customer inventory levels began to normalise and call-offs resumed. Although there is still some excess inventory in the supply-chain this is decreasing steadily as a result of sustained higher levels of usage, and recent evidence of increased investment in microelectronics manufacturing in China augers well for the future.

We have seen a similar upturn in demand for precision optics and acousto-optics for use in laser-based metrology applications, ranging from semiconductor manufacturing and inspection equipment, to precision engineering and civil engineering.

Telecommunications demand for our products was adversely affected in the first half of 2012 by a combination of the floods in Thailand and delays to large scale undersea cable infrastructure projects as a result of uncertainties over funding. Gooch & Housego is well-placed to benefit from this market once these issues are resolved.

The fibre-laser market has been the fastest growing subset of the industrial laser market in recent years and is becoming an increasingly important source of revenue. A major contributor to this revenue is the Fibre-Q, which is an optimised "Q-switch" for fibre lasers that was developed by combining Gooch & Housego's traditional acousto-optics expertise with its more recently acquired fibre optic capabilities. After an extensive period of qualification testing we have received our first volume production orders for fibre laser applications in recent months. Other versions of the Fibre-Q have been optimised for remote sensing applications and have also recently made the transition to volume manufacturing. The total value of Fibre-Q orders in recent months is in excess of £1.6 million.

Products & Markets - Aerospace & Defence

The Aerospace & Defence market for Gooch & Housego is characterised by high-value, long-term programmes involving the main US and European defence contractors. During the first six months of 2012 we have worked with our customers to progress these programmes through the often protracted development and qualification phases.  While we are approaching the completion of the initial phases of a number of programmes, overall revenues from Aerospace & Defence were slightly down on the same period last year.

In recognition of the potential of this sector we have created a new senior business development position and established a dedicated sales team focussed solely on Aerospace & Defence. A primary objective is to extend the best practice established at our Boston and Ilminster operations to our other locations. These sites have been successful in migrating the business from a component level sale to higher-value integrated modules and sub-systems by acting in the role of strategic partner, rather than simply as a supplier, to our customers.

In parallel, we have in recent months committed to a total investment of approximately £1.1 million at our Torquay and Boston facilities in order to meet the requirement of our US and European Aerospace & Defence customers to be able to source locally-manufactured product. These investments ensure that Gooch & Housego is well-positioned to benefit from the trend we are observing for defence contractors to outsource more manufacturing in response to budgetary constraints.

These initiatives and commitments reflect the increased visibility we now have of significant opportunities to participate in long-term programmes as a result of the planning and preparation we are doing with several of our principal customers.

Products & Markets - Life Sciences

Our Life Sciences activities fall into two main revenue streams - fibre optic modules for optical coherence tomography (OCT) applications, and acousto-optic and electro-optic Q-switches for laser surgery applications - and one area of technology development - diagnostic systems based on hyperspectral imaging technology. The principal commercial application of OCT systems is retinal imaging, and Gooch & Housego continues to be the leading provider of fibre optic solutions (products and design services) to this industry. The first half of the year has seen a high level of activity and the addition of a significant new customer entering the field. We have a similarly strong market position in the medical laser market, with a number of orders from the industry leaders in recent months. In preparation for engaging with commercial partners to exploit our diagnostic work we have initiated a number of studies, including a limited trial to demonstrate the capabilities of our technology. These investigations are expected to be completed in the second half of the year.

Products & Markets - Scientific Research

The principal application for our scientific products is high energy laser physics, and in particular, laser inertial confinement fusion, where lasers are used to create the conditions found in the core of a star. Our main customer is the National Ignition Facility (NIF) at Lawrence Livermore National Laboratory (LLNL). After more than a decade in the building NIF is now complete and operational, hence the gradual decline in revenues. This trend may reverse if NIF is successful in achieving its objective of "ignition" and energy gain later this year, thereby paving the way for future programmes, notably Laser Inertial Fusion Energy (LIFE), aimed at realising energy generation from nuclear fusion. During the first half of this year we have been actively engaged in discussions with LLNL about the role Gooch & Housego could play in a future LIFE programme.

Strategy

During the first half of 2012 we introduced a number of significant changes to the way the business is run in order to facilitate the execution of our strategy.

Five years ago we embarked on a strategy to transform Gooch & Housego into a leading, medium-sized photonics business with a portfolio of world-class products and a global capability. The aim was to deliver above average growth and returns by diversifying into new markets (Aerospace & Defence and Life Sciences) and by moving up the value-chain from materials and components to sub-systems and instruments. Through the acquisition of best-in-class businesses, Gooch & Housego today has a uniquely broad range of photonics technology and we have established a presence in our target markets. The build phase is essentially complete and the focus has now moved on to executing on the strategy.

With the emphasis shifting from acquisition to innovative organic growth and business development we recognised the need to introduce new skills and revise the organisational structure.  We have appointed two new non-executive directors, established a new Operational Board as the executive decision making body, created the new Operational Board position of Chief Technology Officer (CTO), and introduced new Business Development and Business Unit Manager positions.

In February 2012 we announced the appointment of Peter Bordui and Mark Webster to the main board bringing, respectively, extensive experience of the photonics and healthcare industries. In April 2012 Murray Reed joined Gooch & Housego as CTO to provide the leadership needed to drive the introduction of innovative new products and technologies.

Focussing on the needs of our customers and markets, the new Business Development positions are aimed at achieving greater penetration of our target markets through greater sector specialisation. The Aerospace & Defence business development team was launched in April.

Looking internally, having acquired four businesses over the past five years we are seeking to derive greater efficiency and effectiveness from our manufacturing operations, which fall into natural groupings by product type. In order to leverage the commonality within the business units and to enable them to achieve their full potential, we have created two new Business Unit Manager positions in Fibre Optics and Acousto-Optics.

Cash Flow and Financing

In the six months to 31 March 2012 Gooch & Housego generated net cash from operations of £1.9 million, compared to £5.5 million in the same period of 2011. 

The Company has invested in working capital during the first six months of the year.  Inventories have increased by £2.9 million since the year end as the company has sought to secure supply of key components, build strategic inventories and, in particular, manage the transfer of crystal growth from California to Ohio.   

Capital expenditure on property, plant and equipment increased to £2.5 million (2011: £1.2 million). The largest proportion of this (£1.1 million) related to the crystal growth & fabrication transfers. 

On 25 March 2012, Gooch & Housego paid £2.0 million in respect of the deferred consideration on the 2011 Crystal Technology acquisition.  Contingent consideration was not paid on the EM4 acquisition due the earnings threshold not being reached as a result of a delay of a major contract, which was subsequently awarded after the end of the earn out period.

Acquisition Summary	EM4	Crystal Technology
	£m	£m
Initial purchase price - paid in financial year 2011	7.3	6.6
Deferred consideration - paid 31 March 2012	-	2.0
Total purchase price	7.3	8.6

Cash, cash equivalents and bank overdrafts as at 31 March 2012 amounted to a positive cash position of £5.7 million, compared to £9.0 million at 30 September 2011.

Since 30 September 2011, net debt has increased by £3.7 million.  The movement in net debt is outlined in the table below.

MOVEMENT IN NET DEBT
All amounts in £m	Gross cash	Gross debt	Net debt
At 1 October 2011	13.8	(15.7)	(1.9)
Net cash flows from trading	3.9	-	3.9
Debt repayments	(1.7)	1.7	-
Acquisitions	(2.0)	-	(2.0)
Capital Expenditure	(2.7)	-	(2.7)
Working capital	(2.0)	-	(2.0)
Interest & dividends	(1.0)	-	(1.0)
Foreign exchange	(0.1)	0.2	0.1
At 31 March 2012	8.2	(13.8)	(5.6)

At 31 March 2012, the banking facilities for Gooch & Housego with its bankers, the Royal Bank of Scotland, comprise of an $18 million dollar denominated term loan, a £3.1 million sterling denominated term loan, an $8 million revolving credit facility and an undrawn capital expenditure facility of $6 million.  All facilities are committed until April 2015. The term loan balances at 31 March 2012 were $13.5 million and £2.7 million sterling, whilst the business utilised $4 million of its revolving credit facility. 

People

Gooch & Housego has a loyal and skilled workforce that helps make us a leader in our industry. It is with regret that we found it necessary to reduce manufacturing headcount, as part of a number of cost saving measures, in response to the lower levels of demand that we experienced in the first quarter. Overall headcount decreased by 4% from 623 to 597 during the first six months of the year.

Dividends

The Directors have declared an interim dividend of 2.0p per share (2011 : 2.0p per share).  This will be payable on 27 July 2012 to shareholders on the register as at 22 June 2012.

Summary & Outlook

After a very challenging first quarter, trading conditions have shown a steady and sustained improvement.  We have used the period to make changes to our management team and put in place the structure to facilitate future growth as we execute our strategy. We have continued to make significant progress behind the scenes in developing our business in the Aerospace & Defence sector. Overall, we retain a positive outlook despite the wider uncertainties affecting the global economy.

Julian Blogh                Gareth Jones                           Andrew Boteler                      

Chairman                     Chief Executive Officer            Chief Financial Officer            

12 June 2012                12 June 2012                            12 June 2012

Unaudited interim results for the 6 months ended 31 March 2012

Group Income Statement	Note	Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Revenue	5	27,800	27,192	61,009
Cost of revenue		(17,477)	(15,252)	(34,815)
Gross profit		10,323	11,940	26,194
Research & Development		(2,089)	(1,654)	(3,746)
Sales & Marketing		(2,019)	(1,623)	(3,733)
Administration and other expenses		(3,826)	(4,602)	(9,826)
Other income		527	236	787
Operating profit	5	2,916	4,297	9,676
Net finance costs		(416)	(361)	(868)
Profit before income tax expense		2,500	3,936	8,808
Income tax expense	6	(603)	(1,283)	(1,285)
Profit for the period		1,897	2,653	7,523
Earnings per share	7	8.7p	13.0p	35.5p

Reconciliation of operating profit to adjusted operating profit:

		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to       30 Sep 2011 (Audited)
		£'000	£'000	£'000
Operating profit		2,916	4,297	9,676
Amortisation of acquired intangible assets		457	530	1,427
Redundancy costs		55	-	-
Impairment of goodwill		-	-	1,969
Release of accrued contingent consideration		-	-	(2,085)
Acquisition costs		-	495	571
Adjusted operating profit		3,428	5,322	11,558

Reconciliation of net finance costs to adjusted net finance costs:

		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to       30 Sep 2011 (Audited)
		£'000	£'000	£'000
Net finance costs		(416)	(361)	(868)
Costs associated with debt re-financing		-	64	64
Adjusted net finance costs		(416)	(297)	(804)

Unaudited interim results for the 6 months ended 31 March 2012

Group Balance Sheet		31 Mar 2012 (Unaudited)	31 Mar 2011 (Unaudited)	30 Sep 2011 (Audited)
		£'000	£'000	£'000
Non-current assets
Property, plant & equipment		21,493	19,713	20,440
Intangible assets		21,410	24,643	22,081
Deferred income tax assets		4,223	4,512	4,045
		47,126	48,868	45,566
Current assets
Trade and other receivables		9,632	10,440	12,596
Inventories		13,845	9,557	11,264
Income tax receivable		-	364	-
Cash and cash equivalents		8,201	11,520	13,844
		31,678	31,881	37,704
Current liabilities
Borrowings		(5,859)	(4,951)	(6,001)
Trade and other payables		(8,317)	(11,845)	(12,726)
Income tax liabilities		(330)	(553)	(424)
Provision for other liabilities and charges		(358)	(373)	(505)
		(14,864)	(17,722)	(19,656)
Net current assets		16,814	14,159	18,048
Non-current liabilities
Borrowings		(7,896)	(12,044)	(9,696)
Deferred income tax liabilities		(648)	(1,214)	(563)
Derivative financial instruments		(177)	(104)	(255)
		(8,721)	(13,362)	(10,514)
Net assets		55,219	49,665	54,100
Shareholders' equity Capital and reserves attributable to equity shareholders
Called up share capital		4,372	4,370	4,370
Share premium account		14,211	14,200	14,200
Merger reserve		2,671	2,671	2,671
Hedging reserve		(202)	(125)	(264)
Cumulative translation reserve		(101)	55	588
Retained earnings		34,268	28,494	32,535
Equity Shareholders' Funds		55,219	49,665	54,100

Unaudited interim results for the 6 months ended 31 March 2012

Group Statement of Changes In Shareholders' Equity		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Balance at beginning of period		54,100	36,053	36,053
Profit for the period		1,897	2,653	7,523
Movement in the fair value of derivative financial instruments		62	60	(80)
Exchange difference on translation of foreign operations		(689)	(222)	312
Total comprehensive income for the period		1,270	2,491	4,485
Fair value of employee services		235	235	471
Tax credit relating to share option schemes		257	709	80
Proceeds from shares issued net of costs		13	10,611	10,612
Dividends to equity holders of the company		(656)	(434)	(871)
Total contributions by and distributions to owners of the company recognised directly to equity		(151)	13,612	18,047
Balance at end of the period		55,219	49,665	54,100

Unaudited interim results for the 6 months ended 31 March 2012

Group Cash Flow Statement		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Cash flows from operating activities
Cash generated from operations		2,727	6,512	13,238
Income tax paid		(831)	(976)	(1,386)
Net cash generated from operating activities		1,896	5,536	11,852
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(2,068)	(14,408)	(14,484)
Purchase of property, plant and equipment		(2,457)	(1,207)	(2,813)
Sale of property, plant and equipment		59	4	93
Purchase of intangible assets		(264)	(65)	(153)
Interest received		20	5	29
Net cash used in investing activities		(4,710)	(15,671)	(17,328)
Cash flows from financing activities
Proceeds from new borrowings		-	4,676	4,643
Repayment of borrowings		(1,704)	(1,218)	(2,702)
Proceeds from issues of share capital		47	10,611	10,612
Dividends paid to ordinary shareholders		(656)	(434)	(871)
Interest paid		(411)	(247)	(748)
Net cash (used in)/generated  from financing activities		(2,724)	13,388	10,934
Net (decrease)/ increase in cash, cash equivalents, working capital facility and bank overdraft		(5,538)	3,253	5,458
Cash, cash equivalents, working capital facility and bank overdraft at beginning of the period		11,276	5,746	5,746
Exchange (losses)/gains on cash and bank overdrafts		(40)	26	72
Cash, cash equivalents, working capital facility and bank overdrafts at the end of the period		5,698	9,025	11,276

Cash, cash equivalents and bank overdrafts at the end of the period are made up of:

		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Cash and cash equivalents		8,201	11,520	13,844
Bank overdraft		(2,503)	(2,495)	(2,568)
Cash, cash equivalents, working capital facility and bank overdrafts at the end of the period		5,698	9,025	11,276

Notes to the Group Cash Flow Statement		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Profit before income tax		2,500	3,936	8,808
Adjustments for:
- Amortisation of acquired intangible assets		457	530	1,427
- Amortisation of other intangible assets		154	167	323
- Depreciation		995	854	2,063
- Profit/(Loss) on disposal of property, plant    and equipment		(19)	15	(20)
- Share based payment obligations		235	235	471
- Acquisition costs		-	495	571
-Impairment of goodwill		-	-	1,969
-Non cash release of accrued contingent    consideration		-	-	(2,085)
- Finance income		(20)	(5)	(30)
- Finance costs		436	366	898
Total adjustments		2,238	2,657	5,587
Changes in working capital
- Inventories		(2,860)	(622)	(2,613)
- Trade and other receivables		1,684	(597)	(945)
- Trade and other payables		-	732	1,537
- Provisions for liabilities and charges		(835)	406	864
Total changes in working capital		(2,011)	(81)	(1,157)
Cash generated from operating activities		2,727	6,512	13,238

Reconciliation of net cash inflow to movements in net debt

		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
(Decrease)/Increase in cash in the year		(5,538)	3,253	5,458
Repayment of borrowings		1,704	1,218	2,702
New borrowings		-	(4,676)	(4,643)
Changes in net debt resulting from cash flows		(3,834)	(205)	3,517
Debt acquired upon acquisition		-	(104)	(104)
Translation differences		133	75	(25)
Movement in net debt in the year		133	(234)	3,388
Net debt at start of period		(1,853)	(5,241)	(5,241)
Net debt at end of period		(5,554)	(5,475)	(1,853)

Analysis of net debt

	At 1 Oct 2011	Cash flow	Exchange movement	Non-cash movement	At 31 Mar 2012
	£'000	£'000	£'000	£'000	£'000
Cash at bank and in hand	13,844	(5,538)	(105)	-	8,201
Bank overdrafts & RCF1	(2,568)	-	65	-	(2,503)
	11,276	(5,538)	(40)	-	5,698
Debt due within 1 year	(3,366)	1,671	73	(1,671)	(3,293)
Debt due after 1 year	(9,663)	-	99	1,671	(7,893)
Finance leases	(100)	33	1	-	(66)
Net debt	(1,853)	(3,834)	133	-	(5,554)

¹ RCF = Revolving Credit Facility

Notes to the Interim Report

1.      Basis of Preparation

The unaudited Interim Report has been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

The Interim Report was approved by the Board of Directors and the Audit Committee on 11 June 2012.  The Interim Report does not constitute statutory financial statements within the meaning of the Companies Act 2006 and has not been audited.  

Comparative figures in the Interim Report for the year ended 30 September 2011 have been taken from the Group's audited statutory financial statements on which the Group's auditors, PricewaterhouseCoopers LLP, expressed an unqualified opinion.  The comparative figures to 31 March 2011 are unaudited.

The Interim Report will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 12 June 2012. Copies will be available to members of the public upon application to the Company Secretary at Dowlish Ford, Ilminster, Somerset, TA19 0PF.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2011, as described in those financial statements, save for the adoption of the new standards referred to below.

2.      Application of IFRS

Adoption of new standards

During the current reporting period there were no new standards or amendments which had a material impact on the net assets of the Group. In addition, standards or amendments issued but not yet effective are not expected to have a material impact on the net assets of the Group.  However, the Group is closely monitoring the IASB projects on Contract Revenue recognition and the Lease accounting overhaul as they could potentially have a material impact on the Group's results.

3.      Estimates

The preparation of interim financial statements requires management to make 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 condensed consolidated interim financial statements, the significant judgments made by management in applying the Company'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 30 September 2011, with the exception of changes in estimates that are required in determining the provision for income taxes.

4.      Financial risk management

4.1     Financial risk factors

The Company's activities expose it to a variety of financial risks, market risk (including currency risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements as at 30 September 2011.

There have been no changes in the risk management policies since the year end.

Notes to the Interim Report (continued)

4.2     Liquidity risk

Under deferred consideration arrangements associated with the acquisition of Crystal Technology LLC, the Company was obliged to pay the former owners  $3.25 million on 25 March 2012.  The Company's other acquisition in 2011, EM4 Inc, did not reach its threshold for the contingent consideration element to be paid. 

Except as above there have been no material changes in contractual undiscounted cash flows for financial liabilities.

5.         Segmental analysis

	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
For half year to 31 March 2012	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Total revenue	6,754	2,566	18,533	1,598	-	29,451
Inter and intra-division	-	-	(1,651)	-	-	(1,651)
External revenue	6,754	2,566	16,882	1,598	-	27,800
Divisional expenses	(5,786)	(2,109)	(12,965)	(1,478)	(940)	(23,278)
EBITDA¹	968	457	3,917	120	(940)	4,522
EBITDA %	14.3%	17.8%	23.2%	7.5%	-	16.3%
Depreciation & Amortisation	(227)	(75)	(324)	(33)	(490)	(1,149)
Operating profit before amortisation of acquired intangible assets	741	382	3,593	87	(1,430)	3,373
Acquired intangible assets amortisation	-	-	-	-	(457)	(457)
Operating profit	741	382	3,593	87	(1,887)	2,916
Operating profit margin %	11.0%	14.9%	21.3%	5.4%	-	10.5%

5.         Segmental analysis (continued)

	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
For half year to 31 March 2011	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Total revenue	7,017	2,648	16,776	1,972	-	28,413
Inter and intra-division	-	-	(1,221)	-	-	(1,221)
External revenue	7,017	2,648	15,555	1,972	-	27,192
Divisional expenses	(5,318)	(1,985)	(10,934)	(1,738)	(1,370)	(21,345)
EBITDA¹	1,699	663	4,621	234	(1,370)	5,847
EBITDA %	24.2%	25.0%	29.7%	11.9%	-	21.5%
Depreciation & Amortisation	(225)	(55)	(285)	(44)	(411)	(1,020)
Operating profit before amortisation of acquired intangible assets	1,474	608	4,336	190	(1,781)	4,827
Acquired intangible assets amortisation	-	-	-	-	(530)	(530)
Operating profit	1,474	608	4,336	190	(2,311)	4,297
Operating profit margin %	21.0%	23.0%	27.9%	9.6%	-	15.8%

¹EBITDA = Earnings before interest, tax, depreciation and amortisation.

All of the amounts recorded are in respect of continuing operations.

Sales between segments are made on normal commercial terms.

Analysis of revenue by destination

	Half year to 31 Mar 2012 (Unaudited)		Half year to 31 Mar 2011 (Unaudited)
	£'000		£'000
United Kingdom	4,419		4,212
America	13,186		11,490
Continental Europe	6,418		5,350
Asia/Pacific	3,777		6,034
Other	-		106
	27,800		27,192

6.         Income tax expense

Analysis of tax charge in the period

		Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Current taxation
UK Corporation tax		501	617	1,018
Overseas tax		305	793	1,273
Adjustments in respect of prior year tax charge		(78)	60	(181)
Total current tax		728	1,470	2,110
Deferred tax
Origination and reversal of timing differences		(140)	(301)	(592)
Adjustments in respect of prior year deferred tax		(17)	84	(298)
Impact of tax rate change to 24% (2011: 25%)		31	30	65
Total deferred tax		(126)	(187)	(825)
Income tax expense per income statement		602	1,283	1,285

Adjusted income tax workings		Half Year to 31 Mar 2012 (Unaudited)		Half Year to 31 Mar 2011 (Unaudited)		Full Year to 30 Sep 2011 (Audited)
		£'000	£'000		£'000
Income tax expense per income statement		602		1,283		405
Add back one-off items:
Losses utilised not previously recognised on deferred tax		-		-		232
Total one-off items		-		-		232
Adjusted income tax expense		602		1,283		1,517

Income tax expense for the six months ended 31 March 2012 and 31 March 2011, respectively, has been estimated at prevailing rates.  Taxation for the year ended 30 September 2011 is the actual provision for the year.

7.      Earnings per share

The calculation of earnings per 20p Ordinary Share is based on the profit for the period using as a divisor the weighted average number of Ordinary Shares in issue during the period.  The weighted average number of shares is given below.

	Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
	No.	No.	No.
Number of shares used for basic earnings per share	21,858,175	20,477,083	21,162,500
Dilutive shares	1,280,393	409,444	1,194,768
Number of shares used for dilutive earnings per share	23,138,568	20,886,527	22,357,268

A reconciliation of the earnings used in the earnings per share calculation is set out below:

	Half Year to 31 Mar 2012 (Unaudited)		Half Year to 31 Mar 2011 (Unaudited)		Full Year to 30 Sep 2011 (Audited)
	£'000	p per share	£'000	p per share	£'000	p per share
Basic earnings per share	1,897	8.7p	2,653	13.0p	7,523	35.5p
Adjustments net of income tax expense:
Amortisation of acquired intangible assets (net of tax)	347	1.6p	407	2.0p	1,083	5.1p
Acquisition costs	-	-	380	1.9p	434	2.1p
Redundancy costs	42	0.2p	-	-	-	-
Goodwill impairment of investment (net of tax)	-	-	-	-	1,299	6.1p
Change in value of contingent consideration for acquisition	-	-	-	-	(2,085)	(9.9)p
Costs associated with debt re-financing	-	-	49	0.2p	37	0.2p
Impact of one-off tax adjustments	-	-	-	-	(232)	(1.1p)
Total adjustments net of income tax expense	389	1.8p	836	4.1p	(536)	(2.5p)
Adjusted basic earnings per share	2,286	10.5p	3,489	17.1p	8,059	38.0p

Basic diluted earnings per share	1,897	8.2p	2,653	12.7p	7,523	33.6p
Adjusted diluted earnings per share	2,286	9.9p	3,489	16.7p	8,059	36.0p

Adjusted earnings per share before amortisation and adjustments has been shown because, in the opinion of the Directors, it more accurately reflects the trading performance of the Group.  

8.      Dividend

The Directors have declared an interim dividend of 2.0 pence per share for the half year ending 31 March 2012.  This dividend has not been accounted for within the period to 31 March 2012 as it is yet to be paid.

	Half Year to 31 Mar 2012 (Unaudited)	Half Year to 31 Mar 2011 (Unaudited)	Full Year to 30 Sep 2011 (Audited)
	£'000	£'000	£'000
Final 2011 dividend paid : 3.0p per share	656	-	-
2011 Interim dividend paid : 2.0p per share	-	-	437
Final 2010 dividend paid in 2011 : 2.0p per share	-	434	434
	656	434	871

9.      Borrowings

The group's banking facilities with the Royal Bank of Scotland comprise of an $18 million dollar denominated term loan (fully drawn down), a £3.1 million sterling denominated term loan (fully dawn down).  The term loan balances at 31 March 2012 were $13.5 million and £2.7 million sterling respectively.

In addition, the Company has a working capital facility of $8.0 million of which $4.0 million is utilised and an undrawn capital expenditure facility of $6.0 million.

All facilities are committed until April 2015 and attract an interest rate of between 2.25% and 3.00% above LIBOR dependent upon the Company's leverage ratio.

10.     Called Up Share Capital

	2012 No.	2011 No.	2012 £'000	2011 £'000
Authorised Ordinary share of 20p each	24,000,000	24,000,000	4,800	4,800
Allotted, issued and fully paid Ordinary share of 20p each	21,860,798	21,850,798	4,372	4,370

11.     Derivative financial instruments

		Half Year to 31 Mar 2012  (Unaudited)	Half Year to 31 Mar 2011  (Unaudited)	Full Year to 30 Sep 2011 (Audited)
		£'000	£'000	£'000
Interest rate swap		265	173	357
Current liability portion		88	69	102
Non-current liability portion		177	104	255
		265	173	357

The notional principal amount of the outstanding interest swap contract at 31 March 2012 was $15.75 million (2011: $7.7 million).  The end date for the interest rate swap is 1 April 2015.  At 31 March 2012, the fixed rate of the interest rate swap was 2.14% and the floating rate was US dollar LIBOR. The fair value of the swap is a mark to market calculation based on future interest rate expectations over the life of the swap.  This is a level 2 method of determining fair value as defined by IFRS 7.

 

END

 

 

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