Judges Scientific Regulatory News (JDG)

Judges Scientific plc

("Judges Scientific", the "Company", or the "Group")

Interim results for the six months ended 30 June 2016

Key financials 

· Revenues up 9.3% to a record £27.3 million (H1 2015: £24.9 million) including 7.0% organic growth;

· CoolLED, Dia-Stron and Fire Instrumentation and Research Equipment ("FIRE") acquired during the period for a total consideration of £6.6m;

· Interim dividend of 9.0p (H1 2015: 8.1p), an increase of 11.1%; covered 3.7 times by adjusted earnings;

· Organic order intake down 1.6% compared with H1 2015;

· Organic order book at 10.7 weeks (H1 2015: 11.7 weeks);

· Adjusted* pre-tax profit down 11.4% to £3.0 million (H1 2015: £3.3 million);

· Adjusted* basic earnings per share down 19.2% to 33.2p (H1 2015: 41.1p);

· Cash generated from operations of £2.4 million (H1 2015: £2.3 million);

· Adjusted* net debt of £10.3 million as at 30 June 2016 (30 June 2015: £7.5 million and 31 December 2015: £4.0 million);

· Cash balances of £6.0 million as at 30 June 2016 (30 June 2015: £8.2 million and 31 December 2015: £8.5 million).

* Adjusted earnings figures are stated before adjusting items relating to hedging of risks materialising after the end of the period, amortisation of intangible assets, share based payments and acquisition-related costs. Adjusted net debt notionally includes acquisition-related payments which had yet to be settled at the balance sheet date and excludes subordinated debt owed by subsidiaries to minority shareholders.

Alex Hambro, Chairman of Judges Scientific, commented: 

"This has been a period of contrast, with success in the pursuit of earnings-enhancing acquisitions and frustration in respect of short-term trading performance. At this stage, the Board therefore believes that the full year results will be significantly below market expectations."

For further information please contact:

Chairman's Statement

I am pleased to be able to report, for the eleventh consecutive year, record revenues and dividends. This has been a period of contrast, with success in the pursuit of earnings-enhancing acquisitions and frustration in respect of short-term trading performance. The patchy climate, which has characterised our sector in the last five years and affected its participants at various times to various degrees, has continued to prevail and dampened our performance in the first half of 2016. This resulted in slower order intake and reduced adjusted pre-tax profits and earnings per share for the period.

Acquisitions

During the period under review, the Group completed three acquisitions:

· CoolLED Limited, which makes LED based illumination systems for fluorescence microscopy, was acquired on 17 February 2016 for £3.6 million including the payment of a £0.1 million earn-out;

· The business and assets of FIRE were purchased by the Group's subsidiary Fire Testing Technology Limited ("FTT") on 28 March 2016; and

· Dia-Stron Limited, which makes systems to test the mechanical properties of fibres (predominantly human hair), was acquired on 31 March 2016 for £2.7 million.

The results for the six-month period ended 30 June 2016 include the maiden contribution of these three businesses as well as a full six-month contribution from Armfield Limited (acquired 22 January 2015). All references to "Organic" data in this statement exclude Armfield, CoolLED and Dia-Stron ("the Acquired Companies"), as they were not owned by the Group as at 1 January 2015, but include the figures relating to FIRE which are neither material nor distinguishable from FTT's. 

Trading performance

Group revenues for the six months ended 30 June 2016 progressed 9.3% to £27.3 million (H1 2015: £24.9 million), as a result of 7.0% Organic growth and of the inclusion of the revenue generated by the Acquired Companies. Organic sales progressed best in North America, but were weak in the UK (down 13%) and in China / Hong Kong (down 10%). The post-acquisition revenues of CoolLED and Dia-Stron were satisfactory, but Armfield's revenue was down following slow order intake during the first five months of 2016. Group revenue was also significantly held back by production issues in one of the constituents of the Group's Vacuum division.

As a consequence, organic EBITA contribution declined by 3.4% in the first half of 2016 and adjusted pre-tax profit reduced by 11.4% to £3.0 million (H1 2015: £3.3 million). Adjusted basic earnings per share decreased 19.2% to 33.2p (H1 2015: 41.1p); the decline is sharper than that of pre-tax profit due to the good performance in H1 2016 of the Group's two part-owned businesses. Adjusted diluted earnings per share contracted from 40.3p to 32.7p. Return on total invested capital ("ROTIC") progressed modestly to 20.8% (based on 12 months to June 2016) from 18.7% a year before.

Consistent with past reports, the Group's figures have been adjusted to present, in the Directors' opinion, the true operating performance of the Group. The total adjustments of £3.6 million (H1 2015: £4.8 million) include a £2.9 million charge for amortisation of acquired intangible assets (H1 2015: £4.3 million) primarily arising from recent acquisitions. The adjusting items reduce profit before tax from £3.0 million to a loss of £0.7 million (H1 2015: loss of £1.5 million) and earnings per share to a negative 16.3p for both basic and diluted (H1 2015: negative 24.7p basic and diluted).

Cashflow and net debt

Cash flow during the first half of 2016 was robust, with cash from operations of £2.4 million (H1 2015: £2.3 million) representing 75% of adjusted EBIT. The interim balance sheet includes cash balances of £6.0 million and adjusted net debt of £10.3 million, reflecting the acquisitions during the period and the impact of settling the second interim dividend of £1.0 million; this will reduce the outflow in the second half by the same amount.

Order intake

Across the sector demand has been generally soft and for the third consecutive year, order intake was weak in the first quarter. This year order intake did not start to pick up until June and as a result the organic order book at 30 June 2016 had reduced to 10.7 weeks (30 June 2015: 11.7 weeks). The Group's total order book stood at 10.6 weeks at 30 June 2016.

Dividend

In accordance with the Company's dividend policy, the Board is declaring an interim dividend of 9.0p (2015: 8.1p), which will be paid on Friday 4 November 2016 to shareholders on the register on Friday 7 October 2016. The shares will go ex-dividend on Thursday 6 October 2016. The interim dividend is covered 3.7 times by adjusted earnings. 

Outlook

The Group's business environment remains uneven. The long term effect of Brexit is difficult to gauge but, in the short term, the Group benefits from the most favourable global exchange rates since 2009. Although exports represent a vast majority of the Group's sales, the UK is not an insignificant market and it may remain adverse until the Brexit negotiations are concluded. China has been an important source of growth and its continued appetite for education and research investment remains an important factor in the Group's development. The Group remains convinced of the long term growth of the sector, however the Board believes that medium term growth is dampened by its dependence on public funds. As a result the Group is currently more vulnerable to short-term performance fluctuations. Positively, this has not affected the pursuit of our business model as seen through our continued completion of value enhancing acquisitions.

Order intake in the third quarter continued the more positive trend observed in June and organic order intake since the beginning of the year is now ahead of the comparative period in the prior year. A satisfactory outcome for the year still depends on this improvement being sustained and on a continued revival of Armfield's market and on the resolution of the aforementioned production issues. At this stage, the Board therefore believes that the full year results will be significantly below market expectations.

The Hon. Alexander Hambro

Chairman

20 September 2016

Condensed consolidated interim statement of comprehensive income

Condensed consolidated interim balance sheet

Condensed consolidated interim statement of changes in equity

The movement in Other reserves of £617,000 arises from the issue of 36,738 shares as part of the consideration for the acquisition of Armfield Ltd.

Condensed consolidated interim cash flow statement

Notes to the interim report

1. General information and basis of preparation

Judges Scientific plc is the ultimate parent company of the Group, whose principal activities comprise the design, manufacture and sale of scientific instruments. The subsidiaries are grouped into two segments: Materials Sciences and Vacuum. The results of the Group's recent acquisitions of Dia-Stron Limited ("Dia-Stron") and the trade and assets of Fire Instrumentation and Research Equipment ("FIRE") are included in the Materials Sciences segment and CoolLED Limited ("CoolLED") is included in the Vacuum segment.

The financial information set out in this interim report for the six months ended 30 June 2016 and the comparative figures for the six months ended 30 June 2015 are unaudited. The interim report has been prepared in accordance with IAS 34 "Interim Financial Reporting". The interim report does not contain all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2015, which have been prepared in accordance with IFRS as adopted by the European Union.

The financial information for the year ended 31 December 2015 set out in this interim report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2015 have been filed with the Registrar of Companies. The Auditor's Report in respect of those financial statements was unqualified and did not contain statements under section 498 of the Companies Act 2006.

Judges Scientific plc is the Group's ultimate parent company. The Company is a public limited company incorporated and domiciled in the United Kingdom. Its registered office and principal place of business is 52c Borough High Street, London SE1 1XN. Its shares are quoted on the Alternative Investment Market. The interim report is presented in Sterling, which is the functional currency of the parent company. The interim report has been approved for issue by the Board of directors on 19 September 2016.

2. Significant accounting policies

The interim report has been prepared in accordance with the accounting policies adopted in the last annual financial statements for the year ended 31 December 2015, except for the taxation policy where, for the purposes of the interims, the tax charge on adjusted business performance is calculated by reference to the estimated effective rate for the full year.

3. Segmental analysis

3. Segmental analysis (continued)

Unallocated items relate to the Group's head office costs.

Segment assets and liabilities

Unallocated items are borrowings, intangible assets and goodwill arising on acquisition, deferred tax, defined benefit obligations and parent company net assets.

4. Adjusting items

5. Earnings per share

Adjusted basic earnings per share is calculated on the adjusted profit, which is presented before any adjusting items, attributable to the company's shareholders divided by the weighted average number of shares in issue during the period.

Adjusted diluted earnings per share is calculated on the adjusted basic earnings per share, adjusted to allow for the issue of Ordinary shares on the assumed conversion of all dilutive options and any other dilutive potential Ordinary shares. The calculation is based on the treasury method prescribed in IAS 33. This calculates the theoretical number of shares that could be purchased at the average middle market price in the period out of the proceeds of the notional exercise of outstanding options. The difference between this theoretical number and the actual number of shares under option is deemed liable to be issued at nil value and represents the dilution.

Total earnings per share is calculated as above whilst substituting total profit for adjusted profit.

6. Other intangible assets

The following tables show the significant additions to and amortisation of intangible assets:

7. Share capital

Movements in the Group's Ordinary shares in issue are summarised as follows:

During the first six months of 2016 the following allotments took place:

• 3,500 Ordinary shares were issued to satisfy the exercise of share options as follows:

• on 23 February 2016 when the mid-market share price was 1,517.5p;

• on 1 April 2016 when the mid-market share price was 1,682.5p; and

• on 3 May 2016 when the mid-market share price was 1,857.5p.

8. Changes in net debt

Changes in net debt for the six months ended 30 June 2016 were as follows:

Non-cash items represent foreign exchange differences on bank loans.

9. Acquisitions

During the six months to 30 June 2016, the Group completed 3 separate acquisitions namely the purchase of CoolLED Limited, Dia-Stron Limited and the trade and assets of Fire Instrumentation and Research Equipment.

On 18 February 2016, the Group acquired 100% of the issued share capital of CoolLED Limited, an instrument maker based in Andover, Hampshire. CoolLED designs, manufactures and markets illumination systems for fluorescence microscopy. CooLED was acquired for an initial cash consideration of £3.5 million, a payment to reflect excess working capital and an earn-out capped at £1.0 million calculated via achievement of adjusted operating profits of over £1.0 million in respect of the year to 30 June 2016, reducing by £4.50 for each £1 shortfall below £1.0 million. On 8 August 2016 £0.1 million was paid in full settlement of the earn-out.

On 29 March 2016, the Group acquired the trade and certain assets of FIRE, a fire testing equipment manufacturing and servicing business. The purchase consideration is not material in the context of the overall Judges group.

On 1 April 2016 the Group acquired 100% of the issued share capital of Dia-Stron Limited a company which designs and manufactures systems to test the mechanical properties of fibres and is based in Andover, Hampshire. Dia-Stron was acquired for a cash consideration of £2.75 million plus a payment to reflect excess working capital.

The summary provisional fair value of the costs of these acquisitions includes the components stated below:

The consideration and associated transaction costs for these transactions were financed from existing cash resources and £3.5 million was drawn down from the Group's existing £10 million acquisition loan facility.

9. Acquisitions (continued)

The summary provisional fair values recognised for the assets and liabilities acquired are as follows:

Management performed a detailed review of each of the acquiree's intangible assets. The intangible assets recognised reflect recognition of acquired customer relationships, the value of the acquired future committed order books, internally generated technology, trademarks, domain names and distributor relationships. A significant amount of the value of the acquired business is attributable to its workforce and sales knowhow. As no assets can be recognised in respect of these factors, they contribute to the goodwill recognised upon acquisition.

Other fair value adjustments reflect specific inventory provisions and accruals and related deferred tax assets. The deferred tax liabilities recognised represent the tax effect which will result from the amortisation of the intangible assets, estimated using the tax rate substantively enacted at the balance sheet date and the fair value of the assets.

The acquisitions resulted in a profit after tax (before adjusting items) attributable to owners of the parent company of £327,000 in the period post-acquisition. After amortisation of intangible assets, the contribution to owners of the parent company's results amounted to a loss of £61,000 after tax.

If the acquisitions had been acquired on 1 January 2016, based on pro-forma results, revenue for the group for the period to 30 June 2016 would have increased by £792,000 and profit after tax (before adjusting items) attributable to owners of the parent company would have increased by £199,000 after allowing for interest costs but before charging amortisation of intangible assets (a reduction of £132,000 after charging additional amortisation of intangible assets of £331,000).

10. Defined Benefit Scheme

The Group's defined benefit pension scheme liability has increased to £2.3 million compared to £1.4 million at 31 December 2015. This increase in liability is mainly attributable to a significant reduction of 0.9% in the Discount rate to 3.00% from 3.90% at 31 December 2015.

11. Dividends

During the period, the Company paid a second interim dividend of 15.9p per share (£1.0 million) on 22 March 2016 relating to the financial year ended 31 December 2015 (2015: £nil).

The Company also paid a final dividend of 1.0p per share (£0.1 million) on 8 July 2016 relating to the financial year ended 31 December 2015.

The Company will pay an interim dividend for 2016 of 9.0p per share on 4 November 2016 to shareholders on the register on 7 October 2016. The shares will go ex-dividend on 6 October 2016.