Annual Report and Accounts 2016 J u d g e s S c i e n t i fi c p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6 Judges Scientific plc Annual Report and Accounts 2016 Strategic report A year of contrasts A record four acquisitions but a disappointing trading performance. However, Judges commences 2017 with a solid financial position, four new businesses, a strong order book and positive order intake, all of which provide a platform for a year of progress. Who we are Judges Scientific plc is an AIM-quoted group specialising in the acquisition and development of a portfolio of scientific instrument businesses. Corporate expansion is being pursued, both through organic growth within its subsidiary companies and through the acquisition of top-quality businesses with established reputations in world-wide markets. For more information visit: www.judges.uk.com Highlights Operational highlights Contents • Revenues up 2% to a record £57.3 million (2015: £56.2 million), Strategic report 1 Highlights 2 At a glance 6 Chairman’s statement 7 Chief Executive’s report 9 Business model and strategy 10 Principal risks and uncertainties 12 Finance Director’s report 14 Board of Directors 16 Directors’ report Financial statements Independent auditor’s report 19 20 Consolidated statement of comprehensive income 21 Consolidated balance sheet 22 Consolidated statement of changes in equity 23 Consolidated cashflow statement 24 Notes to the consolidated financial statements 46 47 Parent company balance sheet 48 Parent company statement of changes in equity 49 Notes to the parent company financial statements 54 Notice of Annual General Meeting 56 Ten year financial history IBC Company information Independent auditor’s report including 2.5% organic growth • A record four acquisitions completed during the year: CoolLED, Dia-Stron, Fire Instrumentation and Research Equipment (“FIRE”) and EWB Solutions for £9.0 million • Final dividend of 18.5p, making a total 27.5p for the year, an increase of 10%; covered 3.1 times by adjusted earnings • Adjusted* operating profit of £7.1 million (2015: £9.3 million) • Statutory operating profit of £1.0 million (2015: £1.8 million) • Organic order intake up 2.9% compared with 2015 • Organic order book at 14.7 weeks (1 January 2016: 11.4 weeks) • Adjusted* basic earnings per share 84.8p (2015: 109.2p) • Cash generated from operations of £6.2 million (2015: £8.5 million) • Adjusted* net debt of £9.9 million as at 31 December 2016 (31 December 2015: £4.0 million) • Cash balances of £7.9 million as at 31 December 2016 (31 December 2015: £8.5 million) * Adjusted earnings figures are stated before adjusting items relating to amortisation of intangible assets, acquisition-related costs, share-based payments and hedging of risks materialising after the end of the year. Adjusted net debt includes acquisition-related liabilities and excludes subordinated debt owed by subsidiaries to minority shareholders. Judges businesses at a glance Pages 2–5 Financial highlights Revenue (£000) Adjusted operating profit (£000) Adjusted undiluted basic earnings per share (pence) +2% -22.8% -22.3% 3 0 2 , 6 5 5 8 2 7 5 , 0 5 2 , 9 4 4 1 , 7 3 1 8 7 , 3 1 0 7 , 4 4 9 , 5 5 . 0 0 1 3 . 1 8 2 . 9 0 1 7 . 2 8 . 8 4 8 8 6 5 , 0 4 2 4 0 6 3 , 1 4 0 8 2 , 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 Ten year financial history Page 56 1 At a glance Established reputations Who we are Judges Scientific plc is an AIM-quoted group specialising in the acquisition and development of a portfolio of scientific instrument businesses. Corporate expansion is being pursued, both through organic growth within its subsidiary companies and through the acquisition of top-quality businesses with established reputations in worldwide markets. Our businesses 1 2 3 Armfield’s innovative engineering teaching and research equipment is aimed at the broad disciplines of civil, chemical and mechanical engineering for universities, schools and colleges. Its industrial division provides market-leading R&D technology for applications in the food, beverage, edible oils, ingredients and pharmaceuticals industries. Products and services: • dedicated engineering teaching products; • market-leading R&D technology; • flexible product training packages; • product maintenance contracts; and • worldwide network of agents and support. FTT is internationally recognised as the world’s leading supplier of fire testing instrumentation and has supplied the majority of leading fire research groups and testing laboratories around the world. Our directors and senior researchers participate in UK, ISO, CEN and ASTM standardisation committees to ensure that our instruments are always compliant. These include committees dealing with construction products, electro-technical products, furnishing products and transport applications for instruments such as the Cone Calorimeter, NBS Smoke Density Chamber, EN 50399, SBI, etc. Sircal designs, manufactures and distributes rare gas purifiers typically for use in metal analysis utilising the Arc/Spark spectrometry technique. This technique provides qualitative and quantitative analysis of a metallic sample for determination of its purity. The products are sold worldwide to OEM customers (spectrometer manufacturers that use such purifiers in conjunction with their own instruments) or directly to end users such as metal manufacturers and dealers, and test houses. 4 5 6 PE.fib eroptics GDS designs, develops and manufactures equipment and software used for the computer-controlled testing of soils and rocks. This technology is used to evaluate the mechanical properties that are key in geotechnical and earthquake engineering design. Services include: • advanced systems for commercial soil and rock testing laboratories; and • bespoke systems for university research in the engineering properties of soil and rock. Dia-Stron is the leading manufacturer of innovative and automated modular testing systems for single fibres and filaments. Fibre measurements range from dimensional analysis and mechanical properties (tensile, bending and torsion) to fatigue failure evaluation, and the measurement modules can be automated for increased productivity. Delivers solutions to: • the hair care industry – mainly single hair fibre testing supporting R&D innovations; and • the technical fibre market – including carbon or ceramic filaments used in composites. PE.fiberoptics is a leading manufacturer of equipment for testing optical fibers. Optical fibers are the main medium for long distance transmission of telecommunication data. We export 95% of our products and have an installed base in approximately 40 countries. Products enable: • production of optical fibers; • characterisation of optical fiber cables; • performance confirmation of installed telecommunication networks; and • R&D for new fiber designs. 2 Strategic report 6 PE.fiberoptics Field Portable unit FP5000 The FP5000 is a new portable unit for the testing of PMD, chromatic dispersion and OTDR. 2 FTT iCone Plus Calorimeter The iCone Plus Calorimeter is the first in FTT’s new interactive range of calorimeters, the i-series. It features the latest technology in control and automation making it the most advanced, reliable and user-friendly cone calorimeter in the world. 4 GDS Instruments The GDS hydraulic loading frames are load frames with a hydraulic dynamic actuator mounted on the crossbeam for axial stress/strain cyclic dynamic loading. The frames are available in 100kN, 250kN and 1,500kN loads. 8 Quorum Technologies The GloQube® was launched in 2016 and is a compact, easy-to-use glow discharge system primarily used for the hydrophilisation (wetting) of TEM carbon support films and grids. The GloQube’s unique design has two independent vacuum chambers, which allows users to avoid cross-contamination by devoting one chamber to “clean” applications and the other chamber to applications which require vapour to be added during the glow discharge. 12 CoolLED pE-300white Fluorescent skin image taken using a CoolLED pE-300white, Olympus BX51 40x objective and a DP71 colour camera. 11 Scientifica Simultaneously perform two-photon microscopy and photoactivation with exceptional performance thanks to our most advanced multiphoton imaging system yet. Our businesses 7 8 Quor um Technologies 9 Aitchee Engineering Ltd is a well-established precision engineering company that can offer high end sheet metalwork, laser cutting and CNC machining. We use state of the art software to take customers drawings and turn them into manufactured goods in Steel, Aluminium, Stainless Steel, Yellow metals or plastics. We can supply large batch-work, call off orders and R&D including prototypes, we can also offer manufacturing process assistance and value engineering. East Sussex-based Quorum Technologies manufactures market-leading scientific instruments primarily used for electron microscopy (EM) sample preparation. Electron microscopy is a key research tool in almost every area of scientific endeavour, from the fight against cancer and major diseases, through to food safety and the development of advanced microelectronics and new materials. Awards: • 2014: Queen’s Award for Enterprise in International Trade. Key products: • Q Series of vacuum coating systems; and • PP3010T cryo preparation systems for SEM and FIB/SEM. UHV Design, founded in 1993, specialises in the design, manufacture and supply of high precision sample heating and manipulation products for use in the high and ultrahigh vacuum markets for materials research. Globally, our products often play a pivotal role in major big physics experiments including: • high energy particle accelerators such as CERN and SLAC; and • synchrotron light sources including the UK’s own facility, Diamond. They are also used routinely in laboratory- scale R&D instrumentation focused on new state-of-the-art materials, typically for use in: • semiconductors; • photovoltaics; • catalysis; and • bio-compatible materials. 10 11 12 Deben is a precision engineering company providing innovative solutions for SEM and µX-Ray CT in-situ tensile testing. Deben also manufactures SEM detectors and a range of SEM accessories including motor control and heating and cooling stages. Product groups: • in-situ tensile and compression systems; • accessories for electron beam applications; and • imaging and detectors for SEM and TEM. Scientifica is a multi-award winning, globally recognised brand in nanopositioning, photomanipulation and advanced imaging systems. Currently celebrating its 20th anniversary, the company develops cutting-edge equipment with leading scientists at top research laboratories for use in the neuronal electrophysiology, two-photon imaging and optogenetics markets. • Two-time Queen’s Award for Enterprise winners. Most recently the Queen’s Award for Enterprise: Innovation. • British Chamber of Commerce National Business of the Year 2016. • Microscopy Today Innovation Award 2016 for SciScan open-source software. • British Chamber of Commerce National Export Business of the Year 2016. • Offices in the United Kingdom, the United States and China. CoolLED designs and manufactures high- performance LED illumination systems for use in medical research and other demanding applications. Researchers and clinicians benefit from using its advanced LED technology. This offers a more stable, longer lasting, and energy-efficient solution than traditional lamp-based illuminators as well as superior safety and environmental features. Main products: • pE-100: a range of compact, simple-to-use, single wavelength illumination systems for screening fluorescence. • pE-300 series: offers intense, broad spectrum illumination with a choice of control and integration levels to suit user requirements. • pE-4000: universal LED illumination system for research that sets a new standard for the industry with its 16 selectable wavelengths. 13 Founded in 1999, EWB Solutions specialises in the design and manufacture of edge-welded metal bellows where a high integrity hermetic seal is required in the presence of an applied movement. Supplied globally, EWB bellows are produced in a wide range of materials, meeting a variety of life and environmental constraints for applications within a diverse range of industries such as: • semiconductor processing; • particle physics experimentation; • material/surface analysis; • oncology therapy; and • petrochemical processing. 5 Chairman’s statement Summary • 2016 was a year of contrasts for Judges. A record of four acquisitions were completed but the overall trading performance of the Group was disappointing. • Weak demand throughout the Group in the first half gave way to a good recovery and a strong order book by the year end. • The underlying market for scientific instruments remains robust and the sector’s long-term growth drivers provide comfort that the Group will continue to deliver strong and durable returns for shareholders. 2016 was a year of contrasts for Judges. A record of four acquisitions were completed but the overall trading performance of the Group was disappointing. The Group currently consists of 13 trading businesses; the excellent progress of five of our organic businesses and the contribution of the newly acquired ones only partially compensated for the underperformance of three of the Group’s businesses. The Group as a whole achieved modest revenue growth in 2016 to a new record of £57.3 million (2015: £56.2 million). While the long-term growth drivers of the scientific instrumentation sector remain excellent, the volatile demand observed in the previous three to four years has continued to be a feature of our business; weak demand throughout the Group in the first half gave way to a good recovery and a strong order book by the year end of 13.9 weeks (31 December 2015: 11.4 weeks). Acquisitions The year under review saw the completion of the acquisitions of: • 100% of the issued share capital of CoolLED Limited (“CoolLED”) on 18 February 2016 for a total consideration of £3.6 million (including an earn-out payment of £0.1 million) plus excess cash. CoolLED designs, manufactures and markets illumination systems for fluorescence microscopy, which is a technique used in life sciences; • the business and assets of Fire Instrumentation & Research Equipment (“FIRE”) on 29 March 2016. This business manufactures instruments which test reaction to fire and has been integrated into Fire Testing Technologies; • 100% of the issued share capital of Dia-Stron Limited (“Dia-Stron”) on 1 April 2016 for a total consideration of £2.7 million plus excess cash. The company designs, manufactures and sells systems to test the mechanical properties of fibres; and • 100% of the issued share capital of EWB Solutions Limited (“EWB”) on 29 November 2016 for £1.8 million plus excess cash. The company manufactures edge-welded bellows used in Ultra High Vacuum systems and other scientific, medical and defence applications. I am pleased to report that these new additions to the Group have performed well and further diversified our revenue streams and mitigated our risk profile. Performance Group revenues increased from £56.2 million to £57.3 million. This included organic growth of 2.5% and the 2016 acquisitions, offset to a degree by lower sales at Armfield. Adjusted operating profits reduced from £9.3 million in 2015 to £7.1 million. Statutory operating profit was £1.0 million (2015: £1.8 million). Despite a disappointing trading performance, the Group’s financial position remains strong and the Board recommends a final dividend of 18.5p, making a total of 27.5p in respect of 2016 (2015: 25.0p), representing a 10.0% increase. Strategy The Group’s strategy is based on creating shareholder returns through highly selective and carefully structured acquisitions, underpinned by diversified, solid and consistent earnings and cashflows arising from our acquired businesses. The Group’s acquisition model is to acquire small/medium-sized scientific instrument companies, paying a disciplined multiple of earnings and to finance any acquisition ideally through existing cash resources and/or bank borrowings. We are highly selective in acquiring businesses with long-term sustainable profits and cashflows, in order to obtain immediate and enduring earnings enhancement for our shareholders. It is paramount that acquisitions are completed only when the Directors are satisfied that the target business has sound longstanding strength. As our Group grows it is then able to promptly pay down the acquisition debt, making space to reinvest in further acquisitions, subject to our prudent approach on gearing. The underlying market for scientific instruments remains robust and the sector’s long-term growth drivers provide comfort that the Group will continue to deliver strong and durable returns for shareholders despite, as we have seen this year, the potential for some short-term variability in performance. Long-term market drivers are rooted in the general global expansion of higher education and the need for improved measurement to support the relentless worldwide search for optimisation across science and industry. Our team The Group has highly specialised and skilled employees who constantly strive to improve and perfect their products and services in a rapidly changing technical world. Their intimate knowledge of their niche markets and customers, most of which are international to the UK, has allowed your Company to weather some changeable economic circumstances over the past few years and we are fortunate to benefit from their dedication and sheer hard work. Our thanks go out to them and to all our stakeholders for their continued and important contributions to the achievements reported during the year. Alex Hambro Chairman 20 March 2017 6 Strategic report Chief Executive’s report Summary • Group revenues progressed modestly from £56.2 million to £57.3 million, an increase of 2%. • Total dividend per share of 27.5p, an increase of 10% and covered more than three times by adjusted earnings per share. • The long-term fundamentals supporting demand for scientific instruments remain positive, driven primarily by increased worldwide investment in higher education and a growing trend towards optimisation across science and industry, where optimisation requires ever increasing measurement. Group revenues for the financial year ended 31 December 2016 progressed modestly from £56.2 million to £57.3 million, an increase of 2%. This reflects organic growth of 2.5%, and the contribution of the four businesses acquired during 2016 and the full-year albeit reduced contribution from Armfield (2015: 11 months). For the year as a whole and excluding the businesses acquired since 1 January 2015 (this is the meaning of “organic” in this Report and Accounts), revenues declined 14% in the UK, 14% in the rest of Europe and 5% in China/Hong Kong but North America was strong, with USA/Canada up 34%. Profit before tax and adjusting items receded to £6.6 million (2015: £8.8 million). Organic operating contribution was down 19.8% due to the underperformance of two businesses in the Group’s Vacuum division; one was impacted by a reduction in demand from end customers in its niche, whilst the other suffered production and supply chain issues. Five organic businesses made excellent progress and increased the amount of their contribution by 29% but this only partially compensated the shortfall at the two organic underperformers. All operating subsidiaries combined (including Armfield and the 2016 acquisitions) produced a Return on Total Invested Capital of 15.2% (2015: 24.1%). Basic earnings per share before adjusting items decreased by 22.3% to 84.8p from 109.2p, while fully diluted earnings per share before adjusting items declined 22.0% to 83.7p (2015: 107.3p). For the third consecutive year, order intake started slowly and, in 2016, it only began to improve in June. The recovery was particularly strong in the third quarter and organic intake finished up 2.9% for the full year. Armfield also had a poor start and a strong third quarter but was behind last year in the fourth quarter and well behind for the year as a whole. Order intake in the newly acquired subsidiaries was in line with Judges’ expectations. The organic order book grew from 11.4 weeks, as at 1 January 2016, to 14.7 weeks as at 31 December 2016; total order book at the year end reached 13.9 weeks. The trading issues experienced during 2016 impacted cashflow. Cash generated from operations, which amounted to £6.2 million (2015: £8.5 million), was also affected by the production problems mentioned previously. Adjusted net debt as at 31 December 2016, excluding subordinated debt owed to non-controlling shareholders and including sums still due in respect of an acquisition, amounted to £9.9 million (2015: £4.0 million); the main contribution to the increase is the £9.0 million spent on acquisitions. Year-end cash balances totalled £7.9 million (2015: £8.5 million). Dividends The Company is returning to the practice of paying only one interim dividend. Your Board is recommending a final dividend of 18.5p per share which, subject to approval at the forthcoming Annual General Meeting on 24 May 2017, will make a total distribution of 27.5p per share in respect of 2016 (2015: 25.0p per share). Despite the proposed 10.0% increase, the total dividend is covered over three times by adjusted earnings per share. The proposed final dividend will be payable on 7 July 2017 to shareholders on the register on 9 June 2017 and the shares will go ex-dividend on 8 June 2017. The Company’s shareholders are reminded that a Dividend Reinvestment Plan (DRIP) is in place to enable shareholders to automatically reinvest their dividends in new Judges shares should they so wish. Trading environment The long-term fundamentals supporting demand for scientific instruments remain positive. Market demand is being driven primarily by increased worldwide investment in higher education and a growing trend towards optimisation across science and industry; optimisation requires measurement. Despite these positive long-term trends, the markets across which Judges and its peers operate are characterised by a degree of shorter-term variability, influenced mostly by government spending, currency fluctuations and the business climate in major trading blocs, particularly the USA and China. In smaller territories, year-on-year comparisons can be somewhat meaningless, partly due to the high value of some individual orders and the long gestation period often occurring before purchasing intentions crystallise into orders and sales. As a large percentage of the Group’s sales are overseas, exchange rates have a significant influence on the Group’s business: Judges’ manufacturing costs are largely denominated in Sterling and most of its revenue originates from countries where the standard of value is the Euro (one-third of total revenue) or the US Dollar (half of total revenue). The currency movements in the run-up to the Brexit vote and since have had a positive influence (mitigated to an extent by hedging) on our margins or our competitiveness. Current exchange rates are the most favourable we have seen since 2009. 7 applications include aerospace, medical and industrial devices. The acquisition reinforces the Group’s pre-eminent position in the UHV field. Current trading and prospects 2017 has commenced in a positive fashion with overall order intake for the first ten weeks of the year in line with our yearly budget, and organic order intake substantially ahead of the same period at the start of 2016. This continues the momentum of order intake experienced in the second half of 2016. This early start to 2017 is in contrast to the weak beginning observed in the previous three years. Since the year end we have taken further steps to address the production challenges in one of our businesses. However, we expect that these actions will take some time before bearing fruit. As a business which exports a significant amount of its output, we are benefiting from the weakness in Sterling resulting from the Brexit vote and we are now enjoying the most favourable foreign exchange environment since 2009. In spite of the continuing influence of some of the difficulties experienced in 2016, Judges commences 2017 with a solid financial position, four new businesses, a strong order book and positive order intake since the start of the year, all of which provides a platform for a year of progress. David Cicurel Chief Executive 20 March 2017 Chief Executive’s report continued Trading environment continued We are always seeking to maintain and develop market share through the creation of new and improved products. This is evidenced by our significant investment in research and development. Your Group’s investment towards achieving these goals increased to £3.8 million during 2016, equivalent to 6.6% of Group revenue (2015: £3.0 million; 5.4%). We have budgeted to maintain this level of investment in 2017 reflecting the importance we place in providing our customers with innovative, state-of-the-art, products. Acquisitions As a buy-and-build group, the acquisition of new businesses is a fundamental feature of our strategy. Executing this effectively is required to ensure that long-term value is generated for shareholders. In 2016 we acquired four businesses: CoolLED in February, FIRE in March, Dia-Stron in April and EWB Solutions in November. The industry in which we operate consists of a multitude of small global niches as highlighted by the diverse nature of the new entrants to our Group. The UK is recognised as a centre of excellence for product innovation and manufacturing with world-leading businesses in this arena. Our Group has built a reputation over the past decade as a worthwhile home for businesses in our sector whose owners wish to sell. We are trusted to act decisively and to complete deals under the initial terms agreed. Consequently, we continue to see many opportunities; affording us a high degree of selectivity. CoolLED CoolLED specialises in the design, manufacture and marketing of LED illumination systems for fluorescence microscopy and is based in Andover, Hampshire. The purchase consideration included an initial £3.5 million cash payment, a payment reflecting excess cash at completion and a potential £1.0 million earn-out payable to the extent that adjusted EBIT for the financial year ended 30 June 2016 exceeded £0.78 million. In line with the Board’s expectations at completion £0.1 million was paid to settle the earn-out in August 2016. The trailing twelve months adjusted operating profit for CoolLED to 30 September 2015 was £0.75 million arising from £2.8 million of revenue. The £3.5 million paid at completion was drawn from the Group’s acquisition facility. CoolLED’s innovative products have proven their value to researchers as high quality LED lighting sources which are progressively replacing outdated mercury lamps. It has grown strongly over the past few years and Scientifica, one of our subsidiaries and a major customer, believe their products are the best available. FIRE Our subsidiary, Fire Testing Technology (“FTT”) acquired the business and certain assets of FIRE, which manufactures products similar in nature to FTT. Post-acquisition, FIRE has been integrated into FTT’s operations. Dia-Stron Dia-Stron, which is based in Andover, Hampshire and with a sales office in the USA, manufactures systems to test the mechanical properties of fibres. Their instruments are predominantly used in the testing of human hair, where approximately 75% of its sales are achieved and they are the world leader. The balance comprises industrial fibres, skin testing instruments and contract testing for third parties. The company was acquired for a cash consideration of £2.7 million plus a separate payment to reflect excess cash at completion. Dia-Stron’s adjusted operating profits for the 12-month period ended 30 August 2015 totalled £0.66 million on sales of £1.67m. This acquisition was financed from existing cash resources. EWB EWB is a company based in Hemel Hempstead, Hertfordshire, that manufactures edge-welded bellows used in Ultra High Vacuum (“UHV”) systems and various other applications. EWB was acquired for a cash consideration of £1.76 million plus a payment to reflect excess cash at completion. The company’s adjusted operating profit for the year ended 30 April 2016 was £0.5 million and its average adjusted operating profit for the five years ended on 30 April 2016 was £0.44 million. The acquisition was financed partly from the Judges acquisition facility and partly from existing cash resources. The majority of EWB’s products are bespoke but repetitive and sold directly to original equipment manufacturers (“OEMs”) for integration into UHV systems; these provide high tech surface analysis and processing techniques, for use in semiconductor manufacturing, nanotechnology, nuclear science and general research. Other 8 Strategic report Business model and strategy Buy and build Develop the Group through a “buy-and-build” programme of carefully structured acquisitions, supported by long-term organic individual business development. Target companies need to meet exacting performance criteria that supports sustainable sales, profits and cash generation. Core value is created through the repayment of debt used to acquire target companies and organic sales growth. The scientific instrument sector is a robust market, supporting long-term organic growth and cashflow generation, underpinned by long-term global drivers, based on growth in higher education and the industrial push to improve optimisation, which requires measurement. The UK is a recognised worldwide centre of excellence for scientific instrument development and manufacture, placing us in a good position to consolidate and support a fragmented market, characterised by over 2,000 privately held businesses in the UK alone. 1 Leverage expertise and capital We use our knowledge of the scientific instrument sector to identify and progress suitable acquisition targets. Through longstanding relationships, we leverage our access to capital enabling us to act decisively and in a timely fashion. 2 Accumulate sustainable, established businesses The companies we acquire have established reputations in worldwide niche markets and must generate sustainable profits and cash. We pay three to six times EBIT according to size and borrow up to 2.5 times EBITDA at 2–4% depending on the Group’s level of gearing. 3 Create an environment where businesses can thrive We buy successful businesses with long-term futures. Our approach is to create additional opportunities through guidance, business support, expertise and capital, under an umbrella of robust financial controls. 4 Repay debt and reinvest profits in further acquisitions Diverse portfolio with sustainable returns and strong dividends 9 Principal risks and uncertainties International competitiveness Acquisitions Why is it important? The most significant risk for the Group is that an acquired company does not meet its expected profitability. As an important element of the Group’s business strategy is development through acquisition, the Group is also exposed to the risk of insufficient availability of target companies of requisite quality. What are we doing to mitigate the risk? The Group manages these risks by maintaining relationships with organisations that market appropriate targets and by performing detailed research into potential acquisitions; post-acquisition, the Group provides advice and support to entity management teams as appropriate. Key personnel Why is it important? The Group’s future success is dependent on its senior management and key personnel and, given the small niche-serving nature of the Group’s businesses, there is always a challenge to maintain back-up support in respect of key roles or replace key staff should they leave our organisation. Finding quality executives in our sector is a challenge and it can take a long time to replace and/or to prove the suitability of any new executive. Economic conditions Why is it important? The Group’s customers are internationally located and are often state owned or those whose liquidity are closely linked to government spending. Accordingly, the prevailing uncertainties in the world economy, and particularly the borrowing constraints currently affecting many western nations, represent a risk to the Group’s prospects. What are we doing to mitigate the risk? The Group encourages succession planning wherever possible and seeks to provide a positive work environment with opportunities for career growth coupled with appropriate remuneration and, where appropriate, longer-term incentives. What are we doing to mitigate the risk? The Group seeks to trade globally as it operates in small worldwide niches. In the short to medium term, the decision by the UK to leave the EU also creates additional economic uncertainty as it is not yet clear what impact Brexit will have on our business. 10 Strategic report What are we doing to mitigate the risk? The Group maintains a focus on ensuring there are ongoing R&D roadmaps for our businesses and that we continue to invest in well trained and qualified R&D and operations teams to deliver quality, well-engineered products for our customers. What are we doing to mitigate the risk? The Group seeks to mitigate this through detailed market analysis when considering acquisitions and seeks to acquire companies in small global niches. Additionally the Group continues to listen carefully to its customers’ aspirations for product development and, where possible, satisfy those product development requests. What are we doing to mitigate the risk? The Group seeks, so far as is practicable, to mitigate these currency effects via hedging foreign exchange rates. Additional detail is set out in note 25. R&D and products Why is it important? The Group continues to invest in the development of new products to meet the needs of our end customers. There is a risk that our businesses may be unable to develop suitably commercial and technically reliable new products with which to maintain and drive sales performance. There is also a risk that new developments in science will make certain of the Group’s products obsolete. Competition Why is it important? The Group faces competition across all its businesses and there can be no certainty that each business will achieve the market penetration it seeks. There is also no guarantee that there will be no new competition or new entrant to the market with better products. Currency and foreign exchange Why is it important? The Group exports the large majority of its products, hence it is exposed to fluctuations in exchange rates which may impact on its competitiveness. Further, Brexit has weakened exchange rates and may cause uncertainty and greater volatility in the medium term. On behalf of the board David Cicurel Director 20 March 2017 Company registration number: 04597315 11 Finance Director’s report Summary • Group revenues of £57.3 million (2015: £56.2 million) included organic sales growth of 2.5% in the year (2015: 4.9%). • Adjusted operating profits decreased by £2.2 million to £7.1 million (2015: £9.3 million). This reflects the weak performance at three of our businesses, which more than offset the benefit of good performance at five others and the new acquisitions. • The Group’s total number of employees at year end stood at 417 (2015: 335). The growth in staff during the year is largely due to the 2016 acquisitions. The Group’s strategy is based on the acquisition of companies operating in the scientific instruments sector and the continuing generation of profitable performance at its existing subsidiary businesses. The Group’s Key Performance Indicators, which are aligned with the ability to repay acquisition debt and fund dividend payments to shareholders, are earnings per share, return on capital and cashflow generation. All three KPIs have suffered as a result of the underperformance of three of our businesses this year. Revenue Group revenues only rose 2.0% by £1.1 million to £57.3 million (2015: £56.2 million). These revenues included organic sales growth of 2.5% in the year (2015: 4.9%), which was a mixture of strong performance at five of our businesses partially offset by weak performance at two others. The benefits of revenues from our new acquisitions were counterbalanced by weak performance at Armfield in 2016. Armfield will be measured as part of the organic businesses in 2017. The Materials Sciences segment revenues remained stable at £28.2 million (2015: £28.3 million) and Vacuum revenues increased by 4.5% to £29.1 million compared to £27.9 million in 2015. Within the Material Sciences segment, poor performance at Armfield offset good organic performance and revenue from new acquisitions. The growth in Vacuum revenues is attributable to new acquisitions partially offset by sluggish organic sales. Profits 2016’s adjusted operating profits decreased by £2.2 million to £7.1 million (2015: £9.3 million). This decrease of 22.8% reflects the weak performance at three of our businesses, which more than offset the benefit from our new 12 acquisitions and the good performance at five of our other businesses. Adjusted operating margins consequently reduced to 12.5% (2015: 16.5%) particularly impacted by the production issues at one of our businesses. Adjusted profit before tax was £6.6 million compared to £8.8 million in 2015. Statutory operating profit reduced by £0.8 million to £1.0 million (2015: £1.8 million), and statutory profit before tax was £0.4 million compared to £1.3 million in 2015. Adjusting items Total adjusting items recorded in 2016 were £6.2 million compared to £7.5 million in 2015. Amortisation of intangible assets recognised upon acquisition, as required under IFRS, totalled £5.2 million compared to £6.7 million in 2015 and acquisition costs increased by £0.2 million to £0.7 million (2015: £0.5 million) as a consequence of the increased number of completed acquisitions this past year. Finance costs Net finance costs (excluding adjusting items) totalled £0.5 million (2015: £0.5 million). Statutory net finance costs were £0.6 million, the difference due to the £0.1 million net finance cost of the defined benefit pension scheme acquired with Armfield in 2015. Taxation The Group’s tax charge arising from adjusted profit before tax was £0.8 million compared to £1.8 million in 2015. The effective tax rate for adjusted profit is 11.6% (2015: 20.0%). This significant reduction is due to three reasons: reduced UK corporation tax rates; significantly improved claims for research and development tax credits; and achieving lower profitability in the US than originally expected. The latter was impacted by weaker demand at Armfield and a longer set-up period than expected following the opening of our new US subsidiary at Scientifica. As and when US profitability recovers this will weigh against the overall tax rate. At the same time, whilst we remain an SME for R&D tax credits the Group will derive the benefit from this scheme. Earnings per share Adjusted basic earnings per share reduced by 22.3% to 84.8p compared to 109.2p in 2015, while adjusted diluted earnings per share receded to 83.7p (2015: 107.3p), a decrease of 22.0%. Statutory basic earnings per share, after reflecting adjusting items which were heavily influenced by the amortisation of intangible assets arising from recent acquisitions, was 1.3p (2015: 12.8p) and statutory diluted earnings per share totalled 1.3p (2015: 12.6p). Order intake Organic order intake in 2016 was weak for the first quarter, similar to the previous two years. However, this weakness continued until the end of May 2016 when order intake then rebounded strongly and remained satisfactory for the rest of the year, resulting in a small increase in overall organic intake of 2.9% for 2016 (2015: 12.7%). If Armfield (which was acquired in January 2015 and is hence not part of organic growth on a like-for-like basis) was included, order intake would have shown a 2.3% decline. Your Board considers order intake and the resultant year-end order book as an important bellwether to the Group’s ability to achieve its expected results. Our organic order book at 1 January 2017 was a robust 14.7 weeks of budgeted sales (1 January 2016: 11.4 weeks). Total order book which includes Armfield and our 2016 acquisitions totalled 13.9 weeks. Return on Capital The Group closely monitors the return it derives on the capital invested in its Strategic report Your Group remains in a strong financial position and is well placed to continue with its enduring strategy of achieving growth in earnings via selective acquisitions of strong niche businesses in the scientific instruments sector.” subsidiaries. At 31 December 2016 the annual rate of Return on Total Invested Capital (“ROTIC”) was 15.2% compared with 24.1% at the end of 2015, which is disappointing. The reduction illustrates the impact of the three underperforming companies. The annual rate of ROTIC is calculated by comparing attributable earnings excluding central costs, adjusting items and before interest, tax and amortisation (“EBITA”) with the investment in property, plant and equipment, goodwill and unamortised intangibles and net current assets (excluding cash). ROTIC is influenced by the overall performance of our businesses and the size of, and multiple paid for, acquisitions. We continue to strive to improve ROTIC although we remain cognisant of the downward impact that acquiring businesses at higher multiples has on overall ROTIC. Dividends In relation to the financial year ended 31 December 2016 the Company paid an interim dividend of 9.0p per share in November 2016. The Board is recommending a final dividend of 18.5p per share which will, in aggregate, total 27.5p per share (2015: 25.0p per share), subject to shareholder approval, which is an increase of 10%. Dividend cover remains more than three times adjusted earnings per share. Your Group’s policy is to pay a progressively increasing dividend provided the Group retains sufficient cash and borrowing resources with which to pursue its longstanding business acquisition policies. Headcount The Group’s total number of employees at year end stood at 417 (2015: 335). The growth in staff during the year is largely due to the 2016 acquisitions. Share capital and share options The Group’s issued share capital at 31 December 2016 totalled 6,107,628 Ordinary shares (2015: 6,098,549). The issued shares arose from the exercise of share options by various members of staff during the year. See note 23 for further details. Share options issued during the year under the 2015 scheme totalled 29,500 (2015: 144,172) and the total share options in issue under both the 2005 and 2015 schemes amounted to 268,411 (2015: 256,176). Defined benefit pension scheme The Group has a defined benefit pension scheme which was assumed as part of the acquisition of Armfield in 2015. This scheme has been closed to new members from 2001 and closed to new accrual in 2006. As part of the scheme’s 2014 full actuarial valuation the annual contributions to the scheme were increased to £0.2 million subject to the next full actuarial valuation in 2017. At 31 December 2016 the net pension liability was £1.8 million (31 December 2015: £1.1 million). This increase in pension deficit is primarily attributable to the significant decrease in discount rates during 2016 from 3.9% to 2.8% offset partially by increases in the returns achieved on fund assets. Armfield takes its responsibility seriously to ensure the pension is adequately funded whilst also continuing to keep under review appropriate methods to control the deficit. Cashflow and net debt Cash generated from operations totalled £6.2 million (2015: £8.5 million), with reduced cash conversion of 87% (2015: 92%) due to additional working capital usage arising from the operational difficulties at one of our businesses. Total capital expenditure on property, plant and equipment amounted to £0.8 million compared to £0.5 million in 2015. Year-end cash balances totalled £7.9 million (2015: £8.5 million). Adjusted net debt at 31 December 2016 was £9.9 million compared to £4.0 million at 31 December 2015. This increase of £5.9 million is explained by the four acquisitions offset by the Group’s overall cash generation. Gearing at 31 December 2016 was 1.39 times adjusted operating profit (31 December 2015: 0.43 times). We remain committed to maintaining a conservative gearing position whilst at the same time taking the opportunities of acquiring strong, sound businesses at disciplined multiples as illustrated over this past year. The Group remains in a strong financial position. The existing five-year banking arrangements with Lloyds Bank Corporate Markets which were put in place in December 2014, have enabled the Group to pursue its acquisitive strategy. Our historical acquisition loans were consolidated into one single five-year amortising loan, which is repaid at over £2 million per annum, and a £10.0 million revolving acquisition facility, which following the four acquisitions made during the year is now drawn to £9.3 million (2015: £2.8 million). As and when opportunities arise for further acquisitions, we may activate the uncommitted and undrawn accordion facility of £10 million with the bank. Overall, whilst your Group has had a positive year for acquisitions but a disappointing year for performance, it remains well placed to continue with its enduring strategy of achieving growth in earnings via selective acquisitions of strong niche businesses in the scientific instruments sector, alongside the ongoing performance of its existing businesses. Brad Ormsby Group Finance Director 20 March 2017 13 Board of Directors Our board Providing a unique combination of international business, investor and financing experience across public and private markets. Hon. Alexander Hambro Chairman David Cicurel Chief Executive Brad Ormsby Group Finance Director David Barnbrook Chief Operating Officer David Cicurel (born 1949) founded Judges in 2002 having spent much of his career as a turnaround specialist and, subsequently, as an “active value” investor operating with his own funds. He has been responsible for several corporate recovery exercises including two UK public companies, International Media Communications plc (later known as Continental Foods) and International Communication and Data plc. Brad Ormsby (born 1976) is a Chartered Accountant who has significant senior finance and operational experience acquired during nine years at PwC followed by six years at Eurovestech plc, the pan-European development capital fund, and associated companies. Prior to joining Judges Scientific, Brad was Chief Financial Officer at Kalibrate Technologies plc. David Barnbrook (born 1952) is a Chartered Engineer with more than 20 years’ experience as a Senior Manager and Director in sectors encompassing defence, instrumentation, aerospace and customer service. He is a former Program Director at EDO MBM Rugged Systems and Operations Manager at Muirhead Vactric Motion Controls, both of which are suppliers to the defence and aviation industries. Previously (1988 to 1996) he was Production and Operations Manager at Rheometric Scientific, a specialist in the design and manufacture of thermal analysis instrumentation and flammability testing apparatus. A R Alex Hambro (born 1962) has been in the private equity industry both in the UK and the USA for 30 years, during which time he has acted as a principal investor, manager and sponsor of private equity and venture capital management teams and adviser to high net worth families on their private equity investment strategies and targets. As well as Judges Scientific plc, Alex is Chairman of AIM-listed Benchmark Holdings plc, a company engaged in the development of health and vaccine products for the aquaculture industry, and Octopus Apollo VCT plc. In addition to his responsibilities at these three companies, Alex is also Chairman of Bapco Closures Holdings Ltd and a NED of Whitley Asset Management Ltd, Crescent Capital Ltd and BACIT (UK) Ltd. Alex is currently a principal at Welbeck Capital Partners, a specialist investment syndicate that deploys secured convertible loan notes to finance growth opportunities for small-cap AIM companies. 14 Strategic report Ralph Cohen Non-Executive A R Ralph Elman Non-Executive A R Glynn Reece Non-Executive A R Chris Talbot Company Secretary Ralph Elman (born 1953) is a former Finance Director of quoted companies Paramount plc, Delyn plc and International Communication & Data plc and Finance Director of businesses within GUS plc and RR Donnelley. Ralph was Senior Partner of accountancy firm Elman Wall and is a Non-Executive Director of a number of private companies. He is Chairman of the Judges Audit Committee. Glynn Reece (born 1958) is a graduate of Oxford University and a qualified solicitor. Since 1987, he has specialised in providing corporate finance deal origination and advisory services, working for (inter alia) Coopers & Lybrand, Arthur Andersen and CLB, a specialist AIM firm. He is currently a Proprietor of Carl Reiss Meyer, a business that acts as an arranger of pre-flotation finance for small fast growing companies. Chris Talbot (born 1967) is a Chartered Management Accountant with over twenty years’ experience in sectors including instrumentation, construction, software and engineering. He has been the Group Financial Controller since 2008 and was appointed Company Secretary in 2015. Ralph Cohen (born 1948) was the Finance Director of Judges Scientific plc for nearly ten years until his retirement in April 2015. He held various senior executive positions within the energy and water divisions of the Paris based Vivendi group between 1981 and 2001, including eight years as Finance Director of a listed subsidiary, followed by positions as Managing Director within that group. He previously spent nine years at Ernst & Young. Latterly he was the founding partner of MC Consultancy Services, where he was closely associated with major projects, including electricity supply opportunities in Europe and M&A projects. He is currently the Non-Executive Chairman of the recently AIM-listed Yü Group PLC. Committee membership A Audit committee R Remuneration committee 15 Directors’ report The Directors present their report and audited consolidated financial statements for the year ended 31 December 2016. Comparative information is provided for the year ended 31 December 2015. Results and dividends The results for the financial year to 31 December 2016 are set out in the Consolidated Statement of Comprehensive Income. The Company paid a first interim dividend of 9.0p per Ordinary share on 4 November 2016. At the forthcoming Annual General Meeting, the Directors will recommend payment of a final dividend for the year of 18.5p per Ordinary share to be paid on Friday 7 July 2017 to shareholders on the register on Friday 9 June 2017. The shares will go ex-dividend on Thursday 8 June 2017. The total dividend proposed for the 2016 financial year will aggregate to 27.5p, an increase of 10.0% (2015: 25.0p). Going concern The consolidated financial statements have been prepared on a going concern basis. The Directors have taken note of guidance issued by the Financial Reporting Council on Going Concern Assessments in determining that this is the appropriate basis of preparation of the financial statements. The Group’s principal operating companies performed reasonably and generated satisfactory cashflows resulting in net debt of 44% of equity, despite acquiring four businesses during 2016 for a combined acquisition outlay of £9 million. The Group entered 2017 with a strong order book despite some of the challenges experienced in order intake in the first half of 2016. Whilst the global economic environment remains uncertain, the Directors consider that the Group is appropriately placed to manage its business risks successfully. The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Payment policy The Group’s policy is to agree terms and conditions with suppliers in advance and to pay agreed invoices in accordance with the agreed terms of payment. Creditor days of the Company at the end of the year represented 45 days (2015: 26 days). Financial risk management objectives and policies The Group utilises financial instruments (see note 21), comprising borrowings, cash and cash equivalents and various other items such as trade receivables and payables that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The main risks arising from the Group’s financial instruments relate to interest rates, liquidity, credit and foreign currency exposure. The Directors review and agree policies for managing each of these risks, which are described and evaluated in more detail in note 25 and which are summarised below. Except as stated, the policies have remained unchanged from previous years. 1. Interest rate risk The Group finances its operations through a mixture of bank borrowings, equity and retained profits. With adjusted net debt of £9.9 million at 31 December 2016 (see note 20), exposure to interest rate fluctuations remains a low risk to the Group; however, the Group’s loans are subject to interest rate hedges, as described in note 25. 2. Liquidity risk The Group seeks to manage liquidity risk by ensuring that sufficient funds are available to meet foreseeable needs and to invest cash assets safely and profitably. Primarily this is achieved through loans arranged at Group level. Short-term flexibility is achieved through the significant cash balances that the Group currently holds. Additionally where the Group has already repaid funds into the revolving credit facility, it is able to subsequently redraw these funds should the need arise. 3. Credit risk The Group reviews the credit risk relating to its customers by ensuring, wherever possible, that it deals with long-established trading partners, agents and government/ university-backed bodies, where the risk of default is considered low. Where considered appropriate, the Group insists on upfront payment or requires letters of credit to be provided. 4. Currency risk With exports representing a significant proportion of its sales, the main risk area to which the Group is exposed is that of foreign currencies (principally US$ and Euros). The Group adopts a strategy to hedge against this risk by entering into currency options/forward exchange contracts and/or by maintaining a proportion of its bank loans in these currencies, although this does not represent a hedge under IAS 39. The Directors review the value of this economic hedge on a regular basis. There remains, nevertheless, an ongoing threat to the Group’s competitive position in international markets from any sustained period of Sterling strength. Forward and option contracts are entered into in both US$ and Euros maturing in the subsequent year, aimed at protecting the ensuing year’s competitive position and margins from adverse currency movements. 5. Cashflow risk The Group manages its cashflow through a mixture of working capital, bank borrowings, equity and retained profits. With adjusted net debt at 31 December 2016 of £9.9 million (see note 20) and cash and cash equivalents of £7.9 million, the Group’s cash position is considered to be a key strength. Directors The following Directors have held office during the year and until the date of signing this report: Hon. AR Hambro* – Non-Executive Mr DE Cicurel Mr BL Ormsby Mr D Barnbrook Mr RL Cohen* – Non-Executive Mr RJ Elman* – Non-Executive Mr GC Reece* – Non-Executive * Member of the audit and remuneration committees. 16 Strategic report Corporate governance Being AIM quoted, the Company is not required to and does not fully comply with the UK Corporate Governance Code. However, drawing upon best practice, the Directors have established an Audit Committee and a Remuneration Committee with formally delegated duties and responsibilities. The members of both committees are the Non-Executive Directors. Following Ralph Cohen’s transition from an executive role to that of a Non-Executive, he was appointed to both Board committees after serving as a Non-Executive Director for more than one year. The Audit Committee determines the terms of engagement of the Company’s auditor and, in consultation with the Company’s auditor, Ordinary shares of the Company the scope of the audit. The Audit Committee has unrestricted access to the Company’s auditor. The Remuneration Committee has delegated authority to determine the scale and structure of the Executive Directors’ remuneration and the terms of their service contracts. The remuneration of the Non-Executive Directors is determined by the Board as a whole. The main Board meets monthly in addition to any ad hoc Board meetings that may be required during the year, such as to approve changes to the Share Dealing Code following the implementation of the MAR rules. All Board members were in attendance at all meetings this year except when a Board member was unable to attend on two separate occasions. The Audit Committee met three times, once in reviewing the audit scope and plan, and twice to review the auditor’s findings on the financial results. The Remuneration Committee met three times to review the level of executive pay and approve changes to the eligibility of the Group’s Share Incentive Plan. Directors’ interests At 31 December 2016, the Directors had the following beneficial interests in the Company’s Ordinary shares of 5p each and options to subscribe for shares: Non-Executive Directors Hon. AR Hambro Mr RL Cohen Mr RJ Elman Mr GC Reece Executive Directors Mr DE Cicurel Mr BL Ormsby Mr D Barnbrook 31 December 2016 Shares Options 1 January 2016 Shares Options 71,500 64,341 62,402 — — 1,775 — — 916,833 258 18,136 9,275 60,000 28,325 77,500 64,341 62,398 — 916,672 — 21,953 — 1,775 — — 9,275 60,000 28,325 Dividends paid in the year to Directors who hold shares amounted to £295,000 in aggregate (2015: £260,000). Throughout 2016, the Group continued to award a free “matching share” under the Judges Scientific Share Incentive Plan for every share purchased up to a maximum value of £600 per employee per tax year for all eligible employees who have completed 12 months’ service within the Group. Shares acquired by Directors, including matching shares, were 161 acquired by Mr DE Cicurel (2015: 152) and 133 by Mr D Barnbrook (2015: 162). Mr BL Ormsby joined this scheme in March 2016 after completing one year of service and acquired 258 shares in 2016. Options over Ordinary shares in the Company Date of option issue 2005 Option Scheme 28 April 2008 at 124p 23 July 2009 at 92p 9 May 2011 at 470p 25 October 2013 at 1690p 30 March 2015 at 1437.5p 2015 Option Scheme 21 October 2015 at 1402.5p Mr DE Cicurel Mr D Barnbrook Mr BL Ormsby Mr RL Cohen Number of shares — — — 1,775 — 7,500 9,275 6,550 10,000 5,000 1,775 — 5,000 28,325 — — — — 60,000 — 60,000 — — — 1,775 — — 1,775 17 Directors’ report continued Directors’ remuneration The remuneration paid to or receivable by each person who served as a Director during the year was as follows: Non-Executive Directors Hon. AR Hambro Mr RL Cohen (from 1 May 2015) Mr RJ Elman Mr GC Reece Executive Directors Mr DE Cicurel Mr BL Ormsby (from 3 March 2015) Mr D Barnbrook Mr RL Cohen (to 30 April 2015) Total Salary/fees £000 Bonus £000 Pension £000 Benefits £000 2016 total £000 2015 total £000 33 23 23 48 163 137 131 — 558 — — — — — — — — — — — — — — 7 7 — 14 — — — — 5 2 17 — 24 33 23 23 48 168 146 155 — 596 33 15 23 48 205 147 183 59 713 During the course of 2016 no Directors exercised options over the Ordinary shares of the Company. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs) and the parent company financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and of the profit or loss of the Group and the parent company for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs or UK Accounting Standards have been followed, subject to any material departures disclosed and explained; and • prepare the financial statements on the • the Directors have taken all the steps that going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also generally responsible for taking steps as are reasonably open to them to (i) safeguard the assets of the Group and (ii) prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Information published on the website is accessible in many countries and legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Provision of information to the auditor The Directors confirm that: • so far as each Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. Auditor The auditor, Grant Thornton UK LLP, has expressed willingness to continue in office. In accordance with section 489(4) of the Companies Act 2006, a resolution to re-appoint Grant Thornton UK LLP will be proposed at the Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company will be held on Wednesday 24 May 2017 at 12.00 noon at the Lansdowne Club, 9 Fitzmaurice Place, London W1J 5JD. On behalf of the Board Brad Ormsby Director 20 March 2017 Company registration number: 04597315 (England and Wales) 18 Strategic report Independent auditor’s report To the members of Judges Scientific plc We have audited the consolidated financial statements of Judges Scientific plc for the year ended 31 December 2016 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cashflow Statement and notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the consolidated financial statements: • give a true and fair view of the state of the Group’s affairs as at 31 December 2016 and of its profit for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and Directors’ Report for the financial year for which the consolidated financial statements are prepared is consistent with the consolidated financial statements; and • the Strategic Report and Directors’ Report has been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors’ Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the parent company financial statements of Judges Scientific plc for the year ended 31 December 2016. Philip Sayers Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants East Midlands 20 March 2017 19 Consolidated statement of comprehensive income For the year ended 31 December 2016 Revenue Operating costs Adjusted operating profit Adjusting items Operating profit/(loss) Interest income Interest expense Profit/(loss) before tax Taxation (charge)/credit Profit/(loss) for the year Attributable to: Owners of the parent Non-controlling interests Profit/(loss) for the year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Retirement benefits actuarial (loss)/gain Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign subsidiaries Other comprehensive income for the year, net of tax Total comprehensive income for the year Attributable to: Owners of the parent Non-controlling interests Earnings per share – adjusted Basic Diluted Earnings per share – total Basic Diluted Note 3 3 4 9 9 10 Adjusted £000 57,285 (50,141) 7,144 — 7,144 9 (523) 6,630 (767) 5,863 5,173 690 5,863 Adjusting items £000 — — — (6,153) (6,153) — (60) (6,213) 1,091 (5,122) (5,092) (30) (5,122) 2016 Total £000 57,285 (50,141) 7,144 (6,153) 991 9 (583) 417 324 741 81 660 741 Adjusted £000 56,203 (46,953) 9,250 — 9,250 28 (523) 8,755 (1,753) 7,002 6,614 388 7,002 Adjusting items £000 — — — (7,443) (7,443) — (60) (7,503) 1,615 (5,888) (5,839) (49) (5,888) (776) 126 (650) 91 (569) 660 2016 Pence 1.3 1.3 2015 Pence 109.2 107.3 2016 Pence 84.8 83.7 12 12 12 12 2015 Total £000 56,203 (46,953) 9,250 (7,443) 1,807 28 (583) 1,252 (138) 1,114 775 339 1,114 113 13 126 1,240 901 339 2015 Pence 12.8 12.6 The accompanying notes form an integral part of these consolidated financial statements. 20 Financial statements Consolidated balance sheet As at 31 December 2016 ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Trade and other payables relating to acquisitions Borrowings Current tax liabilities Non-current liabilities Borrowings Deferred tax liabilities Retirement benefit obligations Total liabilities Net assets EQUITY Share capital Share premium account Other reserves Retained earnings Equity attributable to owners of the parent company Non-controlling interests Total equity The accompanying notes form an integral part of these consolidated financial statements. The financial statements were approved by the Board on 20 March 2017. David Cicurel Director Brad Ormsby Director Note 2016 £000 2015 £000 13 14 15 16 17 18 19 20 20 16 28 22 24 13,337 9,736 5,288 776 29,137 9,939 11,341 7,909 29,189 58,326 (11,682) (1,648) (2,693) (1,195) (17,218) (13,855) (2,310) (2,198) (18,363) (35,581) 22,745 305 14,472 2,130 4,425 21,332 1,413 22,745 10,927 9,088 4,787 351 25,153 7,922 11,040 8,530 27,492 52,645 (10,807) (85) (3,361) (1,436) (15,689) (9,556) (1,922) (1,394) (12,872) (28,561) 24,084 305 14,441 2,004 6,532 23,282 802 24,084 21 Consolidated statement of changes in equity For the year ended 31 December 2016 At 1 January 2016 Dividends Issue of share capital Share-based payments Transactions with owners Profit for the year Retirement benefit actuarial losses Foreign exchange differences Total comprehensive income for the year At 31 December 2016 At 1 January 2015 Dividends Issue of share capital Share-based payments Transactions with owners Profit for the year Retirement benefit actuarial gains Foreign exchange differences Total comprehensive income for the year At 31 December 2015 Share capital £000 305 — — — — — — — — 305 Share premium £000 14,441 — 31 — 31 — — — — 14,472 Other reserves £000 2,004 — — — — — — 126 126 2,130 300 — 5 — 5 — — — — 305 14,294 — 147 — 147 — — — — 14,441 1,374 — 617 — 617 — — 13 13 2,004 The accompanying notes form an integral part of these consolidated financial statements. Total attributable to owners of the parent £000 23,282 (1,581) 31 169 (1,381) 81 (776) 126 (569) 21,332 Non-controlling interests £000 802 (49) — — (49) 660 — — 660 1,413 22,878 (1,385) 769 119 (497) 775 113 13 901 23,282 512 (49) — — (49) 339 — — 339 802 Retained earnings £000 6,532 (1,581) — 169 (1,412) 81 (776) — (695) 4,425 6,910 (1,385) — 119 (1,266) 775 113 — 888 6,532 Total equity £000 24,084 (1,630) 31 169 (1,430) 741 (776) 126 91 22,745 23,390 (1,434) 769 119 (546) 1,114 113 13 1,240 24,084 22 Financial statements Consolidated cashflow statement For the year ended 31 December 2016 Cashflows from operating activities Profit after tax Adjustments for: Financial instruments measured at fair value: Hedging contracts Contingent consideration measured at fair value Share-based payments Depreciation Amortisation of intangible assets Loss on disposal of property, plant and equipment Foreign exchange gain on foreign currency loans Interest income Interest expense Retirement benefit obligation net finance cost Contributions to defined benefit plans Tax (credit)/expense recognised in income statement (Increase)/decrease in inventories Decrease/(increase) in trade and other receivables Increase in trade and other payables Cash generated from operations Finance costs paid Tax paid Net cash from operating activities Cashflows from investing activities Paid on acquisition of new subsidiary Gross cash inherited on acquisition Acquisition of subsidiaries, net of cash acquired Paid on the acquisition of trade and certain assets Purchase of property, plant and equipment Interest received Net cash used in investing activities Cashflows from financing activities Proceeds from issue of share capital Repayments of borrowings Proceeds from bank loans Repayment of loan notes Equity dividends paid Dividends paid – non-controlling interest in subsidiary Net cash from/(used in) financing activities Net change in cash and cash equivalents Cash and cash equivalents at the start of the year Exchange movements Cash and cash equivalents at the end of the year The accompanying notes form an integral part of these consolidated financial statements. 2016 £000 741 21 — 241 592 5,155 30 166 (9) 523 60 (198) (324) (1,442) 620 37 6,213 (522) (1,080) 4,611 (9,847) 3,714 (6,133) (261) (835) 9 (7,220) 31 (3,945) 7,545 (117) (1,581) (49) 1,884 (725) 8,530 104 7,909 2015 £000 1,114 10 25 119 482 6,736 30 (15) (28) 523 60 (198) 138 617 (2,759) 1,638 8,492 (528) (1,387) 6,577 (11,421) 3,904 (7,517) (33) (530) 28 (8,052) 150 (4,626) 4,755 — (1,385) (49) (1,155) (2,630) 11,148 12 8,530 23 1. General information Judges Scientific plc is the ultimate parent company of the Group, whose principal activities comprise the design, manufacture and sale of scientific instruments. Judges Scientific plc is incorporated and domiciled in the UK and its registered office is 52c Borough High Street, London SE1 1XN. 2. Summary of significant accounting policies Basis of preparation The consolidated financial statements have been prepared under the historical cost convention except for certain financial instruments which are carried at fair value. Being quoted on the Alternative Investment Market of the London Stock Exchange, the Company is required to present its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Accordingly, these financial statements have been prepared in accordance with the accounting policies set out below which are based on the IFRS in issue as adopted by the European Union (EU) and in effect at 31 December 2016. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed under “Use of key accounting estimates and judgements”. Changes in accounting policies Standards, amendments and interpretations to existing standards that are not yet effective At the date of approval of these consolidated financial statements, certain new standards, amendments to and interpretations of existing standards have been published but are not yet effective, and have not been adopted early by the Group including the following: IFRS 9 ‘Financial Instruments’ (2014) (effective date 1 January 2018) – the new standard introduces extensive changes to IAS 39’s guidance on the classification and measurement of financial assets and introduces a new “expected credit loss” model for the impairment of financial assets. IFRS 9 also provides new guidance on the application of hedge accounting. IFRS 15 ‘Revenues from Contracts with Customers’ (change to IASB effective date 1 January 2018) – this new standard presents new requirements for the recognition of revenue, replacing IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’ and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account for arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase options and other common complexities. IFRS 16 ‘Leases’ (effective date 1 January 2019) – this new standard will require the capitalisation of operating leases, such as the Group’s building and vehicle leases, as right to use assets with an offsetting financial liability. The current rental charge will be replaced with a combination of depreciation from the asset and an interest charge from the liability. Management currently anticipates that all of the pronouncements will be adopted in the Group’s accounting policies in accordance with each standard’s effective date. Assessment of the potential impact of these standards on the Group’s financial statements is ongoing. Consolidation The consolidated financial statements include those of the parent company and its subsidiaries. Subsidiaries are entities where the Group is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to effect those returns through its power over the subsidiary. The Group obtains and exercises control through voting rights. Income, expenditure, unrealised gains and intra-group balances arising from transactions within the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group uses the purchase method of accounting for the acquisition of a subsidiary. Acquisition consideration is measured at the fair value of the consideration given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Business combination costs directly attributable to the acquisition are immediately written off through the Statement of Comprehensive Income. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income. The parent company has taken the merger relief that is required by section 612 of the Companies Act 2006 in respect of the fair value of the consideration received in excess of the nominal value of the equity shares issued in connection with the acquisition of Fire Testing Technology Limited, UHV Design Limited, Scientifica Limited and Armfield Limited. Goodwill Goodwill is the difference between the fair value of the consideration paid and the fair value of the net identifiable assets and liabilities acquired in a business combination. Following recognition, it is not amortised; however, it is subject to impairment testing on an annual basis or more frequently if circumstances indicate that the asset may have become impaired and is carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units for the purpose of impairment testing. 24 Financial statementsNotes to the consolidated financial statementsFor the year ended 31 December 2016 2. Summary of significant accounting policies continued Revenue recognition Revenue is measured by reference to the fair value of consideration received or receivable by the Group, excluding value added tax (or similar local sales tax). It is recognised when the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be measured reliably and it is probable that the associated economic benefits will flow to the Group. Revenue from sales of instruments and spares is recognised at the point at which the risks and rewards of ownership are transferred to the customer. This is usually on despatch; however for sales from overseas subsidiaries, it is when the customer receives the goods. Revenue from services, such as installation, support, training or consultancy, is recognised once the service has been performed. Interest income is recognised using the effective interest method which calculates the amortised cost of a financial asset and allocates the interest income over the relevant period. Dividend income is recognised when the shareholder’s right to receive payment is established. Segment reporting The Group’s activities are predominantly in or in support of the design and manufacture of scientific instruments. The Group operates two main operating segments: Materials Sciences and Vacuum. No operating segments have been aggregated. Operating segments are reported in a manner consistent with internal reporting provided to the Board of Directors, which is responsible for allocating and assessing performance of operating segments, and which is considered to be the Chief Operating Decision Maker. Each segment’s range of instruments has its individual requirements in terms of design, manufacture and marketing. Intangible assets acquired as part of a business combination In accordance with IFRS 3 ‘Business Combinations’, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Amortisation charges are included as adjusting items in operating costs in the Statement of Comprehensive Income. Amortisation is provided at rates calculated to write off the cost of each intangible asset over its expected useful life, as follows: Customer relationships 3 years Non-competition agreements 2 years Distribution agreements Research and development Sales order backlog Brand and domain names Between 2 and 5 years 5 years On shipment (this is usually consumed within six months of initial recognition) Between 1 and 5 years Subsequent to initial recognition, intangible assets are stated at deemed cost less accumulated amortisation. Research and development Research and development expenditure is recognised in the Statement of Comprehensive Income as an expense until it can be demonstrated that the conditions for capitalisation under IAS 38 ‘Intangible Assets’ apply. The criteria for capitalisation include demonstration that the project is technically and commercially feasible, the Group has sufficient resources to complete development and the asset will generate probable future economic benefit. Property, plant and equipment Property, plant and equipment is stated at historical cost, less accumulated depreciation. Disposal of assets: the gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in the income statement. Depreciation: provided at annual rates calculated to write off the cost less residual value of each asset over its expected useful life, within the following ranges: Property Plant and machinery Fixtures, fittings and equipment Between 3 and 7 years Motor vehicles Building improvements 4 years Over the minimum term of the lease 50 years (excluding the estimated cost of land) 7 years Material residual value estimates and expected useful lives are updated as required but at least annually. 25 2. Summary of significant accounting policies continued Impairment testing of goodwill, other intangible assets and property, plant and equipment For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use. Value in use is based on estimated future cashflows from each cash-generating unit, discounted at a suitable rate in order to calculate the present value of those cashflows. The data used for impairment testing procedures is directly linked to the Group’s latest approved budgets, adjusted as necessary to exclude any future restructuring to which the Group is not yet committed. Discount rates are determined individually for each cash-generating unit and reflect their respective risk profiles as assessed by the Directors. Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Impairment charges are included in operating costs in the Statement of Comprehensive Income. An impairment charge that has been recognised is reversed if the cash-generating unit’s recoverable amount exceeds its carrying amount. Leases For finance leases, where the Group bears substantially all the risks and rewards related to ownership of the leased asset, the related asset is capitalised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the minimum lease payments. The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the Statement of Comprehensive Income over the period of the lease. Finance lease obligations are included in financial liabilities net of interest costs. Operating leases where the lessor retains substantially all of the risks and rewards of ownership are charged to the Statement of Comprehensive Income on a straight-line basis over the lease term. Lease incentives are spread over the term of the lease. Inventories Inventories are recorded at the lower of cost and net realisable value. Costs of ordinarily interchangeable items are assigned using the first-in, first-out cost formula. Cost includes materials, direct labour and an attributable proportion of manufacturing overheads based on normal levels of activity. Taxation Current tax is the tax currently payable based on taxable profit for the year. Deferred taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of those temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the Statement of Comprehensive Income, except: • where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity; or • where items are recognised in other comprehensive income, in which case the related deferred tax is recognised in other comprehensive income. Share-based employee compensation The Group operates equity-settled share-based compensation plans for remuneration of its Directors and employees. All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. The fair value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). Share-based compensation is recognised as an expense in the Statement of Comprehensive Income with a corresponding credit to other reserves. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised. 26 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 2. Summary of significant accounting policies continued Financial assets Financial assets consist of loans, receivables, derivatives and investments in subsidiaries. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short-term deposits which are subject to an insignificant risk of changes in value. Trade receivables Trade receivables are recognised and carried at the original invoice amount less an allowance for uncollectable amounts. An estimate of uncollectable amounts is made when collection of the full amount is no longer probable. Uncollectable amounts are written off to the Statement of Comprehensive Income when identified. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are recorded initially at fair value net of direct issue costs if they are not held at fair value through profit and loss. Derivatives are recorded at fair value through profit or loss. The fair value of derivative financial instruments is determined by reference to active market transactions or using a valuation technique where no active market exists. All financial liabilities with the exception of interest rate swaps and foreign currency options are recorded at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance cost in the income statement. These financial liabilities include trade and other payables and borrowings, including bank loans, subordinated loans and hire purchase commitments. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the Statement of Comprehensive Income on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Interest rate swaps and foreign currency options are treated as derivative financial instruments and are accounted for at fair value through profit and loss. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires. Employee benefits – Defined contribution plans The Group operates defined contribution pension schemes for employees and Directors. The assets of the schemes are held by investment managers separately from those of the Group. The contributions payable to these schemes are recorded in the Statement of Comprehensive Income in the accounting period to which they relate. Employee benefits – Defined benefit plans The Group operates a funded defined benefit scheme, where payments are made to trustee administered funds. The asset or liability recognised in the consolidated Statement of Financial Position is calculated as the present value of the defined benefit obligation less the fair value of the plan assets, as at the balance sheet date. The defined benefit obligation is calculated at least triennially by independent actuaries using the projected unit credit method and is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds, matched to the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. The plan administration expenses and past service costs or credits are recognised as an operating expense in the consolidated Statement of Comprehensive Income. There is no current service cost. The retirement benefits obligation net finance cost is the change during the year in the net defined benefit liability due to the passage of time and is recognised as an interest expense in the consolidated Statement of Comprehensive Income. The interest rate is based on the yield on high quality corporate bonds. Actuarial gains and losses arising from changes in actuarial assumptions and experience adjustments are recognised in the consolidated Statement of Comprehensive Income in the year which they arise. Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in the Statement of Comprehensive Income in the period in which they arise. In respect of overseas subsidiaries on consolidation, assets and liabilities have been translated at the closing rate and income and expenses have been translated at the average rate over the reporting period. Exchange differences are recorded in other comprehensive income. Dividends Final dividend distributions payable to equity shareholders are included in trade and other payables when the dividends are approved in general meeting but not paid prior to the balance sheet date. Interim dividends are recognised in the period in which they are paid. 27 2. Summary of significant accounting policies continued Equity Equity comprises the following: Share capital Share capital represents the nominal value of equity shares. Share premium Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. Capital redemption reserve Capital redemption reserve represents amounts set aside from retained earnings on conversion of convertible redeemable shares equal to the reduction then arising in the overall nominal value of share capital of all classes. Merger reserve Merger reserve represents the fair value of the consideration received in excess of the nominal value of equity shares issued in connection with acquisitions where the Company has taken the merger relief that is required by section 612 of the Companies Act 2006. Retained earnings Retained earnings represents retained profits and losses. Revaluation reserve Revaluation reserve represents gains and losses due to the revaluation of certain financial assets. Non-controlling interests Non-controlling interests represent retained profits and losses attributable to minority shareholders in subsidiary companies. Adjusting items Adjusting items (and their related tax impact) are those which by their size or nature the Directors’ consider should be disclosed separately for the purposes of presenting results and earnings per share figures so as to enable users of the financial statements to evaluate more effectively the underlying operating performance of the Group. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is likely that an outflow of resource will be required to settle the obligation and that the amount of the probable outflow can be reasonably estimated. Where the Group expects all or some of the obligation to be reimbursed, the reimbursement is recognised as a separate asset to the extent that it is virtually certain to be reimbursed. The expense relating to any provision is presented in the Statement of Comprehensive Income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the year-end date. If material, provisions are determined by discounting the expected future cashflows using rates that reflect current market assessments of the time value of money. Use of key accounting estimates and judgements Many of the amounts included in the consolidated financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the consolidated financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the consolidated financial statements and the key areas are summarised below. Judgements in applying accounting policies • Revenue recognition: The Group makes a judgement whether all of the conditions required for revenues to be recognised in the Statement of Comprehensive Income have been met. • Fair value assessment of a business combination: Following an acquisition the Group makes an assessment of all assets and liabilities, inclusive of identification of intangible assets and acquired and/or related goodwill. The valuation process for the intangible assets requires a number of judgements to be made regarding future performance of an acquisition, together with other asset-specific factors. Sources of estimation uncertainty • Retirement benefits: The costs and present value of any related pension assets and liabilities depend on factors such as life expectancy of the members, the salary progression of current employees, the returns that plan assets generate and the discount rate used to calculate the present value of the liabilities. The Group uses estimates based on the previous experience and independent external actuarial advice in determining these future cashflows and the discount rate. • Depreciation: Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. • Carrying value of intangible assets and goodwill: Estimates are required as to intangible asset carrying values, their useful lives and goodwill carrying value. These are assessed by reference to budgeted profits and cashflows for future periods for the relevant income-generating units and an estimate of their values in use. • Provisions: Provisions are based on estimates of the expenditure required to settle. 28 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 3. Segmental analysis For the year ended 31 December 2016 Revenue Operating costs Adjusted operating profit Adjusting items Operating profit Net interest expense Profit before tax Income tax credit Profit for the year For the year ended 31 December 2015 Revenue Operating costs Adjusted operating profit Adjusting items Operating profit Net interest expense Profit before tax Income tax charge Profit for the year Unallocated items relate to the Group’s head office costs. Segment assets and liabilities At 31 December 2016 Assets Liabilities Net assets Capital expenditure Depreciation Amortisation At 31 December 2015 Assets Liabilities Net assets Capital expenditure Depreciation Amortisation Materials Sciences £000 28,162 (22,937) 5,225 Vacuum £000 29,123 (25,731) 3,392 Unallocated items £000 — (1,473) (1,473) Materials Sciences £000 28,347 (22,894) 5,453 Vacuum £000 27,856 (22,957) 4,899 Unallocated items £000 — (1,102) (1,102) Note 4 Note 4 Materials Sciences £000 14,963 (6,622) 8,341 305 223 2,865 Materials Sciences £000 14,370 (6,562) 7,808 117 185 4,246 Vacuum £000 22,445 (7,482) 14,963 523 289 2,290 Vacuum £000 14,070 (7,026) 7,044 202 233 2,490 Unallocated items £000 20,918 (21,477) (559) 7 80 — Unallocated items £000 24,205 (14,973) 9,232 211 64 — Total £000 57,285 (50,141) 7,144 (6,153) 991 (574) 417 324 741 Total £000 56,203 (46,953) 9,250 (7,443) 1,807 (555) 1,252 (138) 1,114 Total £000 58,326 (35,581) 22,745 835 592 5,155 Total £000 52,645 (28,561) 24,084 530 482 6,736 29 3. Segmental analysis continued Segment assets and liabilities continued Unallocated items are borrowings, intangible assets and goodwill arising on acquisition, deferred tax, defined benefit obligations and parent company net assets. Geographic analysis UK (domicile) Rest of Europe North America Rest of the world Year to 31 December 2016 £000 8,732 13,794 15,489 19,270 57,285 Year to 31 December 2015 £000 9,303 13,822 12,526 20,552 56,203 Segmental revenue is presented on the basis of the destination of the goods where known, otherwise the geographical location of customers is utilised. No customer makes up more than 10% of the Group’s revenues. 4. Adjusting items Amortisation of intangible assets Contingent consideration measured at fair value Financial instruments measured at fair value: Hedging contracts Share-based payments Acquisition costs Total adjusting items in operating profit Retirement benefits obligation net interest cost Total adjusting items Taxation Total adjusting items net of tax Attributable to: Owners of the parent Non-controlling interest 5. Operating costs Raw materials and consumables Other external charges Staff costs Depreciation Other operating costs, excluding adjusting items Amortisation of intangible assets Contingent consideration measured at fair value Hedging contracts Share-based payments Acquisition costs Total operating costs 2016 £000 5,155 — 21 241 736 6,153 60 6,213 (1,091) 5,122 5,092 30 5,122 2016 £000 24,217 7,890 17,442 592 50,141 5,155 — 21 241 736 56,294 2015 £000 6,736 25 10 119 553 7,443 60 7,503 (1,615) 5,888 5,839 49 5,888 2015 £000 24,763 6,492 15,216 482 46,953 6,736 25 10 119 553 54,396 Research and development expensed in the year totalled £3,774,000 (2015: £3,018,000). This does not include amortisation of research and development intangibles arising on acquisition. 30 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 6. Remuneration of key senior management Short-term employee benefits: Salaries including bonuses and social security costs Company car allowance and other benefits Total short-term employee benefits Post-employment benefits: Defined contribution pension plans Total post-employment benefits 2016 £000 1,752 77 1,829 121 121 1,950 2015 £000 1,706 73 1,779 55 55 1,834 Key management personnel comprise Directors of the parent company and the managing directors of the principal operating companies and totalled 18 (2015: 14). Remuneration of Directors is disclosed in the Directors’ Report on page 18. 7. Employees Employment costs Wages and salaries Social security costs Pension costs Share-based payments Average number of employees By function: Manufacturing Sales and administration By operating segment: Materials Sciences group Vacuum group Head office (includes Non-Executive Directors in both years) 8. Operating profit Operating profit is stated after charging: Fees payable to the Company’s auditor: for the audit of the Company’s annual accounts Fees payable to the Company’s auditor for other services: for the audit of the Company’s subsidiaries, pursuant to legislation for taxation compliance services for taxation advisory services for all other assurance services Depreciation Amortisation of intangible assets Operating lease rentals – land and property Operating lease rentals – vehicles Operating lease rentals – other 2016 £000 2015 £000 15,243 1,469 730 17,442 241 17,683 13,326 1,370 520 15,216 119 15,335 2016 No. 139 269 408 174 225 9 408 2016 £000 2015 No. 115 217 332 154 169 9 332 2015 £000 29 32 103 — — 136 592 5,155 626 55 52 87 27 40 91 482 6,736 543 37 50 31 9. Interest income and expense Interest income – short-term bank deposits Interest expense – bank loans Retirement benefits obligation net finance cost Net interest expense 10. Taxation charge/(credit) UK corporation tax at 20.00% (2015: 20.25%) Current year Prior years Foreign tax suffered Deferred tax – origination and reversal of temporary differences: Current year Prior years Effect of changes in tax rates Tax on profit for the year – current year Tax on profit for the year – prior years Factors affecting the tax charge for the year: Profit before tax Profit before tax multiplied by standard rate of UK corporation tax of 20.00% (2015: 20.25%) Share options Provisions and expenditure not deductible for tax purposes Changes in tax rates Contingent consideration Overseas tax Other temporary differences Tax on profit for the year – current year Tax on profit for the year – prior years Total net taxation charge 2016 £000 9 (523) (60) (583) (574) 2016 £000 847 (456) 52 443 (727) (21) (19) (767) 153 (477) (324) 417 83 (42) 116 (19) — 15 — 153 (477) (324) 11. Dividends Second interim dividend for the previous year Final dividend for the previous year First interim dividend for the current year 2016 2015 Pence per share 15.9 1.0 9.0 25.9 £000 970 61 550 1,581 Pence per share — 14.7 8.1 22.8 2015 £000 28 (523) (60) (583) (555) 2015 £000 1,576 (98) — 1,478 (1,340) — — (1,340) 236 (98) 138 1,252 254 (181) 136 — 5 59 (37) 236 (98) 138 £000 — 892 493 1,385 The Directors will propose a final dividend of 18.5p per share, amounting to £1,130,000, for payment on 7 July 2017. As the final dividend remains conditional on shareholders’ approval at the Annual General Meeting, provision has not been made for this dividend in these consolidated financial statements. Dividends declared by subsidiaries that are not wholly owned are paid to the non-controlling interest in the period in which they are declared and amounted to £49,000 in the year (2015: £49,000). 32 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 12. Earnings per share Profit attributable to owners of the parent Adjusted profit Adjusting items Profit for the year Earnings per share – adjusted Basic Diluted Earnings per share – total Basic Diluted Issued Ordinary shares at the start of the year Movement in Ordinary shares during the year Issued Ordinary shares at the end of the year Weighted average number of shares in issue Dilutive effect of share options Weighted average shares in issue on a diluted basis Note 4 2016 £000 2015 £000 5,173 (5,092) 81 6,614 (5,839) 775 Pence Pence 84.8 83.7 1.3 1.3 109.2 107.3 12.8 12.6 22 Number 6,098,549 9,079 6,107,628 6,102,463 80,957 6,183,420 Number 5,996,211 102,338 6,098,549 6,054,699 109,140 6,163,839 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 year. 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 are calculated as above whilst substituting total profit for adjusted profit. 13. Goodwill Cost 1 January Additions 31 December 2016 £000 2015 £000 10,927 2,410 13,337 8,678 2,249 10,927 Goodwill is tested annually for impairment by reference to the value in use of the relevant cash-generating units, which are the Group’s operating segments. This is calculated on the basis of projected cashflows for five years. These are derived from detailed budgets for the coming year, with subsequent years including revenue and cost growth of 3% per annum and maintained gross margins. The 3% long-term growth rate takes into account both UK and overseas markets. These cashflows are discounted using a weighted average cost of capital of 11.2% (2015: 11.4%) per annum, calculated by reference to year-end data on equity values and interest, dividend and tax rates. The long-term growth rate and discount rate is consistent for all segments on the basis that the businesses operate in similar markets and are exposed to similar risks. The residual value at the end of the five years, computed by reference to projected year six cashflows and discounted, is also included. There was no requirement for any impairment provision at 31 December 2016 (2015: £nil). The Directors have considered the sensitivity of the key assumptions, including the weighted average cost of capital and long-term growth rates, and have concluded that any possible changes that may be reasonably contemplated in these key assumptions would not result in the value in use falling below the carrying value of goodwill, given the amount of headroom available. 33 14. Other intangible assets Gross carrying amount 1 January 2015 Acquisitions 31 December 2015 Acquisitions 31 December 2016 Amortisation 1 January 2015 Charge for the year 31 December 2015 Charge for the year 31 December 2016 Carrying amount 31 December 2016 Carrying amount 31 December 2015 Carrying amount 31 December 2014 15. Property, plant and equipment Cost 1 January 2015 Additions Acquisitions Disposals Exchange differences 31 December 2015 Additions Acquisitions Disposals Exchange differences 31 December 2016 Accumulated depreciation 1 January 2015 Charge Disposals Exchange differences 31 December 2015 Charge Disposals Exchange differences 31 December 2016 Net book value – 31 December 2016 Net book value – 31 December 2015 Net book value – 31 December 2014 Distribution agreements £000 Research and development £000 Sales order backlog £000 Brand and domain names £000 Customer relationships £000 1,949 707 2,656 272 2,928 1,387 519 1,906 541 2,447 481 750 562 4,438 1,905 6,343 2,132 8,475 2,239 1,201 3,440 1,488 4,928 3,547 2,903 2,199 2,276 1,947 4,223 300 4,523 2,276 1,947 4,223 210 4,433 90 — — 7,348 2,201 9,549 1,486 11,035 3,147 1,825 4,972 1,970 6,942 4,093 4,577 4,201 6,425 402 6,827 1,613 8,440 4,725 1,244 5,969 946 6,915 1,525 858 1,700 Plant and machinery £000 Fixtures, fittings and equipment £000 Motor vehicles £000 Property and building improvements £000 761 33 52 (77) 2 771 124 77 (41) 17 948 512 88 (60) 2 542 116 (30) 14 642 306 229 249 831 122 39 (8) 1 985 446 76 (7) 9 1,509 539 144 (8) — 675 225 — 6 906 603 310 292 172 139 165 (56) 2 422 145 — (127) 23 463 93 130 (43) 1 181 138 (102) 8 225 238 241 79 4,158 236 — — — 4,394 120 114 — — 4,628 267 120 — — 387 113 (13) — 487 4,141 4,007 3,891 Total £000 22,436 7,162 29,598 5,803 35,401 13,774 6,736 20,510 5,155 25,665 9,736 9,088 8,662 Total £000 5,922 530 256 (141) 5 6,572 835 267 (175) 49 7,548 1,411 482 (111) 3 1,785 592 (145) 28 2,260 5,288 4,787 4,511 Included in the net book value of property and building improvements at 31 December 2016 is £2,615,000 (2015: £2,661,000) relating to a factory in Laughton, East Sussex, occupied by Quorum Technologies Limited and UHV Design Limited. The net book value of plant, machinery and vehicles included above held under finance leases and hire purchase contracts amounted to £23,000 at 31 December 2016 (2015: £46,000). 34 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 16. Deferred tax Assets 1 January Acquisitions in the year (note 27) Adjustments in respect of prior years Movement in Other comprehensive income – Retirement benefits actuarial (loss)/gain Credit to income statement in the year Credit to equity in the year 31 December Deferred tax balances relate to temporary differences as follows: Provisions allowable for tax in subsequent periods Share options Losses Defined benefit obligation Liabilities 1 January Acquisitions in the year (note 27) Adjustments in respect of prior years Credit to income statement in the year 31 December Deferred tax balances relate to temporary differences as follows: Accelerated capital allowances Provisions allowable for tax in subsequent periods Intangible assets 2016 £000 351 143 (55) 165 81 91 776 64 150 188 374 776 1,922 1,130 (75) (667) 2,310 475 — 1,835 2,310 2015 £000 — 404 — (63) 10 — 351 72 — — 279 351 1,820 1,432 — (1,330) 1,922 158 3 1,761 1,922 Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. The changes in rate from 20% to 19%, effective from 1 April 2017, and from 19% to 18%, effective from 1 April 2020, were both substantively enacted on 26 October 2015. Subsequently the Finance Act 2016, which was substantively enacted on 6 September 2016, announced that the tax rate would instead reduce to 17% effective from 1 April 2020. 17. Inventories Raw materials Work in progress Finished goods 2016 £000 6,333 1,463 2,143 9,939 2015 £000 4,784 1,018 2,120 7,922 In 2016, a total of £24,217,000 of inventories was included in the Statement of Comprehensive Income as an expense (2015: £24,763,000). This includes an amount of £54,000 (2015: £121,000) resulting from write-downs of inventories and an amount of £67,000 (2015: £4,000) which is the reversal of previous write-downs. The carrying amount of inventories held at fair value less costs to sell is £767,000 (2015: £834,000). All Group inventories form part of the assets pledged as security in respect of bank loans. 18. Trade and other receivables – current Trade receivables Other receivables Prepayments and accrued income 2016 £000 8,737 1,400 1,204 11,341 2015 £000 9,445 702 893 11,040 The fair value of receivables approximates to their carrying value. All trade and other receivables have been reviewed for impairment with no material provision being required. 35 18. Trade and other receivables – current continued Some of the unimpaired trade receivables were past due at the balance sheet date as follows: Not more than three months More than three months but not more than six months More than six months but not more than twelve months Greater than one year Trade and other receivables are denominated in the following currencies: Sterling US Dollars Euros 19. Trade and other payables – current Trade payables Social security and other taxes Other payables Accruals and deferred income The fair value of trade and other payables approximates to their carrying value. 20. Borrowings Current Bank loans Subordinated loans Net obligations under hire purchase contracts Non-current Bank loans Net obligations under hire purchase contracts 2016 £000 2,466 359 61 91 2,977 2016 £000 7,589 2,714 1,038 11,341 2016 £000 5,261 1,016 749 4,656 11,682 2016 £000 2,306 379 8 2,693 13,852 3 13,855 2015 £000 3,561 444 237 39 4,281 2015 £000 7,457 2,722 861 11,040 2015 £000 5,403 593 785 4,026 10,807 2015 £000 2,845 497 19 3,361 9,545 11 9,556 There were four bank loans secured on assets of the Group at the start of the year. During the year one of these loans was repaid in full. The four bank loans are summarised as follows: • The first loan of £6,756,000 (2015: £8,948,000) is repayable in quarterly instalments over the period ending 31 December 2019 and bears interest at 1.75 to 2.75% (depending upon gearing) above LIBOR-related rates. • The second loan of £9,300,000 (2015: £2,755,000) is repayable by 2019 and bears interest at 1.75 to 2.75% (depending upon gearing) above LIBOR-related rates. • The third loan of £540,000 was settled in March 2016. • The fourth loan of £102,000 (2015: £147,000) is repayable in quarterly instalments over the period ending 31 March 2019 and bears interest at 3.75% above LIBOR-related rates. The subordinated loans were advanced by minority shareholders in Bordeaux Acquisition Limited. They are unsecured, interest free and repayable at the discretion of that company. The hire purchase obligations are secured on the related assets. 36 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 20. Borrowings continued Borrowings mature as follows: 31 December 2016 Repayable in less than six months Repayable in months seven to twelve Current portion of long-term borrowings Repayable in years one to five Total borrowings Less: interest included above Less: cash and cash equivalents Total net debt Adjusting items Subordinated debt to non-controlling shareholders Accrued deferred consideration Adjusted net debt 31 December 2015 Repayable in less than six months Repayable in months seven to twelve Current portion of long-term borrowings Repayable in years one to five Total borrowings Less: interest included above Less: cash and cash equivalents Total net debt Adjusting items Subordinated debt to non-controlling shareholders Accrued deferred consideration Adjusted net debt Bank loans £000 1,387 1,352 2,739 14,404 17,143 (985) (7,909) 8,249 Subordinated loan £000 379 — 379 — 379 — — 379 Bank loans £000 1,833 1,273 3,106 9,981 13,087 (697) (8,530) 3,860 Subordinated loan £000 497 — 497 — 497 — — 497 Hire purchase £000 5 3 8 3 11 — — 11 Hire purchase £000 13 6 19 11 30 — — 30 Total £000 1,771 1,355 3,126 14,407 17,533 (985) (7,909) 8,639 (379) 1,648 9,908 Total £000 2,343 1,279 3,622 9,992 13,614 (697) (8,530) 4,387 (497) 85 3,975 A proportion of the Group’s bank loans is drawn in foreign currencies to provide a hedge against assets denominated in those currencies. The Sterling equivalent at 31 December 2016 of loans denominated in Euros was £1,217,000 (2015: £1,050,000). These amounts are included in the figures above for bank loans, repayable in years one to five. 21. Financial instruments The Group’s policies on treasury management, capital management objectives and financial instruments are given in the Directors’ Report commencing on page 16. Fair value of financial instruments Financial instruments include the borrowings set out in note 20. The Group enters into derivative financial instruments in order to manage its interest rate and foreign currency exposure. The principal derivatives used include interest rate swaps and foreign currency options. Material changes in the carrying values of these instruments are recognised in the Statement of Comprehensive Income in the periods in which the changes arise. Such recognition is treated as an adjusting item in the Statement of Comprehensive Income where the foreign currency hedge was entered into in order to protect profits in later accounting periods. In such cases, the charge or credit will be reversed out of adjusting items in the accounting period for which the hedge was intended and will be shown in results before adjusting items. All financial instruments denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. The Directors believe that there is no material difference between the book value and fair value of all financial instruments. Borrowing facilities The Group has a revolving acquisition facility of £10 million. At 31 December 2016 the Group had drawn £9,300,000 (2015: £2,755,000). Trade payables All amounts are short term (all payable within six months) and their carrying values are considered reasonable approximations of fair value. The values are set out in note 19. 37 21. Financial instruments continued Fair value hierarchy The fair value hierarchy has the following levels: Level 1: quoted prices (unadjusted) in active markets for identical assets or 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). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The interest rate swaps and foreign currency hedges are measured at fair value in accordance with the fair value hierarchy and are classed as level 2. Summary of financial assets and financial liabilities by category Financial assets Trade and other receivables Cash and cash equivalents Total financial assets Financial liabilities – amortised cost Trade payables Accruals and deferred income Other payables Trade and other payables relating to acquisitions Current portion of long-term borrowings Long-term borrowings Total financial liabilities Net financial liabilities Non-financial assets and liabilities not within the scope of IAS 39 Goodwill Other intangible assets Property, plant and equipment Inventories Prepayments and accrued income Social security and other taxes Retirement benefit obligations Current tax payable Deferred tax assets Deferred tax liabilities Total equity 2016 £000 2015 £000 10,137 7,909 18,046 5,261 4,656 749 1,648 2,693 13,855 28,862 10,816 13,337 9,736 5,288 9,939 1,204 (1,016) (2,198) (1,195) 776 (2,310) 33,561 22,745 10,147 8,530 18,677 5,403 4,026 785 85 3,361 9,556 23,216 4,539 10,927 9,088 4,787 7,922 893 (593) (1,394) (1,436) 351 (1,922) 28,623 24,084 Financial assets The Group’s financial assets (which are summarised above) comprise cash and cash equivalents and trade and other receivables. The amounts derived from these assets and included as interest income in the Statement of Comprehensive Income are £9,000 (2015: £28,000) (see note 9). Cash and cash equivalents are principally denominated in Sterling and earn interest at floating rates. Financial liabilities The Group’s principal financial liabilities are bank loans, trade and other payables and derivative financial instruments. The Group also holds interest rate swaps and foreign currency forward contracts and options: The costs attributable to these liabilities and included as interest expense in the Statement of Comprehensive Income amounted to £523,000 (2015: £523,000) (see note 9). A proportion of the bank loans are denominated in foreign currencies to provide a hedge against currency risk on Group assets (see note 20). Foreign exchange losses attributable to bank loans and included as operating income in the Statement of Comprehensive Income amounted to £166,000 (2015: gain £15,000). 38 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 22. Share capital Allotted, called up and fully paid – Ordinary shares of 5p each 1 January: 6,098,549 shares (2015: 5,996,211) Issue of 36,738 Ordinary shares as part of the deferred consideration due upon the acquisition of Armfield Limited Exercise of share options: 9,079 shares (2015: 65,600) 31 December: 6,107,628 shares (2015: 6,098,549) Allotments of Ordinary shares in 2016 were made: 2016 £000 305 — — 305 2015 £000 300 2 3 305 • to satisfy the exercise of 9,079 share options in aggregate on six occasions during the year when the share price was within the range of 1285.0p to 1857.5p (2015: exercise of 65,600 share options when the share price was within the range 1400.0p to 1887.5p). Throughout 2016, the Group continued to award a free “matching share” under the Judges Scientific Share Incentive Plan for every share purchased up to a maximum value of £600 per employee per tax year. In 2016, an average of 85 employees participated in the scheme each month (2015: 71 employees), purchasing 10,109 shares in total, including matching shares (2015: 7,960 shares). The market price of the Company’s Ordinary shares at 31 December 2016 was 1387.5p. The share price range during the year was 1190.0p to 1895.0p. 23. Share-based payments Equity share options At 31 December 2016, options had been granted and remained outstanding in respect of 269,411 Ordinary shares in the Company, all priced by reference to the mid-market price of the shares on the date of grant and all exercisable, following a three-year vesting period, between the third and tenth anniversaries of grant, as below: 2005 Approved Option Scheme 2005 Unapproved Option Scheme 2015 Approved Option Scheme 2015 Unapproved Option Scheme At 1 January 2016 Number 69,212 114,664 37,747 34,553 256,176 Granted Number — — 17,328 12,172 29,500 Lapsed Number (4,686) — (3,500) — (8,186) At 31 December 2016 Number 55,447 114,664 51,575 46,725 268,411 Exercised Number (9,079) — — — (9,079) Weighted average exercise price (p) 922.2 189.6 — — Of which exercisable Number 41,375 56,050 — — 97,425 2005 Option Scheme Exercise prices for the year ended 31 December 2016 ranged between 124.0p and 720.0p per share (2015: between 92.0p and 720.0p per share), with a weighted average remaining contractual life of 5.52 years (2015: 6.42 years). 2015 Option Scheme No options were exercised in the year ended 31 December 2016. The weighted average remaining contractual life is 8.96 years (2015: 9.80 years). In accordance with IFRS 2, a Black Scholes valuation model has been used. The key assumptions used in the model are as follows: • interest rate – 0.8%; • volatility – 30.2%; • dividend yield – 1.6%; and • expected life of option – 3.0 years. The charge for the year ended 31 December 2016 was £241,000 (2015: £119,000). 39 24. Other reserves Balance at 1 January 2016 Issue of share capital Transactions with owners Exchange differences on translation of foreign subsidiaries Total comprehensive income Balance at 31 December 2016 Balance at 1 January 2015 Issue of share capital Transactions with owners Exchange differences on translation of foreign subsidiaries Total comprehensive income Balance at 31 December 2015 Capital redemption reserve £000 23 — — — — 23 Capital redemption reserve £000 23 — — — — 23 Merger reserve £000 1,968 — — — — 1,968 Merger reserve £000 1,351 617 617 — — 1,968 Translation reserve £000 13 — — 126 126 139 Translation reserve £000 — — — 13 13 13 Total £000 2,004 — — 126 126 2,130 Total £000 1,374 617 617 13 13 2,004 The movement on the merger reserve arose from the issue of 36,738 shares as part of the acquisition cost of Armfield. 25. Risk management objectives and policies The Group is exposed to market risks, arising predominantly from currency exposure resulting from its export activities, interest rate fluctuation on its loans and deposits and credit and liquidity risks. Risk management strategies are co-ordinated by the Directors. Foreign currency sensitivity The Group exports a substantial proportion of its sales, frequently denominated in foreign currencies (principally in US$ and Euros). Exposure to currency rate fluctuations exists from the moment a sales order is confirmed through to the time when the related remittance is converted into Sterling. This exposure is computed monthly (along with offsetting exposure on purchases, generally of minimal amounts) and economically hedged, predominantly through the use of currency forward contracts and options. The net exposure to risk is therefore substantially reduced. This does not, however, represent a hedge under IAS 39. Residual exposure is the difference between the net exposure and the amounts of currency hedges, both translated into Sterling at each measurement date. 31 December 2016 Amount of foreign currency hedged at year end Residual exposure at year end – long/(short) Impact on pre-tax profits of a 5% variation in exchange rate on year-end residual exposure Impact on equity of a 5% variation in exchange rate on year-end residual exposure 31 December 2015 Amount of foreign currency hedged at year end Residual exposure at year end – long/(short) Impact on pre-tax profits of a 5% variation in exchange rate on year-end residual exposure Impact on equity of a 5% variation in exchange rate on year-end residual exposure Sterling equivalent of US$ £000 3,382 4,770 239 191 Sterling equivalent of US$ £000 3,900 2,497 125 100 Sterling equivalent of € £000 3,717 (1,516) 76 61 Sterling equivalent of € £000 2,650 (311) 16 13 In addition to the hedging of existing measured foreign currency exposure, the Group seeks to mitigate the impact of currency fluctuations on future trading performance. This was achieved at 31 December 2016 by entering into currency options to sell €4.5 million and $6.2 million during 2017, at predetermined exchange rates. The fair value of these financial instruments is an asset of £13,000 (2015: £56,000), offset by a fair value liability of £18,000 (2015: £39,000) on interest rate swaps. These transactions have been recognised in these accounts and are held within other receivables. 40 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 25. Risk management objectives and policies continued Interest rate sensitivity The Group’s interest rate exposure arises in respect of its bank loans, which are LIBOR linked for interest rate purposes, and its surplus funds, which are bank base rate linked. To hedge this risk the Group is party to interest rate swaps at predetermined rates. The fair value of these financial instruments has been recognised in these accounts. The Group’s sensitivity to interest rate changes is as follows: Unhedged bank loans outstanding at year end Impact on pre-tax profits of a 1% change in LIBOR Impact on equity of a 1% change in LIBOR Surplus funds at year end Impact on pre-tax profits of a 1% change in bank base rates Impact on equity of a 1% change in bank base rates 2016 £000 12,897 129 103 7,909 79 63 2015 £000 5,505 55 44 8,530 85 68 Credit risk The Group’s exposure to credit risk is limited to the carrying amounts of financial assets recognised at the balance sheet date, as follows: Cash and cash equivalents Trade and other receivables 2016 £000 7,909 10,137 18,046 2015 £000 8,530 10,147 18,677 The Group reviews the credit risk relating to its customers by ensuring wherever possible that it deals with long-established trading partners, and agents and government/university-backed bodies, where the risk of default is considered low. Where considered appropriate, the Group insists on upfront payment and requires letters of credit to be provided. The Directors consider that all the Group’s financial assets that are not impaired at each of the reporting dates under review are of good credit quality, including those that are past due (see note 18). None of the financial assets are secured by collateral or other credit enhancements. Group companies generally trade through overseas agents and credit exposure to an individual agent can be significant at times. At 31 December 2016, no counterparty owed more than 10% of the Group’s total trade and other receivables (2015: none). The credit risk for liquid funds and other short-term financial assets is considered small. The substantial majority of these assets are deposited with Bank of Scotland, part of the Lloyds Banking Group. Liquidity risk Longer-term finance is required to enable the Group to pursue it strategic goal of growing through acquisitions as well as through organic development. This financing need has been satisfied for the foreseeable future by a £10 million revolving acquisition facility advanced by Lloyds Bank Capital Markets together with a £10 million uncommitted accordion facility. The Group’s strategy envisages the servicing of this debt to be achieved from the cashflow arising from the businesses acquired. For short and medium-term financial needs, the Group regularly compares its projected requirements with available cash and borrowing facilities. The periods of maturity of the Group’s borrowings are set out in note 20. The maturity of all trade and other payables is within the period of less than six months. 26. Operating lease commitments Minimum operating lease commitments falling due: Within one year – land and property Within one year – vehicles Within one year – other Between one and five years – land and property Between one and five years – vehicles Between one and five years – other Greater than five years – land and property Total commitment 2016 £000 670 45 26 741 1,117 54 13 1,184 135 2,060 2015 £000 492 35 52 579 1,068 49 22 1,139 180 1,898 41 27. Acquisitions During the financial year to 31 December 2016, the Group completed four separate acquisitions, namely the purchase of CoolLED Limited, Dia-Stron Limited and EWB Solutions 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. CoolLED 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 £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. On 29 November 2016 the Group acquired 100% of the issued share capital of EWB Solutions Limited, a manufacturer of edge-welded bellows used in Ultra High Vacuum systems and various other applications. EWB is based in Hemel Hempstead, Hertfordshire. EWB was acquired for a cash consideration of £1.8 million and a payment to reflect excess working capital. The summary provisional fair value of the costs of these acquisitions includes the components stated below: Consideration Initial cash consideration Deferred consideration Gross cash inherited on acquisition Cash retained in the business Payment in respect of surplus working capital* Total consideration Acquisition-related transaction costs charged to the income statement £000 8,223 100 8,323 3,714 (367) 3,347 11,670 736 * Of the £3,347,000 payment in respect of surplus working capital, £1,598,000 is payable in 2017. The consideration and associated transaction costs for these transactions were financed from existing cash resources and £4.5 million was drawn down from the Group’s existing £10 million acquisition loan facility. The summary provisional fair values recognised for the assets and liabilities acquired are as follows: Book value £000 267 — 115 830 921 3,714 5,847 (21) (728) (234) (983) 4,864 Fair value adjustments £000 — 5,803 28 (255) — — 5,576 (1,109) (71) — (1,180) 4,396 Fair value £000 267 5,803 143 575 921 3,714 11,423 (1,130) (799) (234) (2,163) 9,260 11,670 2,410 Property, plant and equipment Intangible assets Deferred tax assets Inventories Trade and other receivables Cash and cash equivalents Total assets Deferred tax liabilities Trade payables Current tax liability Total liabilities Net identifiable assets and liabilities Total consideration Goodwill recognised 42 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 27. Acquisitions continued 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 £908,000 in the period post-acquisition. After amortisation of intangible assets, the contribution to owners of the parent company’s results amounted to a gain of £127,000 after tax. If the acquisitions had been acquired on 1 January 2016, based on pro-forma results, revenue for the Group for the year ended 31 December 2016 would have increased by £1,091,000 and profit after tax (before adjusting items) attributable to owners of the parent company would have increased by £265,000 after allowing for interest costs but before charging amortisation of intangible assets (a reduction of £375,000 after charging additional amortisation of intangible assets of £640,000). Armfield acquisition There have been no amendments to the fair values presented in the 2015 consolidated financial statements. As part of the terms of the acquisition, there is a further contingent payment of £360,000 which may become due if the triennial actuarial valuation of Armfield’s defined benefit pension fund as at 31 March 2017 shows a reduction in the yearly contribution required to eliminate its funding deficit. The fair value of this consideration has been recorded at £nil as the Directors consider that it is unlikely that the Company will be required to settle this potential payment. 28. Retirement benefit obligations Defined benefit obligations The Group’s subsidiary, Armfield Limited, operates a defined benefit scheme for certain of its employees. The latest full actuarial valuation was carried out as at 31 March 2014 and the retirement benefit liability was independently revalued as at 31 December 2014. The scheme has been closed to new members from 2001 and closed to new accrual in 2006. The average duration of the plan’s liabilities has been calculated to be approximately 18 years. The trustees are drawn partly from Armfield’s employees and also from nominees of the Judges Group. The full actuarial valuation carried out as at 31 March 2014 was in accordance with the scheme funding requirements of the Pensions Act 2004 and the funding of the plan is agreed between Armfield and the pension trustees in line with those requirements. These in particular require the surplus/deficit to be calculated using prudent, as opposed to best estimate, actuarial assumptions. It was agreed with the trustees that contributions be increased to £198,000 per annum to eliminate the deficit over a period of six years. The next full actuarial valuation will be carried out no later than 31 March 2017. The asset investment strategy is the responsibility of the trustees. Summary Fair value of plan assets Present value of defined benefit obligation Deficit in scheme Deferred tax Net retirement benefit obligation Changes in the fair value of plan assets 1 January Interest income Return on plan assets (excluding amounts in interest income) Contributions by the Company Benefits paid 31 December 31 December 2016 £000 5,759 (7,957) (2,198) 374 (1,824) 31 December 2016 £000 5,405 201 410 198 (455) 5,759 31 December 2015 £000 5,405 (6,799) (1,394) 279 (1,115) 31 December 2015 £000 5,286 190 (150) 198 (119) 5,405 43 28. Retirement benefit obligations continued Defined benefit obligations continued The actual return on plan assets for the year ended 31 December 2016 was £611,000 (2015: £40,000). Changes in the fair value of defined benefit pension obligations 1 January Current service cost Expenses Interest expense Actuarial gains due to scheme experience Actuarial gains due to changes in demographic assumptions Actuarial losses/(gains) due to financial assumptions Benefits paid 31 December There were no plan amendments, curtailments or settlements in the above years. Major categories of plan assets Quoted equities Bonds Property Cash and other assets Principal actuarial assumptions Discount rate Inflation rate In payment pension increases In deferment pension increases 31 December 2016 £000 6,799 — — 261 — (76) 1,428 (455) 7,957 31 December 2016 £000 2,114 3,197 432 16 5,759 31 December 2016 % 2.80 3.50 3.50 5.00 31 December 2015 £000 6,994 — — 250 — — (326) (119) 6,799 31 December 2015 £000 1,893 2,898 438 176 5,405 31 December 2015 % 3.90 3.20 3.40 5.00 The mortality assumptions used in valuing the liabilities of the plan are based 100% on the standard tables S2PxA, projected using the CMI 2013 model with a 1.00% per annum long-term rate of improvement. The life expectancies assumed are as follows: Male retiring in 2016 Female retiring in 2016 Male retiring in 2036 Female retiring in 2036 Life expectancy at age 65 (years) 21.9 23.9 23.2 25.4 Sensitivity The significant actuarial assumptions in determining the defined benefit obligation are the discount rate, the rate of mortality and rate of inflation. Changes to these actuarial assumptions may impact this obligation as follows: Discount rate – decrease by 0.25% per annum Inflation rate – increase of 0.25% per annum Mortality rate – increase of one year in life expectancy Change in liabilities £000 350 111 228 The above shows the impact on the defined benefit obligation if the assumptions were changed as shown (assuming all other assumptions remain constant). The sensitivity analysis may not be representative of the actual change in the obligation as it is unlikely that any change in assumption would happen in isolation. 44 Financial statementsNotes to the consolidated financial statements continuedFor the year ended 31 December 2016 28. Retirement benefit obligations continued Risk management There is a risk that changes in discount rates, price inflation, asset returns and/or mortality assumptions could lead to a materially greater deficit. Given the long-term time horizon of the pension plan cashflows, the assumptions used are uncertain. The assumptions can also be volatile from year to year due to changes in investment market conditions. A higher pension deficit could directly impact the Group’s equity valuation and credit rating and may lead to additional funding requirements in future years. Any deficit relative to the actuarial liability for funding purposes, which may differ from the funding position on an accounting basis, will generally be financed over a period that ensures the contributions are reasonably affordable to the Group and in line with local regulations. 29. Non-controlling interests Summarised financial information of the Group’s non-controlling interests is set out below: Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity Attributable to: Owners of the parent Non-controlling interest Revenue Profit for the year Attributable to: Owners of the parent Non-controlling interest Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Net cash inflow No dividends were paid to the non-controlling interest during the year (2015: £nil). 2016 £000 585 2,472 3,057 (1,353) (63) (1,416) 1,641 837 804 2016 £000 3,867 1,109 566 543 2016 £000 1,005 (20) (866) 119 2015 £000 598 2,402 3,000 (2,355) (113) (2,468) 532 271 261 2015 £000 4,127 788 402 386 2015 £000 623 (38) (398) 187 45 Independent auditor’s report To the members of Judges Scientific plc We have audited the parent company financial statements of Judges Scientific plc for the year ended 31 December 2016 which comprise the balance sheet, the statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements: • give a true and fair view of the state of the company’s affairs as at 31 December 2016 and of its profit for the year then ended; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and Directors’ Report has been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the parent company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and Directors’ Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the consolidated financial statements of Judges Scientific plc for the year ended 31 December 2016. Philip Sayers Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants East Midlands 20 March 2017 46 Financial statements Parent company balance sheet As at 31 December 2016 Fixed assets Tangible assets Investments in subsidiaries Current assets Debtors Cash in hand and at bank Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Deferred tax liability Total net assets Capital and reserves Called up share capital Share premium Capital redemption reserve Profit and loss account Shareholders’ funds Note 2016 £000 2015 £000 3 4 5 6 7 8 9 714 39,264 39,978 22,061 — 22,061 (8,998) 13,063 53,041 (13,796) — 39,245 305 14,472 23 24,445 39,245 3,403 27,936 31,339 16,421 428 16,849 (3,542) 13,307 44,646 (9,443) (110) 35,093 305 14,441 23 20,324 35,093 In accordance with the exemptions permitted by section 408 of the Companies Act 2006, the profit and loss account of the parent company has not been presented. Profit for the year totalled £5,552,000 (2015: £5,996,000). These parent company financial statements were approved by the Board on 20 March 2017. David Cicurel Director Brad Ormsby Director 47 Parent company statement of changes in equity For the year ended 31 December 2016 At 1 January 2016 Dividends Issue of share capital Share-based payments Transactions with owners Profit for the year Total comprehensive income for the year At 31 December 2016 At 1 January 2015 Dividends Issue of share capital Share-based payments Transactions with owners Profit for the year Total comprehensive income for the year At 31 December 2015 Share capital £000 305 — — — — — — 305 300 — 5 — 5 — — 305 Share premium £000 14,441 — 31 — 31 — — 14,472 14,294 — 147 — 147 — — 14,441 Capital redemption reserve £000 23 — — — — — — 23 23 — — — — — — 23 Retained earnings £000 20,324 (1,581) — 150 (1,431) 5,552 5,552 24,445 15,594 (1,385) — 119 (1,266) 5,996 5,996 20,324 Total equity £000 35,093 (1,581) 31 150 (1,400) 5,552 5,552 39,245 30,211 (1,385) 152 119 (1,114) 5,996 5,996 35,093 48 Financial statements Notes to the parent company financial statements For the year ended 31 December 2016 1. Statement of compliance The financial statements were prepared in accordance with FRS 101 ‘Reduced Disclosure Framework’. 2. Summary of significant accounting policies Basis of preparation As permitted by FRS 101, for both periods presented, the Company has taken advantage of the disclosure exemptions available under that standard in relation to financial instruments, capital management, presentation of a cashflow statement, share-based payments, fair value measurements, comparative reconciliations for tangible and intangible assets, standards not yet effective, related party transactions with other wholly owned members of the Group, and key management personnel compensation. Equivalent disclosures are, where required, given in the Group accounts of Judges Scientific plc. The Group accounts of Judges Scientific plc are available to the public. The financial statements have been prepared on the historical cost basis. Use of key accounting estimates and judgements Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimates is contained in the accounting policies and/or the notes to the financial statements, and the key areas are summarised below. Sources of estimation uncertainty Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. Tangible fixed assets Tangible fixed assets are stated at historical cost, less accumulated depreciation. Depreciation is provided at annual rates calculated to write off the cost less residual value of each asset over its expected useful life at the following rate: Property Leasehold improvements Fixtures, fittings and equipment 50 years (excluding the estimated cost of land) Over the minimum term of the lease Between three and seven years Investments Fixed asset investments in subsidiaries are stated at cost less provision for impairment. Taxation Current tax is provided at amounts expected to be paid or recovered either directly or through Group relief arrangements. Deferred tax assets and liabilities are calculated at rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Employee benefits – defined contribution plans The Company operates defined contribution pension schemes for employees and Directors. The assets of the schemes are held by investment managers separately from those of the Group. The contributions payable to these schemes are recorded in the Statement of Comprehensive Income in the accounting period to which they relate. Share-based employee compensation The Group operates equity-settled share-based compensation plans for remuneration of its Directors and employees. All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. The fair value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). Share-based compensation is recognised as an expense in the Statement of Comprehensive Income with a corresponding credit to other reserves. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised. Foreign currencies Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are recorded at the rate of exchange prevailing at the date of transaction. All differences are taken to the profit and loss account. 49 Notes to the parent company financial statements continued For the year ended 31 December 2016 3. Tangible assets Cost 1 January 2016 Additions Disposal 31 December 2016 Depreciation 1 January 2016 Disposal Charge 31 December 2016 Net book value – 31 December 2016 Net book value – 31 December 2015 The disposal relates to the intra-group transfer of Judges House to UHV Design Limited. 4. Investments in subsidiaries Cost 1 January Additions Repayment of subordinated debt in Bordeaux Acquisition Limited 31 December Property and leasehold improvements £000 Fixtures, fittings and equipment £000 3,565 7 (2,775) 797 180 (160) 74 94 703 3,385 20 — — 20 2 — 7 9 11 18 Total £000 3,585 7 (2,775) 817 182 (160) 81 103 714 3,403 2016 £000 2015 £000 27,936 11,450 (122) 39,264 16,537 11,399 — 27,936 The additions in the year relate to the acquisitions of CoolLED Limited, Dia-Stron Limited and EWB Solutions Limited. 50 Financial statements 4. Investments in subsidiaries continued The Company’s subsidiaries at 31 December 2016, all of which are incorporated and domiciled in the United Kingdom (except as stated), are as follows: Company Fire Testing Technology Limited PE.fiberoptics Limited Principal activity Design and assembly of fire testing instruments Design and assembly of fibre-optic testing instruments UHV Design Limited Aitchee Engineering Limited Quorum Technologies Limited Sircal Instruments (UK) Limited Deben UK Limited* Global Digital Systems Limited Scientifica Limited* Scientifica LLC (USA)* Dia-Stron Limited Dia-Stron Inc. (USA)* EWB Solutions Limited Judges Capital Limited EM Technologies Limited* FTT Scientific Limited* GDS Instruments Limited* Polaron Instruments Limited* Stanton Redcroft Limited* * Indirectly held. Bordeaux Acquisition Limited Armfield Limited Armfield Technical Education Limited* Dormant Armfield Inc. (USA)* CoolLED Limited Design and manufacture of instruments used to manipulate objects in ultra high vacuum chambers Manufacture of engineering parts and finished products Design, manufacture and distribution of instruments that prepare samples for examination in electron microscopes Design, manufacture and distribution of rare gas purifiers for use in metals analysis Design and manufacture of devices used to enable or improve the observation of objects under a microscope Design and manufacture of instruments used to test the physical properties of soil and rocks Design and manufacture of instruments used in electrophysiology to enable or improve the observation of objects under a microscope Sale of instruments used in electrophysiology to enable or improve the observation of objects under a microscope Holding company Design and supply of research and training equipment Supply of research and training equipment Design and manufacture of illumination systems for fluorescence microscopy Design and manufacture of systems to test the mechanical properties of fibres Sale of systems to test the mechanical properties of fibres Design and manufacture of edge-welded bellows Holding company Dormant Dormant Dormant Dormant Dormant Class of shares Ordinary £1 % held 100% “A” Ordinary 50p 100% of “A” class, being 51% of total equity 100% Ordinary £1 Ordinary £1 Ordinary £1 Ordinary £1 Ordinary £1 “A” and “B” Ordinary £1 Ordinary £1 Ordinary £1 Ordinary £1 Ordinary £1 Common Shares Ordinary £1 Ordinary £1 Common Shares Ordinary £1 Ordinary £1 Ordinary £1 Ordinary £100 Ordinary £1 Ordinary £1 Ordinary £1 100% 100% 100% 51% 100% 100% 100% 51% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 51 Notes to the parent company financial statements continued For the year ended 31 December 2016 5. Debtors Amounts owed by Group companies Prepayments and accrued income Deferred tax asset (note 8) 2016 £000 21,261 721 79 22,061 2015 £000 15,890 531 — 16,421 Included in amounts owed by Group companies are: • the sum of £14,349,000 (2015: £13,896,000) which is repayable on demand at any time after 30 June 2017 provided that all liabilities to third parties falling due on or before that date have been met. These loans are unsecured and bear interest at the rate of 7.5% per annum; • the sum of £1,500,000 (2015: £nil) which is repayable on demand at any time after 30 June 2017 provided that all liabilities to third parties falling due on or before that date have been met. This loan is unsecured and bears interest at the rate of 5% per annum; • a loan to UHV Design Limited, made during 2016 to finance the transfer of Judges House, amounting to £2,615,000 (2015: £nil) which is to be repaid by 2026. This loan is unsecured and bears interest at the rate of 5% per annum; and • a loan to Fire Testing Technology Limited, made during 2010 to finance the acquisition of Sircal Instruments (UK) Limited, amounting to £1,316,000 at 31 December 2016 (2015: £1,316,000). This loan is unsecured, repayable on demand and bears interest at the rate of 7.5% per annum. Except as stated, all amounts are recoverable in less than one year. 6. Creditors: amounts falling due within one year Bank overdraft Current portion of bank loans Trade and other payables Amounts owed to Group companies Corporation tax Social security and other taxes Other creditors Amounts owed to acquisition creditors Accruals and deferred income 7. Creditors: amounts falling due after more than one year Bank loans 2016 £000 3,282 2,260 436 415 321 470 69 1,604 141 8,998 2016 £000 13,796 2015 £000 — 2,260 126 300 315 168 42 — 331 3,542 2015 £000 9,443 Borrowings comprise a bank loan secured on assets of the Group. The loan is repayable in quarterly instalments over the period ending 31 December 2019 and bears interest at 1.75% to 2.75% above LIBOR-related rates, depending upon gearing. The repayment profile of borrowings is as follows: Repayable in less than one year Repayable in years one to five Less: interest included above Bank loans £000 2,625 14,345 16,970 (914) 16,056 A proportion of the Company’s bank loans is drawn in foreign currencies to provide a hedge against Group assets denominated in those currencies. The Sterling equivalent at 31 December 2016 of loans denominated in Euros was £1,216,000 (2015: £1,050,000). These amounts are included in the figures above for bank loans, repayable in years one to five. The Company enters into derivative financial instruments in order to manage its interest rate and foreign currency exposure. The principal derivatives used include interest rate swaps and foreign currency forward contracts and options. The fair value of these financial instruments is an asset of £13,000 (2015: £56,000), offset by a fair value liability of £18,000 (2015: £39,000) on interest rate swaps. These transactions have been recognised in these accounts and are held within other creditors. 52 Financial statements 7. Creditors: amounts falling due after more than one year continued The parent company guarantees bank loans advanced to its 51%-owned subsidiary, Bordeaux Acquisition Limited, amounting in aggregate at 31 December 2016 to £102,000 (2015: £687,000). 8. Deferred tax asset/(liability) 1 January Credit to income statement Adjustment in respect of prior year Credited to equity 31 December 2016 £000 (110) 87 11 91 79 Deferred tax is recorded at a rate of 17% and relates to accelerated capital allowances and share options. 9. Share capital and share-based payments Details relating to the parent company’s share capital are set out in note 22 to the consolidated financial statements. 10. Related party transactions The Company is exempt under the terms of FRS 101.8 from disclosing transactions with its wholly owned subsidiaries. Funds were advanced by the Company in 2011 to its 51%-owned subsidiary, Bordeaux Acquisition Limited, to facilitate the purchase during that year of the entire issued share capital of Deben UK Limited. The amount of £395,000 was outstanding at 31 December 2016 (2015: £517,000). There are no interest or repayment terms to these advances. Dividends paid in the year to Directors who hold shares amounted to £295,000 in aggregate (2015: £260,000). 11. Directors and employees Staff costs (including Directors) Wages and salaries Social security costs Other pension costs Total Directors’ emoluments Emoluments Defined contribution pension scheme contributions Emoluments of the highest paid Director Emoluments During the year, two Directors participated in a defined contribution pension scheme (2015: two). Average number of persons employed Directors Administrative staff Total 2016 £000 718 87 21 826 582 14 596 168 2015 £000 798 100 15 913 701 12 713 205 2016 Number 2015 Number 7 2 9 7 2 9 53 Notice of Annual General Meeting Notice is hereby given that the fourteenth Annual General Meeting of Judges Scientific plc (the “Company”) will be held at The Lansdowne Club, 9 Fitzmaurice Place, London W1J 5JD on Wednesday 24 May 2017 at 12.00 noon for the purpose of dealing with the following business, of which items 6, 7 and 8 are special business. Ordinary business 1. To receive and, if approved, adopt the audited financial statements of the Company for the year ended 31 December 2016 and the reports of the Directors and auditor thereon. 2. To re-appoint David Cicurel, who retires by rotation, as a Director. 3. To re-appoint Glynn Reece, who retires by rotation, as a Director. 4. To approve a final dividend of 18.5 pence per Ordinary share. 5. To re-appoint Grant Thornton UK LLP as auditor to hold office from the conclusion of this meeting until the conclusion of the next general meeting at which financial statements are laid before the Company and to authorise the Directors to fix the remuneration of the auditor for the year ending 31 December 2017. Special business To consider and, if thought fit, to pass the following resolutions, as to the resolution numbered 6 as an ordinary resolution and as to the resolutions numbered 7 and 8 as special resolutions: Ordinary resolution 6. That the Directors of the Company be and are hereby generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 (the “Act”) to allot shares in the Company and to grant rights to subscribe for or to convert any security into shares in the Company up to a maximum aggregate nominal amount of £101,734 provided that this authority unless renewed shall expire at the close of the next Annual General Meeting of the Company, save that the Company may before such expiry make any offer, agreement or other arrangement which would or might require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after such expiry and the Directors of the Company may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of such offer, agreement or other arrangement as if the authority conferred hereby had not expired, this authority to replace any previous authority which is hereby revoked with immediate effect. Special resolutions 7. That: (a) subject to and conditional upon the passing of resolution 6 above, the Directors of the Company be and they are hereby empowered pursuant to section 570 of the Act to allot equity securities (as defined for the purposes of section 560 of the Act) for cash, pursuant to the authority granted by resolution 6 above, as if section 561(1) of the Act did not apply to any such allotment, provided that such power shall be limited to: (i) the allotment of equity securities in connection with a relevant rights issue or open offer in favour of Ordinary shareholders where the equity securities attributable to the respective interests of all Ordinary shareholders are proportionate to the respective numbers of Ordinary shares held by them on the record date for such allotment, but subject to such exclusions as the Directors may deem fit to deal with fractional entitlements or impediments arising under the laws of any overseas territory or the requirements of any recognised regulatory body or stock exchange; and (ii) the allotment (otherwise than pursuant to sub-paragraph (i) above) of equity securities for cash up to an aggregate nominal amount of £30,523, and, unless previously renewed, revoked or varied, such power shall expire at the close of the next Annual General Meeting of the Company, save that the Company may before such expiry make any offer, agreement or other arrangement which would or might require equity securities to be allotted after such expiry and the Directors of the Company may allot equity securities in pursuance of such offer, agreement or other arrangement as if the power conferred hereby had not expired. (b) For the purposes of this resolution: (i) “relevant rights issue” means an offer of equity securities open for acceptance for a period fixed by the Directors of the Company to holders on the register on a fixed record date of Ordinary shares in the Company in proportion (or as nearly as may be practicable) to their respective holdings but subject in any case to such exclusions or other arrangements as the Directors of the Company may deem necessary or desirable to deal with fractional entitlements or legal or practical impediments under the laws of any overseas territory or the requirements of any recognised regulatory body or stock exchange; and (ii) the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or convert any securities into shares of the Company, the nominal amount of such shares, which may be allotted pursuant to such rights. 54 Financial statements Special resolutions continued 8. That the Company be and is hereby generally and unconditionally authorised for the purpose of section 701 of the Act to make one or more market purchases (within the meaning of section 693(4) of the Act) of Ordinary shares of 5 pence each in the capital of the Company on such terms and in such manner as the Directors of the Company may from time to time determine, provided that: (a) the maximum aggregate number of Ordinary shares hereby authorised to be purchased is 610,463 (representing approximately 10% of the Company’s issued share capital at 31 December 2016); (b) the minimum price which may be paid for such shares is the nominal value of 5 pence per Ordinary share (exclusive of expenses); (c) unless the Company makes market purchases of its own Ordinary shares by way of a tender or partial offer made to all holders of Ordinary shares on the same terms, the maximum price (exclusive of expenses) which may be paid for an Ordinary share shall not be more than 5% above the average of the market values for an Ordinary share as derived from the AIM Appendix to the London Stock Exchange Official List for the five business days immediately preceding the date on which the Ordinary share is purchased; (d) unless previously renewed, varied or revoked, the authority hereby conferred shall expire at the conclusion of the next Annual General Meeting of the Company to be held in 2018 or 15 months from the date of passing of this resolution, whichever shall be the earlier; and (e) the Company may validly make a contract or contracts to purchase Ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a purchase of Ordinary shares in pursuance of any such contract or contracts. By Order of the Board Chris Talbot Company Secretary 1 May 2017 Registered office: 52c Borough High Street London SE1 1XN Notes: 1. A member entitled to attend, speak and vote at the meeting convened by the Notice set out above is entitled to appoint one or more proxies to exercise all or any of your rights to attend, speak and vote at a general meeting of the Company. A proxy need not be a member of the Company. A Form of Proxy is enclosed for your use. Please carefully read the instructions on how to complete the form. 2. To be valid, the instrument appointing a proxy together with any power of attorney or other authority under which it is signed or a notarially certified copy of such power or authority, must be deposited with our registrar Capita Asset Service, PXS1 34 Beckenham Road, Beckenham, Kent BR3 4ZF, or at the registered office of the Company not less than 48 weekday hours before the time fixed for holding the meeting or any adjournment thereof. 3. To appoint more than one proxy you may photocopy the Form of Proxy. Please indicate the proxy holder’s name and the number of shares in relation to which he/she is authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope. 4. The completion and return of a Form of Proxy will not preclude a member of the Company from subsequently attending and voting in person at the meeting should he/she so wish. If you appoint a proxy and attend the meeting in person, your proxy appointment will automatically be terminated. 5. Pursuant to Regulation 41 of The Uncertificated Securities Regulations 2001, only those members registered in the Register of Members of the Company as at close of business on 22 May 2017 (being not more than 48 weekday hours prior to the time fixed for the Meeting) or, if the Meeting is adjourned, such time being not more than 48 weekday hours prior to the time fixed for the adjourned meeting are entitled to attend or vote at the meeting in respect of the number of Ordinary shares registered in their name at that time. Changes to entries in the Register after that time shall be disregarded in determining the rights of any person to attend or vote at the meeting. 6. In the case of joint holders the vote of the first-named holder on the Register of Members (whether voting in person or proxy) will be accepted to the exclusion of the votes of the other joint holders. 7. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that (i) if a corporate shareholder has appointed the Chairman of the meeting as its corporate representative to vote on a poll in accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representatives in accordance with those directions; or (ii) any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. 55 Ten year financial history Revenue (£000) 60,000 50,000 40,000 30,000 20,000 10,000 0 07 08 09 10 11 12 13 14 15 16 Adjusted operating profit (£000) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 07 08 09 10 11 12 13 14 15 16 Adjusted undiluted basic earnings per share (pence) 120 100 80 60 40 20 0 07 08 09 10 11 12 13 14 15 16 Annual debt repaid and dividends paid from cashflow (£000) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 56 07 08 09 10 11 12 13 14 15 16 Dividends Repayment of borrowings Financial statements Company information Directors The Hon. Alexander Robert Hambro (Non-Executive Chairman) David Elie Cicurel (Chief Executive) Bradley Leonard Ormsby (Group Finance Director) David Barnbrook (Chief Operating Officer) Ralph Leslie Cohen (Non-Executive Director) Ralph Julian Elman (Non-Executive Director) Glynn Carl Reece (Non-Executive Director) Company Secretary Christopher Talbot Registered Office 52c Borough High Street London SE1 1XN Registrar Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Nominated Adviser Shore Capital and Corporate Ltd Bond Street House 14 Clifford Street London W1S 4JU Stockbroker Shore Capital Stockbrokers Ltd Bond Street House 14 Clifford Street London W1S 4JU Auditor Grant Thornton UK LLP Statutory Auditor Chartered Accountants Regent House 80 Regent Road Leicester LE1 7NH Bankers Lloyds Bank Corporate Markets 125 Colmore Row Birmingham B3 3SF Solicitors Hogan Lovells International LLP Atlantic House Holborn Viaduct London EC1A 2FG Registered in England and Wales, company no. 04597315 Design Portfolio is committed to planting trees for every corporate communications project, in association with Trees for Cities. J u d g e s S c i e n t i fi c p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6 Judges Scientific plc 52c Borough High Street London SE1 1XN