Interim results for the six month period ended 30 June 2016
- Performance in line with the Board’s expectations
- Group revenue of £17.7 million (H1-15: £14.1 million)
- Adjusted* operating profit of £2.5 million (H1-15: £2.4 million)
- Statutory operating profit of £1.4 million (H1-15: £2.0 million), reflecting non-recurring adjustments
- Operating cash inflow of £5.3 million (H1-15: £3.3 million) including VAT rebate of £1.5 million relating to the property purchase in 2015
- Basic EPS of 2.4 pence (H1-15: 4.0 pence). Diluted EPS of 2.3 pence (H1-15: 3.6 pence)
- Net cash and freehold property assets of £31.3 million (30 June 2015 : £26.7 million) including cash balance of £17.2 million at 30 June 2016 (30 June 2015: £21.5 million)
Interim Results 2016
Science Group is an international group of companies providing science and technology based consultancy, advisory and product development services to a range of industries and markets.
Group Financial Performance
The Board has accelerated its reporting timetable for the Group’s interim results in light of recent market volatility following the UK EU Referendum.
For the six months ended 30 June 2016, the Group generated adjusted operating profit of £2.5 million (H1 2015: £2.4 million) in line with the Board’s expectations, on revenue of £17.7 million (H1 2015: £14.1 million). (Throughout this report, adjusted operating profit excludes amortisation and impairment of intangible assets, share based payment charges and other exceptional costs). Approximately 70% (H1 2015: 80%) of the Group’s Services revenue is derived from international markets, with approximately 35% denominated in US Dollars (H1 2015: 55%) and 11% in Euros (H1 2015: 7%), primarily reflecting the effect of the 2015 acquisitions.
The Group has seen the benefits from the increased diversification of client end-markets resulting from the acquisition programme. The Oil & Gas market continued to be challenging and the Medical business suffered in the first half of the year from the lack of new projects to replace those completed in 2015, although, as reported at the time of the Annual General Meeting, a number of significant new projects have been won in the Medical sector during the first half of 2016. The Group's other three business areas have performed satisfactorily, with Leatherhead (food & beverage) outperforming the Board's expectations in terms of profit contribution.
Profit before tax (‘PBT’) was £1.1 million (H1 2015: £1.9 million), reflecting the exceptional costs associated with the ongoing integration and relocation of the Leatherhead business; a one off cost of £0.2 million in settlement of vested unapproved share options (see below); and an increase in net interest costs due to a £0.1 million loss (H1 2015: £0.1 million gain) on revaluation of the interest rate swap. Basic earnings per share was 2.4 pence (H1 2015: 4.0 pence), and diluted earnings per share in H1 2016 was 2.3 pence (H1 2015: 3.6 pence).
The Group retains a very robust balance sheet with Shareholder Funds at 30 June 2016 of £36.4 million (30 June 2015: £34.6 million), including net cash and freehold property of £31.3 million (30 June 2015: £26.7 million). Net funds at 30 June 2016 were £9.9 million (30 June 2015: £13.2 million) after net cash outflows of £12.1 million related to the acquisition of Leatherhead and purchase of the freehold property in Epsom, and dividend of £1.6 million. The Board continues to review its banking arrangements and debt facilities.
Share Option Plans
Science Group plc has several share option plans: Approved Scheme (2008), Unapproved Scheme (2008) and Performance Share Plan (2013). At 31 December 2015, the Company had 3.0 million share options outstanding, of which 1.9 million had vested or are anticipated to vest in 2016. (The terms Approved and Unapproved refer to HMRC categorisation.) Share trading volume in the Company’s shares is limited. This means that share option holders cannot readily realise the benefits and that vested share options can potentially act as an overhang in the market. Recognising this situation the Board has undertaken a wideranging review of share option programmes and concluded that these plans are not well understood, particularly the issues arising from the lack of liquidity in a closely held small cap company.
The Remuneration Committee therefore determined that :
- The “Unapproved 2008” scheme should be terminated as soon as practicable;
- Under normal circumstances, future share option grants under all plans will not exceed 1% of Issued Share Capital in any year;
- Future share option eligibility will be limited to senior grades where equity-based variable remuneration is a key component of the total remuneration package and the implications of share illiquidity are better understood.
The Remuneration Committee subsequently made an offer to eligible employees of outstanding vested (or to vest in 2016) grants under the Unapproved Scheme and Performance Share Plan (limited to awards up to 15,000 options), to buy out the share option for approximately the net realisable value. In aggregate, acceptances of the offer accounted for 1.0 million share options at an aggregate cash cost of £0.6 million, payable in August, and a one-off charge of £0.2 million. (No Director had any share options that were eligible.) Following this action, the Company has outstanding share options of 1.8 million, of which
0.8 million have vested or will vest in 2016 and 0.2 million are anticipated to lapse.
The Group performance in the first half of 2016 has been in line with the Board’s expectations, incorporating positive and negative external factors. It is beyond doubt that the months ahead will be unpredictable and potentially volatile. However, with a robust balance sheet, including significant cash resources, Science Group is well prepared for this period of uncertainty and the Board will adopt a pragmatic approach to such external influences, adapting the Group’s business model accordingly. As always, the Board remains committed to managing the business in a prudent manner for the long term benefit of shareholders, customers and employees.
The Board also recognises that this period of market and economic volatility may create new opportunities to develop the business. The financial strength of Science Group should enable strategic expansion to be considered if appropriate.