Avon Rubber p.l.c. – Annual report – 30 September 2017
Directors’ Report (extract)
RESEARCH AND DEVELOPMENT
The Group continues to utilise its technical and materials expertise to further advance its products and remain at the forefront of technology in the fields of respiratory protection, dairy milking technology and polymer engineering. The Group maintains its links to key universities in the US and UK and continues to work with new and existing customers and suppliers to develop its knowledge and product range. Total Group expenditure on research and development in the year was £8.4m (2016: £8.3m) further details of which are contained in the Strategic Report on pages 29 to 30.
Through ARTIS, the Group’s research and development arm, the Group is recognised as a world leader in understanding the composition and use of polymer products.
Strategic Report (extract 1)
Chief Executive Officer’s Review (extract)
SELECTIVE PRODUCT DEVELOPMENT
Continued investment to expand our product range
To maintain our innovation leadership position, we will continue to invest in new products in both businesses and in enhancements to our existing product ranges. Our aim is to generate the highest return from our research and development activities by focusing on innovation that is most relevant to our customers and offers the best commercial outcomes. This means that whilst we do not intend to invest at the same levels as recent years, we will target investment in large projects where we see further opportunity to add value in line with our strategic objectives and growth targets.
Building on our long-term partnership with the DoD
The ten year sole-source JSGPM contract for the M50 mask system has been a significant platform for establishing the Group both as a trusted supplier to and as a critical innovation partner for the US Department of Defense (‘DoD’). We have established multi-level relationships with the world’s largest military customer and our R&D teams continue to work closely in addressing the future challenges for military technology. We have been working on a number of potentially significant new platform programmes, including the M69 Aircrew Mask and the M53A1 powered air respirator and Powered Air Purifying Respirator (PAPR) system. Following the recent confirmation from the DoD of the Group’s participation under the Joint Enterprise – Research, Development, Acquisition and Production Procurement contract vehicle, we anticipate commencing production of these systems during 2018 and expect this to offset any revenue reduction as a result of the transition of the JSGPM contract in 2019.
Strategic Report (extract 2)
We continue to invest for the future and our total investment in research and development (capitalised and expensed) amounted to £8.4m (2016: £8.3m) as shown below. Total research and development as a percentage of revenue was 5.1% (2016: 5.8%).
In Avon Protection the most significant investments have been in further developing the M69 aircrew mask, our Deltair SCBA and MCM100 product range. In milkrite | InterPuls, investment has been focused on expanding our Precision, Control and Intelligence (PCI) product range.
Having appraised the range of future product opportunities available, we have decided to discontinue the NIOSH approvals process for the EEBD. This product, which is outside of our core CBRN and respiratory range, was primarily developed for a US Navy contract which was ultimately awarded to a competitor in 2015. Following review of alternative commercial opportunities for this technology, further development has been terminated in view of the limited opportunities identified to commercialise the product in the foreseeable future. As a result, an exceptional non-cash impairment charge of £2.9m has been recorded in the year end accounts as a non-recurring item.
3 ADJUSTMENTS AND DISCONTINUED OPERATIONS (extract)
The tax impact of the above gives rise to a deferred tax credit to the income statement of £1.0m (2016: £0.9m).
The impairment of capitalised development expenditure and plant and machinery in 2017 represents the write down of costs of developing the Emergency Escape Breathing Device (EEBD) product. Further development of this product has been terminated as there are limited commercial opportunities in the current market.
The integration costs in 2016 relate to the acquisition of the argus thermal imaging camera business and the relocation of the manufacturing to our Melksham, UK site.
Defined benefit pension scheme costs relate to administrative expenses of the scheme which is closed to future accrual. £1.0m (2016: £0.7m) of other finance expense relating to the pension scheme is also treated as an adjustment.
The impact on the cash flow statement of the exceptional items was £0.3m cash inflow (2016: £0.4m cash outflow).