TIDMDIA
RNS Number : 8789T
Dialight PLC
30 March 2021
Dialight plc
("Dialight" or "the Group")
Full year results 2020
Dialight plc (LSE: DIA.L), the global leader in sustainable LED
lighting for industrial applications, announces its full year
audited results for the year ended 31 December 2020.
2020 2019
Financial summary GBPm GBPm
======================= ======== ========
Revenue 119.0 151.0
Loss for the year (7.8) (16.2)
Statutory EPS - basic (24.0p) (49.8p)
Net debt(1) 11.4 16.5
----------------------- -------- --------
Key points
-- Project revenue significantly reduced but MRO revenue was
strong and resulted in market share gains
-- Finished goods strategy and essential business status
resulted in on-time delivery maintained at 80%, despite supply
chain headwinds
-- Balance sheet strength improved with inventory unwind of
GBP13.5m and net debt reduced by GBP5.1m
-- Enhanced liquidity from GBP10.0m of additional bank finance
secured with HSBC and UK CLBILS scheme
-- Statutory loss of GBP7.8m reflects lower revenue, includes
GBP6.0m of COVID-19 related costs offset by GBP5.1m of cost
savings
-- Increase in quoting activity in 2021; range of profitable outcomes for full year
Fariyal Khanbabi, Group Chief Executive, said:
"Our efforts to embed a proactive safety culture helped play a
key role in how we responded to COVID-19, focusing on the safety
and wellbeing of our employees. Our agile approach to balance risk
mitigation and business continuity, cost control and ensuring
liquidity was sufficient to weather this crisis, and I would like
to thank the Dialight team for their significant contribution in
ensuring employee safety and operations performance during these
challenging times.
We are experiencing an increase in quoting activity early in the
year and while the Group will continue to be impacted by COVID-19
during 2021 and will take steps to mitigate to the extent possible,
we see a range of profitable outcomes for the full year.
Longer term the actions taken during 2020 will help ensure we
are strongly positioned to return to significant growth as the
pandemic eases, and as a market leader to satisfy the increased
structural demand for more environmentally friendly products."
Full year results presentation
A pre-recorded video of the full year 2020 results presentation
can be found at:
http://ir.dialight.com/reports-presentations-and-results/results-presentation/
The slides of the full year 2020 results presentation can be
found at:
http://ir.dialight.com/reports-presentations-and-results/reports-and-presentations/
Contacts:
Dialight plc
Tel: +44 (0)203 058 3542
Fariyal Khanbabi - Group Chief Executive
Wai Kuen Chiang - Chief Financial Officer
About Dialight :
Dialight (LSE: DIA.L) is a global leader in sustainable LED
lighting for industrial applications. Dialight's LED products are
providing the next generation of lighting solutions that deliver
reduced energy consumption and create a safer working environment.
Our products are specifically designed to provide superior
operational performance, reliability, and durability, reducing
energy consumption and ongoing maintenance, and achieving a rapid
return on investment.
The company is headquartered in the UK, with operations in the
USA, UK, Mexico, Malaysia, Singapore, Australia, Germany and Dubai.
To find out more about Dialight, visit www.dialight.com .
Notes:
1. Net debt excludes lease liabilities under IFRS 16
2. Constant currency impact is calculated by re-translating the
prior year numbers at the exchange rate prevailing in the current
year.
3. Cautionary Statement: This announcement contains certain
statements, statistics and projections that are or may be
forward-looking. The accuracy and completeness of all such
statements, including, without limitation, statements regarding the
future financial position, strategy, projected costs, plans and
objectives for the management of future operations of Dialight plc
and its subsidiaries is not warranted or guaranteed. These
statements typically contain words such as 'intends', 'expects',
'anticipated', 'estimates' and words of similar import. By their
nature, forward-looking statements involve risk and uncertainty
because they relate to events and depend on circumstances that will
occur in the future. Although Dialight plc believes that the
expectations will prove to be correct. There are a number of
factors, many of which are beyond the control of Dialight plc,
which could cause actual results and developments to differ
materially from those expressed or implied by such forward-looking
statements. This announcement contains inside information on
Dialight plc.
Overview
COVID-19 presented significant and unprecedented challenges to
our business. We are proud of the resilience and responsiveness of
our team and impressed and grateful for how we, as a business,
adapted to the changing demands and obstacles which COVID-19
presented. We would like to publicly recognise the significant
contribution made by our employees in a very difficult year. We
also wish to offer our deepest sympathies to the families and
friends of our colleagues who sadly passed away from COVID-19.
Our strategic approach to the crisis entailed maintaining our
sales team and not reducing our finished goods inventory, which
enabled us to win back customers and distributors and secure new
customer MRO orders. Our operations teams performed well in
demanding circumstances, with a relatively resilient supply chain
enabling us to deliver strong levels of customer service and
maintain our lead times throughout this crisis.
Protecting our people
Dialight has always sought to operate with a high level of
on-site safety. During 2020, we enhanced this further and
implemented an extensive range of measures to support and ensure
our teams safety across our sites. These practical measures include
extra screening, reset factory layouts, extra space in amenity
areas, reconfigured shift patterns, additional personal protective
equipment ('PPE') and temperature checking on entry at all our
facilities. Dialight is also providing meals and transportation to
minimise the pandemic risk to our employees travelling to and from
the plants. These actions added to our costs but were critical.
We also worked hard on cultural and behavioural commitments to
ensure that everybody across the business is focused on keeping
people safe and maintaining strict hygiene protocols. Extensive
occupational health supports are in place for our colleagues both
working onsite and those who are working from home.
Supplying our customers
Our strong customer relationships are critical to the business
and have deepened through the challenges presented by COVID-19.
These were allied with lead-times that did not falter thus enabling
us to maintain excellent customer service.
We also increased our engagement in a multiple of ways at
national, regional and local levels by working closely with our
customers and distributors. We provided extensive product training
and targeted marketing campaigns focused on key sectors and on
promoting the benefits of using our products. This was particularly
invaluable given customer site access was restricted. We consider
our increasingly close customer relationships to be a
differentiator and one that creates long term value.
Protecting our business
Whilst COVID-19 is clearly continuing to impact short term
performance, our comprehensive set of actions including supply
chain improvements, streamlining our fixed cost base, stronger
sales platform and enhanced customer engagement model will ensure
we are strongly positioned to return to significant growth as the
pandemic eases. Furthermore, our strong pipeline of sustainable and
differentiated products put Dialight in a unique position to be
able to satisfy the increased longer-term demand for more
environmentally friendly products.
Many of these actions have not been easy and have impacted many
stakeholders, but all were necessary. The board and executive team
took a 20% reduction in salaries, and many of our employees also
took salary reductions for five months. In addition, we furloughed
certain employees early in the year which regretfully we had to
make permanent during Q3 2020. These permanent cost savings
position us better to face the ongoing challenges of COVID-19.
We secured substantial liquidity by increasing our committed
banking facilities to GBP35.0 million (from GBP25.0 million at 31
December 2019). This was achieved through a facility extension with
HSBC of GBP2.0m and accessing GBP8.0m through the CLBILS UK
government loan scheme. In addition, the Group received a waiver on
its existing banking covenants for the June 2020 to June 2021
period. These have been replaced by a new test based on achieving a
12-month rolling EBITDA level derived from a COVID-19 impacted
business plan provided to HSBC. The Group ended the year with a
reduction in net debt of approximately GBP5.0m to GBP11.4m (2019:
GBP16.5m) and was compliant with the revised banking covenant at 31
December 2020.
Full year 2020
Given the challenges of COVID-19 we focused on streamlining our
cost base, increasing our liquidity and maintaining on-time
delivery to our customers and developing stronger sales and supply
chain platforms to accelerate our growth strategy as the markets
return. The full year underlying EBIT loss of GBP6.4m (loss for the
year GBP7.8m), while understandable, was disappointing, especially
in the context of the strong momentum that was building across the
business in the first quarter of the year. The benefits derived
from in-sourcing manufacturing were negated by the reduction in
volumes, particularly in the lighting capex markets. Our production
cost base is predominately fixed and, whilst we were able to meet
our customers on-time delivery requirements, our fixed cost per
unit increased due to the lower volumes. The main driver to return
to profitability will be revenue growth and realising our
productivity and cost saving initiatives.
Overall group revenues in 2020 were 21% lower than the prior
year. In 2019 Lighting revenue comprised of 60% project work and
40% maintenance work (MRO). With the onset of COVID-19 at the end
of Q1, project work largely disappeared as many companies deferred
capex projects to conserve cash. Positively, we were able to
significantly increase our MRO business thereby winning back market
share.
The Lighting segment saw the largest impact from the COVID-19
related disruption to end markets with total orders 22% lower year
on year. The relative resilience of the MRO business resulted in
orders being down 24% in the US despite new capex projects being
adversely affected by circa 74% decline. The EMEA business was
significantly impacted by the strict lockdowns in Europe resulting
in order intake being 24% lower than the previous year.
Australia has a good combination of MRO and project business and
it had a good year with orders up 8% over 2019. It went into
lockdown early and re-opened earlier than some other markets. We
had some good success in securing project orders that were deferred
in 2019 and the launch of the new bulkhead product also generated
new demand in the mining sector. Asia had some large project orders
in the prior year which they were unable to repeat due to lockdowns
and this resulted in a 53% reduction in orders.
Signals and Components performed well during 2020 with an
increase in orders of 7% year on year. The resilience of the
business is due to the diversity of products sold and of the range
of end markets served. The opto- electronics part of the business
performed strongly, mainly as a result of supplying parts to the
medical and telecoms market. In addition, many municipalities in
the US took the opportunity of reduced road traffic to upgrade
traffic light systems. At the same time, vehicle manufacturing was
greatly reduced as bus replacement programmes were put on hold. The
strength of the division is that the other product lines were able
to compensate for this.
Operationally we made significant progress with on-time delivery
at 80% and lead times at pre-COVID-19 levels, despite the
disruption of facility closures during April and May until we
received "essential business" status. We were able to execute on
our comprehensive plan to drive down inventory which ended the year
GBP13.5m lower than at the start of the year. This was achieved
through significant improvements to the supply chain and by
focusing on localising sourcing. We successfully negotiated with
our largest suppliers on enhanced terms and continue to focus on
cost reductions. We did experience some challenges relating to our
critical suppliers and logistical issues caused by COVID-19, and
despite proactive actions to reduce this we expect some ongoing
impact in 2021.
Dialight is a technology company and our technology-enriched
products are our biggest differentiation. At the start of the
pandemic, we paused our new product development in order to
conserve cash. However, we were able to restart a number of
projects as conditions stabilised. We are focused on preserving
this strength going forward with our many years of product and
domain knowledge hard to replicate in the short to medium term. We
have restructured key projects that are critical in maintaining our
leading technology position and filling our portfolio gaps in the
industrial space.
We launched a new Vigilant bulkhead for the APAC and EMEA
markets, which offers significant improvement in performance by
utilising our new power supply and thermal management system. We
also launched a new universal mounting adapter for our area light
which offers significant flexibility in a variety of industrial
applications. Our latest product launch is an upgraded version of
our 60k high bay which is designed to operate at higher ceiling
heights and in high ambient temperatures.
Strategy
Dialight's core strengths center around our products which have
a long history of innovation within the industrial lighting
markets. Our products focus on the real needs of our customers to
enhance safety and reduce energy costs and going forward the
critical objective of the transition to net zero carbon.
Dialight products provide the best cost of ownership to
industrial customers with paybacks based on energy savings and
maintenance cost avoidance. Our in-house custom designed power
supply is the key to our market leading 10-year warranty and field
reliability. Our optimised optics ensure improved light
illumination providing uniformity and quality plus enabling our
customers to use fewer lights to illuminate the target area. Their
integrated design significantly reduces the burden of installation
and maintenance. Our products have the ability to withstand extreme
environmental conditions such as very high or low temperatures,
humidity, high vibration and corrosive environments. The addition
of sensors and controls brings an additional element to the value
proposition for our customers.
Our primary goal is to accelerate growth across our global
industrial markets. We believe that the combination of our
products, strong ESG credentials, people and culture differentiates
us from our peers. Our growth strategy is focused on three key
objectives. First, to protect and grow within our core heavy and
harsh industrial markets which has LED conversion rates below 10%
offering Dialight a significant conversion growth opportunity .
Dialight has a leading position within this space and combined with
the strength of our highly qualified sales team we will continue to
expand our reach within this space.
Second, we believe that sustainability will be a major driver in
the conversion to LED and this will be accelerated post COVID-19.
Therefore, we are building a strategic accounts team focused on
expanding our market reach, leveraging corporate ESG goals and our
differentiated products . We also continue to develop new routes to
market. In order for us to increase our customer reach we need to
expand our sales channel. This not only means increasing the number
of distributors but also developing a three-pronged approach to
getting to the end customer. This consists of targeting the
EPC/engineering firms and electrical contractors. The drive to a
more digital platform for selling has already started internally.
We are working on strengthening our branding, and focusing on
vertical market applications. These initiatives are key to securing
larger sized orders and multi roll out lighting upgrades.
Third, we continue to lead the market in innovation so we can
widen our market leading position. This will also include filling
portfolio gaps we have so we remain strategically relevant to our
customers. The next generation of technology is heavily focused on
building on the sustainability needs of our customers with the goal
to have the first fully recyclable product.
Our continued investment in technology is based on a deep
analysis of the attractiveness of the market balanced against
Dialight's ability to win. The premise of our product roadmap is
based on achieving four core objectives:
-- Reducing payback
-- Expanding operating limits
-- Value added offering
-- Expanding the market
By retaining our focus on innovation, we can extend our
long-term advantage. The timelines for developing new products, and
our ability to quickly react to market requirements will increase
our innovation lead in the market as we continue to develop
advancements. Although our customers may be limiting their spending
now, demand for new and innovative products will increase once the
global economy begins to recover.
Our supply chain remains the single biggest factor in ensuring
the Group has market-leading lead-times. Our high number of SKUs
and reliance on long lead time components creates challenges in the
supply chain. We have made good progress in negotiating new credit
terms with our supplier base and refining our forecasting,
improving the way we manage our supply chain. This, coupled with a
controlled dual sourcing strategy, will be key to leveraging price
reductions. Our vendor managed inventory and consignment stock
plans will remain central to our strategy going forward and we will
continue with more local sourcing; as border closures during this
crisis have highlighted the need for a more localised approach.
We also aim to reduce inventory levels further; reduce costs by
improving operational efficiency; and develop a more flexible cost
structure with more of our costs being variable. This will enable
us to flex up or down dependent on demand.
Purpose and sustainability
Organisational purpose is incredibly powerful when it brings
together strategy and culture. At Dialight we are passionate about
playing our part in building a fairer and more resilient world for
generations to come. We have a real opportunity to draw on the
lessons learnt from COVID-19 to do this successfully.
Underpinning this purpose is the transition to net zero carbon
which is both an opportunity and an obligation for Dialight. Our
products help enable our customers achieve net zero. We are
committed to working to achieve their goals. Dialight itself
commits to being a net zero business by 2040. We will engage with
the Science Based Targets Initiative to set appropriate interim
targets and report them. We also commit to reporting under CDP and
the Task Force on Climate-related Financial Disclosures
protocols.
In addition, we are making a set of commitments across our
business. First, and we believe most importantly, we are going to
provide more opportunity for our employees to become shareholders
in the Company.
Second, we will increase the level of training and development
for everyone who works for Dialight. Every salaried colleague who
works for us will get a personal development plan.
Third, we will further enhance the quality of our products
through innovation. We will also increase our use of technology in
manufacturing and distribution.
Fourth, building on the success of the Dialight Foundation, we
will bring our business to life in the communities we work in.
Every site in Dialight will develop a community engagement
plan.
Lastly, we are going to drive our sustainability initiatives
across all aspects of our business. One of our targets is to
develop and bring to market the first fully recyclable industrial
lighting product.
Full year guidance for 2021
We are experiencing an increase in quoting activity early in the
year and while the Group will continue to be impacted by COVID-19
during 2021 and will take steps to mitigate to the extent possible,
we see a range of profitable outcomes for the full year.
Longer term the actions taken during 2020 will help ensure we
are strongly positioned to return to significant growth as the
pandemic eases, and as a market leader to satisfy the increased
structural demand for more environmentally friendly products.
FINANCIAL REVIEW
COVID-19 brought many challenges outside our control but we
focused on those we could influence; the cost base, liquidity and
delivering orders on time and here there were notable successes.
The benefit from fully insourcing sub-assembly production in 2019
was clearly evident as we were able to adapt quickly to production
challenges.
Whilst overall Group revenue was 21% lower than the prior year
at GBP119.0m, it is important to look at the revenue streams to
understand the drivers behind this. In 2019, Lighting revenue was
comprised of 60% project work and 40% maintenance work (MRO). When
end markets were impacted by COVID-19, at the end of Q1, project
work was largely stopped by most companies who deferred capex
projects in order to conserve cash. However, encouragingly the MRO
business increased significantly due to:
-- Evidence that certain competitors were unable to maintain supply due to supply chain issues
-- Dialight factories gaining essential business status which minimised closure time
-- The decision to hold finished goods inventory, particularly
in Tijuana, enabling us to continue serving our customers
By regaining a more significant portion of the available MRO
market, Dialight recaptured the repeat business that we lost a few
years ago and it also demonstrated to the market that Dialight can
deliver products on-time, even in difficult times.
Signals and Components orders were 7% ahead year on year and
only disruptions in our supply chain prevented us from delivering
revenue growth. Despite reported revenue down 6%, we go into 2021
with a healthy backlog.
Operations performed well in 2020. Despite the disruption from
factory closures, social distancing on the production lines and
supply chains being erratic, the overall level of on-time delivery
was maintained at 80% (same as 2019) and inventory reduced by
GBP13.5m.
There was a very intense focus on cash conservation and
liquidity. At the end of the year, despite the reduction in
revenue, the Group had reduced its net debt by GBP5.1m to
GBP11.4m.
The loss for the year was GBP7.8m (2019: GBP16.2m) and the
underlying EBIT loss was GBP6.4m compared to an underlying EBIT
loss of GBP5.0m in 2019.
The underlying EBIT bridge for the year-on-year movement is as
follows:
Underlying EBIT bridge GBPm
--------------------------------------------- ------
Underlying EBIT loss 2019 (5.0)
EBIT impact of reduced revenue (6.2)
Gross margin improvement due to in-sourcing 5.7
Covid-19 margin impact (6.0)
Reduced SG&A costs 5.1
Underlying EBIT loss 2020 (6.4)
--------------------------------------------- ------
We estimate that the reduction in revenue impacted underlying
EBIT by GBP6.2m. Gross margin for the Group was 28.6% which is
slightly below the margin of 29.1% in the prior year. The benefits
that we should have seen from the elimination of the premiums paid
for outsourced sub-component costs in 2019 was GBP5.7m but this has
been offset by the COVID-19 impact on gross profit. The impact of
lost revenue was partly offset by SG&A savings of GBP5.1m from
significantly reduced travel, by the field-based Lighting
salesforce, and headcount savings as a result of salary reductions,
furloughs and redundancies.
COVID-19 margin impact
The estimated margin impact of COVID-19 can be divided into
several categories and can be summarised as follows:
2020
GBPm
Facility and labour costs while factories
closed 1.5
Fixed costs allocated over smaller
production volume 4.1
Additional PPE 0.4
-------------------------------------------- =====
Total 6.0
============================================ =====
Our Malaysian factory was closed for six weeks and our Mexican
facility was closed for three weeks. During this time, we were
required to pay all staff and incur the fixed costs of these
production facilities. We also have 200 employees classified as
vulnerable under Mexico guidelines. This group were protected due
to underlying health issues and their salaries continued to be
paid.
Once we re-opened our facilities, there were restrictions on the
number of staff permitted per shift. The production volumes in the
facilities (Q2 to Q4) were 36% lower than in 2019 whereas the fixed
production costs were largely similar. Whilst we could meet
on-time-delivery requirements, it was at the expense of the cost
per unit and we estimate this impact on gross margin at GBP4.1m.
There were also additional costs of GBP0.4m for enhanced
sanitisation, protective equipment and staff transportation to
reduce the risk of contracting the virus.
Currency impact
Our major trading currency is the US Dollar (84% of revenue) due
to size of our US business and the use of USD as a contract
currency elsewhere in the world. The Group reports its results in
Sterling and this gives rise to translational exposures on the
consolidation of overseas results. Transactional exposure is where
the currency of sales or purchases differ from the local functional
currency. We use natural hedging on revenue and purchases to
mitigate the majority of the currency risk and forward contracts on
a currency specific basis.
The average US dollar rate against Sterling has been flat year
on year at 1.28 so there is virtually no currency impact in the
Income Statement. We have seen some volatility in the year-end spot
rate with the US Dollar weakening by 3% against the rate at
December 2019. Based on the current mix of currencies and expected
level of activity, a 1% movement in the US dollar relative to
Sterling changes annual revenue by GBP1.0m and has no impact on
underlying EBIT.
Lighting segment
2020 2019 Variance
Lighting GBPm GBPm
---------------------- ------- ------- ---------
Revenue 81.7 111.5 (27%)
------- -------
Gross profit 23.7 31.3 (24%)
------- -------
Gross profit % 29% 28% +100bps
------- -------
Overheads (26.8) (34.5) +22%
---------------------- ------- ------- ---------
Underlying EBIT loss (3.1) (3.2) +3%
====================== ======= ======= =========
The Lighting segment saw the largest impact from COVID-19
related disruption to end markets. In the prior year it represented
74% of the Group's revenue but that fell to 69% in the current
year. The impact of COVID-19 was seen in most of our
geographies.
The Lighting business consists of two main revenue streams,
large retrofit projects and on-going maintenance (MRO) spend. In
the US, we had close to zero project orders after Q1 but we saw an
improvement in our MRO business supported by the finished goods
inventory available in our distribution centre in Tijuana, Mexico,
which enabled us to fulfill orders even when the factory was
closed. Overall revenue in the US was down by 28% compared to the
prior year as a result of capital projects being deferred. However,
regaining a larger share of the MRO market is a very important
demonstration that our operational issues are behind us.
The EMEA business was significantly impacted by lockdowns in
Europe resulting in revenue being 31% lower than the previous
year.
Australia has a good combination of MRO and project business and
it had a positive year with revenue up 5% over 2019. It went into
lockdown early and it re-opened earlier than some other markets. We
saw the benefit from some project expenditure deferred in 2019
turning into revenue in the year and the launch of the new bulkhead
product also generated new demand in the mining sector. Asia had
some large project revenue in the prior year which we were unable
to repeat due to lockdowns and this resulted in a 45% reduction in
revenue.
There was a 100bps improvement in gross margin year on year to
29%. The benefits of the elimination of insourcing costs incurred
in the prior year were offset by the impact of COVID-19 on
production volumes which increased the unit costs.
Overheads were GBP7.7m lower than prior year due to a
combination of lower revenue related costs, lower travel costs,
salary reductions and furloughs. The majority of Group savings in
travel were in the Lighting division as we utilise a large
field-based sales force.
Signals and Components
2020 2019 Variance
Signals and Components GBPm GBPm
======================== ====== ====== =========
Revenue 37.3 39.5 (6%)
------ ------
Gross profit 10.3 12.6 (18%)
------ ------
Gross profit % 27% 32% -500bps
------ ------
Overheads (7.7) (8.3) 7%
========================= ====== ====== =========
Underlying EBIT 2.6 4.3 (40%)
========================= ====== ====== =========
Signals and Components is a high-volume business operating
within highly competitive markets. There are three main elements to
this business: traffic lights, opto-electronic (OE) components and
vehicle lights.
This division performed well during 2020 with revenue only 6%
lower than the previous year despite order intake growth. This was
reflective of the impact of supply chain disruptions as some of our
suppliers' factories were unable to operate at full capacity. The
mix of revenue within the division was more heavily weighted to the
lower margin traffic products and that reduced the overall margin
by 500 bps. There were overheads reductions of GBP0.6m, resulting
in an underlying EBIT profit of GBP2.6m for the year.
Central overheads
Central overheads are comprised of costs not directly
attributable to a segment. These not allocated to the segments. In
the year, they were GBP5.9m, a reduction of GBP0.2m due to reduced
travel and COVID-19 related salary reductions by the Board and
senior managers.
Non underlying costs
In the current year, we removed the impact of items that in the
judgement of the Directors, are separately disclosed due to their
nature and value to allow the reader to obtain a proper
understanding of the financial information and the best indication
of the underlying performance of the Group. These can be summarised
as follows:
2020 2019
Non-underlying costs GBPm GBPm
==================================================== ====== ======
Redundancy costs 0.9 1.1
------ ------
Litigation costs 0.7 -
------ ------
Loss on disposal of subsidiary 0.8 2.5
Write off receivable from outsourced manufacturer - 2.7
------ ------
Total 2.4 6.3
===================================================== ====== ======
Cash impact 1.3 1.6
===================================================== ====== ======
In the current year, the reduction in revenue required a review
of the cost base to ensure that it was right-sized in case of
prolonged COVID-19 impacts and this resulted in redundancy costs of
GBP0.9m. We incurred litigation costs of GBP0.7m related to
potential claims for and against the Group. The Group disposed of
its Brazilian subsidiary (75% owned Joint Venture) through a
management buy-out by the minority shareholder who will revert to
being a distributor of Dialight products in the region. This gave
rise to a loss on sale of GBP0.8m.
In the prior year, there were redundancy costs of GBP1.1m
related to various initiatives during the year to improve the
performance of the business. The Group disposed of its Wind
business in Denmark in September 2019 at a loss of GBP2.5m. We
impaired a receivable balance of GBP2.7m with our former outsource
manufacturer due to GAAP compliance rather than invalidity of the
legal claim.
Inventory
We set a target of reducing inventory from GBP46m at the end of
2019 to GBP38 - GBP40m by the end of 2020. The actual reduction was
even better than this with closing inventory of GBP32.2m.
2020 2019
Inventory (excluding spare parts) GBPm GBPm
------------------------------------- ------ ------
Raw materials and sub-assemblies 19.6 28.5
Finished goods 12.6 17.2
32.2 45.7
------------------------------------- ------ ------
The main reasons for the reduction were:
-- Better supplier management with the use of more Vendor
Managed Inventory programmes and partnering initiatives
-- We slowed R&D at the start of Q2 2020 as part of the cash
conservation programme and this enabled us to focus our engineering
team on inventory projects. The focus was to consume raw materials
that we already had on-hand by using them as alternates to those in
the original specification, as long as it did not compromise the
safety and integrity of the fixtures
-- We started to reap the benefit of having sub-assembly
production in-house as this enabled more just- in-time production
and reduced the level of sub-assemblies on hand
-- The resurgence in the MRO business with fast delivery times
resulted in faster turns on finished goods and reduced the
quantities on hand
Cash and borrowings
The Group ended the year with net debt of GBP11.4m, a reduction
of GBP5.1m from December 2019. Net debt excludes lease liabilities
related to the adoption of IFRS 16 Leases (this is consistent with
the basis of covenant testing). The roll forward of net debt was as
follows:
Net Debt GBPm GBPm
========================================= ======= =======
Opening balance 01 January 2020 (16.5)
Inflows
------- -------
Underlying EBITDA 0.1
------- -------
Reduction in inventory 12.6
------- -------
Tax refund 2.9 15.6
------- -------
Outflows
------- -------
Net working capital excluding inventory (3.6)
------- -------
Investment in new products* (3.7)
------- -------
Maintenance capex/other (1.1)
------- -------
Non underlying costs (1.3)
FX (0.8) (10.5)
========================================= ======= =======
Closing balance at 31 December 2020 (11.4)
========================================= ======= =======
* includes software
The major factors for the reduction of net debt are:
-- The reduction of inventory
-- Utilising tax losses from 2019 to reclaim corporation tax and
also using the COVID-19 stimulus incentive in the US to reclaim
corporate taxes going back to 2014
-- Reducing the outflows of cash through:
- Furlough of administrative staff in the UK and US - many of which were made redundant
- Salary reductions across the Group ranging from 5% to 20%
- Reduced level of capital expenditure which was originally
planned at c.GBP6m but ended less than GBP5m - including product
development
- Increased credit terms with key suppliers
Banking
The Group has its banking relationships with HSBC Bank plc and
Wells Fargo. The Group's revolving credit facility with HSBC of
GBP25m was re-negotiated in February 2020 and runs to February
2023. In order to ensure greater liquidity should the need arise, t
he Group increased its banking facility with HSBC on 15 June 2020
by adding a further GBP10m facility on a 3-year basis, utilising a
combination of GBP8m under the COVID-19 Large Business Interruption
Scheme (CLBILS) and a GBP2m commercial loan. The GBP10m additional
facilities are repayable over 30 months, in equal installments,
commencing January 2021. The Group has GBP35m of available funds
across both facilities and GBP5.3m of cash on hand at the balance
sheet date.
Covenants
As part of the additional GBP10m funding arrangement, the
Group's existing banking covenants based on leverage and interest
cover have been waived for the periods June 2020 to June 2021
inclusive. These have been replaced by a new test based on
exceeding a 12-month rolling EBITDA level derived from a COVID-19
impacted business plan provided to HSBC. The Group was compliant
with its revised banking covenant at 31 December 2020.
Tax
Based on a loss before tax of GBP10.1m in the year, the
effective tax rate of 23% results in a tax credit of GBP2.3m. There
was an unforeseen benefit in the year as the Cares Act in the US
allowed us to reclaim GBP1.3m in tax but this only had a small
impact on the effective tax rate due to UK trading losses for which
we are not recognising a deferred tax asset.
In the year we received GBP2.9m in corporation tax reclaims:
-- W e used the stimulus package under the Cares Act in the US
which allows us to get tax relief by carrying back losses made in
2018 and 2019 for 5 years. This enables us to benefit from tax
recovery at 35% rather than the current rate of 21% which gave rise
to a one-off tax credit of GBP1.3m
-- We received repayments of taxes in the US and Australia of
GBP1.6m based on prior year losses
Pension costs
The Group has two defined benefit schemes that are closed to new
entrants. The aggregate surplus on both schemes is GBP1.1m, a
reduction of GBP1.2m from 31 December 2019. The reduction is due to
changes in the discount on future liabilities which increases the
expected liability at the same time as the value of assets has been
largely unchanged. The cash cost of the scheme in 2020 was GBP0.1m,
a reduction of GBP0.4m from 2019. The Group agreed a payment
holiday for six months with the pension trustees as part of its
COVID-19 related cash conservation measures. Negotiations on the
contribution levels as part of the triennial valuation were also
concluded and the annual cash cost will be GBP0.4m going forward
compared to GBP0.5m in 2019.
Brexit
The sales to the European market only account for 8% of Group
revenue. The finished goods to fulfil these sales are imported from
our Mexico or Malaysia manufacturing plants to our distribution
centre in the UK. With the end of the Brexit transition period,
there have been some administrative challenges as the logistics
industry assimilates the new rules into their working practices. We
will continue to monitor the impact on our lead times and whether
we need to re-locate our distribution centre to mainland Europe in
the future.
Capital management and dividend
The Board's policy is to have a strong capital base in order to
maintain customer, investor and creditor confidence and to sustain
future development of the business. The Board considers
consolidated total
equity as capital. At 31 December 2020 this equated to GBP57.3m
(2019: GBP67.8m).
The emphasis in 2020 has been on cash conservation and
preserving liquidity. Under the terms of the CLBILS scheme,
distributions are not permitted while there is debt outstanding
under the scheme. Therefore, the Board is not proposing a final
dividend payment for 2020 (2019: nil). The Group has a clear
capital allocation discipline and is committed to returning excess
funds to shareholders via future dividend or share repurchase,
subject to any restrictions under the CLBILS scheme.
CONDENSED CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2020
2020 2019
========================================== ==== ======= =======
Note GBP'm GBP'm
========================================== ==== ======= =======
Revenue 2 119.0 151.0
Cost of sales 3 (85.0) (107.1)
------------------------------------------ ---- ------- -------
Gross profit 34.0 43.9
Distribution costs (20.8) (27.2)
Administrative expenses 3 (22.0) (28.0)
========================================== ==== ======= =======
Loss from operating activities (8.8) (11.3)
========================================== ==== ======= =======
Underlying loss from operating activities 3 (6.4) (5.0)
Non-underlying items 3 (2.4) (6.3)
========================================== ==== ======= =======
Loss from Operating activities (8.8) (11.3)
========================================== ==== ======= =======
Financial expense 4 (1.3) (1.2)
========================================== ==== ======= =======
Loss before tax (10.1) (12.5)
Income tax credit/(expense) 5 2.3 (3.7)
========================================== ====
Loss for the year (7.8) (16.2)
========================================== ==== ======= =======
Loss for the period attributable to:
Equity owners of the Company (7.9) (16.1)
Non-controlling Interests 0.1 (0.1)
========================================== ==== ======= =======
Loss for the period (7.8) (16.2)
========================================== ==== ======= =======
Loss per share
Basic 6 (24.0p) (49.8p)
------------------------------------------ ---- ------- -------
The accompanying notes are extracted from the financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
2020 2019
-------------------------------------------- ---- ------ ------
Note GBP'm GBP'm
-------------------------------------------- ---- ------ ------
Other comprehensive expense
Items that may be reclassified subsequently
to profit and loss
Exchange differences on translation
of foreign operations (1.8) (2.6)
Income tax on exchange difference on
translation of foreign operations (0.3) (0.1)
--------------------------------------------- ---- ------ ------
(2.1) (2.7)
============================================ ==== ====== ======
Items that will not be reclassified
subsequently to profit and loss
Remeasurement of defined benefit pension
liability (1.3) 1.6
Income tax on remeasurement of defined
benefit pension liability 5 0.3 (0.3)
============================================= ==== ====== ======
(1.0) 1.3
============================================ ==== ====== ======
Other comprehensive expense for the
year, net of tax (3.1) (1.4)
Loss for the year (7.8) (16.2)
============================================= ==== ====== ======
Total comprehensive expense for the
year (10.9) (17.6)
============================================= ==== ====== ======
Attributable to:
* Owners of the parent (11.0) (17.5)
* Non-controlling interest 0.1 (0.1)
============================================= ==== ====== ======
Total comprehensive expense for the
year (10.9) (17.6)
============================================= ==== ====== ======
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
Capital Non-
Share Merger Translation redemption Retained controlling Total
capital reserve reserve reserve earnings Total interests Equity
-------------------------- -------- -------- ----------- ----------- --------- ------ ------------ -------
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
-------------------------- -------- -------- ----------- ----------- --------- ------ ------------ -------
Balance at 1 January
2020 0.6 0.5 11.6 2.2 52.6 67.5 0.3 67.8
-------------------------- -------- -------- ----------- ----------- --------- ------ ------------ -------
Loss for the year - - - - (7.9) (7.9) 0.1 (7.8)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Other comprehensive
(expense)/income:
Foreign exchange
translation differences,
net of taxes - - (2.1) - - (2.1) - (2.1)
Disposal of Subsidiary - - (0.2) - 0.2 - - -
Remeasurement of
defined benefit pension
liability, net of
taxes - - - - (1.0) (1.0) - (1.0)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total other comprehensive
expense - - (2.3) - (0.8) (3.1) - (3.1)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total comprehensive
(expense)/income
for the year - - (2.3) - (8.7) (11.0) 0.1 (10.9)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Transactions with
owners, recorded
directly in equity:
Share-based payments - - - - 0.4 0.4 - 0.4
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total transactions
with owners - - - - 0.4 0.4 - 0.4
========================== ======== ======== =========== =========== ========= ====== ============ =======
Balance at 31 December
2020 0.6 0.5 9.3 2.2 44.3 56.9 0.4 57.3
========================== ======== ======== =========== =========== ========= ====== ============ =======
Capital Non-
Share Merger Translation redemption Retained controlling Total
capital reserve reserve reserve earnings Total interests Equity
========================== ======== ======== =========== =========== ========= ====== ============ =======
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
========================== ======== ======== =========== =========== ========= ====== ============ =======
Balance at 1 January
2019 0.6 1.4 14.3 2.2 66.2 84.7 0.4 85.1
========================== ======== ======== =========== =========== ========= ====== ============ =======
Loss for the year - - - - (16.1) (16.1) (0.1) (16.2)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Other comprehensive
income/(expense):
Foreign exchange
translation differences,
net of taxes - - (2.7) - - (2.7) - (2.7)
Remeasurement of
defined benefit pension
liability, net of
taxes - - - - 1.3 1.3 - 1.3
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total other comprehensive
income/(expense) - - (2.7) - 1.3 (1.4) - (1.4)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total comprehensive
(expense)/income
for the year - - (2.7) - (14.8) (17.5) (0.1) (17.6)
========================== ======== ======== =========== =========== ========= ====== ============ =======
Transfer of merger
reserve on disposal
of business - (0.9) - - 0.9 - - -
========================== ======== ======== =========== =========== ========= ====== ============ =======
Transactions with
owners, recorded
directly in equity:
Share-based payments - - - - 0.3 0.3 - 0.3
========================== ======== ======== =========== =========== ========= ====== ============ =======
Total transactions
with owners - (0.9) - - 1.2 0.3 - 0.3
========================== ======== ======== =========== =========== ========= ====== ============ =======
Balance at 31 December
2019 0.6 0.5 11.6 2.2 52.6 67.5 0.3 67.8
========================== ======== ======== =========== =========== ========= ====== ============ =======
CONSOLIDATED STATEMENT OF TOTAL FINANCIAL POSITION
As at 31 December 2020
2020 2019
============================== ===== ====== ======
Notes GBP'm GBP'm
============================== ===== ====== ======
Assets
-----
Property, plant and equipment 12.8 15.6
-----
Right of use assets 9.8 12.2
-----
Intangible assets 21.2 21.3
-----
Deferred tax asset 1.4 1.7
-----
Employee Benefits 1.1 2.3
-----
Other Receivables 5.0 4.7
============================== ===== ====== ======
Total non-current assets 51.3 57.8
============================== ===== ====== ======
Inventories 32.5 46.1
-----
Trade and other receivables 19.9 23.8
-----
Income tax recoverable 1.0 1.1
-----
Cash and cash equivalents 9 5.3 0.5
============================== ===== ====== ======
Total current assets 58.7 71.5
============================== ===== ====== ======
Total assets 110.0 129.3
============================== ===== ====== ======
Liabilities
-----
Trade and other payables (21.5) (28.4)
-----
Provisions (1.5) (0.9)
Tax liabilities (1.5) (1.5)
Lease liabilities (1.4) (1.6)
Borrowings 10 (4.0) -
============================== ===== ====== ======
Total current liabilities (29.9) (32.4)
============================== ===== ====== ======
Provisions 7 (1.2) (1.4)
Borrowings 10 (12.7) (17.0)
Lease liabilities (8.9) (10.7)
============================== ===== ====== ======
Total non-current liabilities (22.8) (29.1)
============================== ===== ====== ======
Total liabilities (52.7) (61.5)
============================== ===== ====== ======
Net assets 57.3 67.8
============================== ===== ====== ======
Equity
-----
Issued share capital 0.6 0.6
-----
Merger reserve 0.5 0.5
-----
Other reserves 11.5 13.8
-----
Retained earnings 44.3 52.6
============================== ===== ====== ======
56.9 67.5
-----
Non-controlling interests 0.4 0.3
============================== ===== ====== ======
Total equity 57.3 67.8
============================== ===== ====== ======
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2020
2020 2019
======================================== ===== ====== ======
Notes GBP'm GBP'm
======================================== ===== ====== ======
Operating activities
-----
Loss for the year (7.8) (16.2)
-----
Adjustments for:
-----
Financial expense 4 1.3 1.2
-----
Income tax (credit) /expense 5 (2.3) 3.7
-----
Share-based payments 0.4 0.3
-----
Depreciation of property, plant and
equipment 3.1 2.6
-----
Depreciation of right of use assets 2.0 1.7
-----
Amortisation of intangible assets 3.0 2.0
-----
Loss on disposal of property, plant
and equipment - 0.1
-----
Impairment losses on intangible assets 0.3 -
Loss on disposal of business 3 1.1 1.7
======================================== ===== ====== ======
Operating cash flow before movements
in working capital 1.1 (2.9)
-----
Decrease/(Increase) in inventories 12.6 (1.9)
-----
Decrease in trade and other receivables 2.7 8.8
-----
Decrease in trade and other payables (6.3) (0.3)
-----
Increase in provisions 7 0.5 0.3
-----
Pension contributions in excess of
the income statement charge (0.1) (0.5)
======================================== ===== ====== ======
Cash generated by operations 10.5 3.5
-----
Income taxes received/(paid) 2.9 (0.6)
-----
Interest paid(2) 4 (1.3) (1.1)
======================================== ===== ====== ======
Net cash generated by operations 12.1 1.8
---------------------------------------- ----- ------ ------
Investing activities
Capital expenditure (0.8) (6.8)
Capitalised expenditure on development (3.4) (6.0)
Purchase of software and licenses (0.3) (0.3)
Cash and cash equivalents in business
disposed of - (0.5)
Disposal of business - (0.5)
======================================== ===== ====== ======
Net cash used in investing activities (4.5) (14.1)
======================================== ===== ====== ======
Financing activities
Drawdown of bank facility 10 10.0 11.9
Repayment of bank facility 10 (10.3) -
Repayment of lease liabilities(1) (1.7) (1.2)
======================================== ===== ====== ======
Net cash (outflow)/ generated from
financing activities (2.0) 10.7
---------------------------------------- ----- ------ ------
Net increase/(decrease) in cash and
cash equivalents 5.6 (1.6)
Cash and cash equivalents at beginning
of year 9 0.5 2.2
-----
Effect of exchange rates (0.8) (0.1)
======================================== ===== ====== ======
Cash and cash equivalents at end of
year 9 5.3 0.5
======================================== ===== ====== ======
The Group has classified:
1. cash payments for the principal portion of lease payments as
financing activities;
2. cash payments for the interest portion of lease payments as
operating activities consistent with the presentation of interest
payments chosen by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2020 (Audited)
1. Basis of preparation and principal accounting policies
(a) Statement of compliance
The consolidated financial statements have been prepared in
accordance with International Accounting Standards in conformity
with the requirements of the Companies Act 2006 and International
Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
The financial information for the year ended 31 December 2019
and 2020 is derived from the statutory accounts for 2019 (which has
been delivered to the Registrar of Companies) and 2020 (which will
be delivered to the Registrar of Companies following the AGM in May
2021). The auditors have reported on the 2019 and 2020 accounts;
their report was unqualified and did not contain a statement under
Sections 498(2) or 498(3) of the Companies Act 2006. For the
statutory accounts of 2019, the auditor's report included a
reference to going concern to which the auditor drew attention by
way of emphasis of matter without qualifying their report. For the
statutory accounts of 2020, the auditor's report does not include
any audit emphasis of matter.
Whilst the financial information included in this statement has
been compiled in accordance with the recognition and measurement
principles of applicable IFRS, this statement does not itself
contain sufficient information to comply with IFRS. Full Financial
Statements that comply with IFRS are included in the 2020 Annual
Report; these will be available to shareholders via the group
website in March 2021.
(b) Consolidated basis of preparation
The uncertainty as to the future impact on the financial
performance and cash ows of the Group as a result of the ongoing
COVID-19 pandemic has been considered as part of the Group's
adoption of the going concern basis in the preparation of the
consolidated financial statements. The consolidated financial
statements are prepared on a going concern basis which the
Directors believe to be appropriate for the reasons stated
below.
The Group's current GBP25m revolving credit facility with HSBC
which matures in February 2023 has an option for two consecutive
one-year extensions, with the approval of the bank. In order to
ensure the availability of sufficient liquidity, the Group
increased its banking facility with HSBC on 15 June by adding a
further GBP10m facility on a 3-year basis by utilising a
combination of GBP8m under the COVID-19 Large Business Interruption
Scheme (CLBILS) and a GBP2m commercial loan. This new facility is
in addition to the existing banking facility with HSBC of GBP25m.
The Group now has access to GBP35m of banking facilities and has
drawn GBP16.7m against both facilities as at 31 December 2020, with
a net debt headroom of GBP18.3m and cash on hand of GBP5.3m. At the
date of approving these consolidated financial statements the
funding position of the Group has remained unchanged and the cash
position is not materially different.
The GBP25m revolving credit facility term loan runs up till
February 2023 whilst the GBP10m loan will be repaid in equal
installments starting on the 15th January 2021.
As part of the new facility, the original banking covenants of
net debt to EBITDA ratio and interest cover have been replaced by a
new test based on exceeding a 12-month rolling EBITDA level that
was derived from a COVID-impacted business plan as agreed with
HSBC, for the testing periods of June 2020 to June 2021. The Group
is compliant with its revised banking covenant as at 31 December
2020.
1.Basis of preparation and principal accounting policies
(continued)
For Q4-21
Covenant test For Q3-21 onwards
============== ========================= ========= =========
Ratio Calculation Threshold Threshold
============== ========================= ========= =========
Leverage ratio Net debt/Adjusted EBITDA <3.5x <3.0x
============== ========================= ========= =========
Adjusted EBITDA/Interest >4.0x >4.0x
Interest cover expense
============== ========================= ========= =========
In assessing going concern, the Directors have prepared various
scenarios incorporating the continuing impact of COVID-19 based
disruptions. These include the extent and financial impact of new
government restrictions on our operations in the countries where we
operate, a potential time period of these disruptions and the
timescale to recover from them. In addition, we have also
considered the mitigating actions that can be taken to reduce the
impact on the Group. We have modelled future financial performance
taking into account these restrictions, mitigations, expected
inventory unwind not materialising and a negative outcome from
ongoing litigation as per note 14.
In the base case scenario, consistent with current trading
patterns, our factories which have been granted "essential
business" status will remain in operation albeit with reduced
capacity in line with local guidelines with a gradual recovery. In
this scenario, the Directors consider that the Group will continue
to operate within its available committed facilities with
sufficient headroom and meet its financial covenant
obligations.
In a severe but plausible downside scenario, the Directors have
assumed a significant adverse development from a global pandemic,
the associated forecast outturns alongside identified downside
risks, having considered the following:
1. Revenue recovery is delayed by one year, with 2021 achieving
0% growth and recovery in the beginning of 2022 with 8% revenue
growth
2. Gross margin reduction ranging from 2.5% to 4.5% over the
three years from the Board-approved strategic plan
3. Targeted inventory reduction is not achieved in 2021 and
reduction in the inventory of GBP2m to GBP3m in 2022 and 2023
4. Litigation by the former outsource manufacturing partner is
settled at the maximum liability of their claim (GBP8.0m) and the
Dialight claim for damages in excess of GBP190m was
unsuccessful
In all these scenarios, the Group assumes a series of mitigating
actions can be put in place swiftly, including various temporary
and permanent cost and cash reductions. In this severe but
plausible downside scenario, the Group continues to retain
sufficient committed headroom on liquidity and is able to meet its
financial covenant obligations within the going concern assessment
period. It has also been assumed that no additional debt is raised
during the assessment period.
Consequently, the Directors are confident that the Group and
Company will have sufficient funds to continue to meet their
liabilities as they fall due for at least 12 months from the date
of approval of the financial statements and therefore have prepared
the financial statements on a going concern basis.
(c) Use of estimates, judgements and assumptions
The preparation of the consolidated financial statements
requires management to make judgements, estimates and assumptions
that a ect the application of policies and reported amounts of
assets and liabilities, income and expenses. These estimates,
judgements and assumptions are based on historical experience and
other factors that are believed to be reasonable under the
circumstances. Actual results may di er from these estimates. The
areas which require the most use of management estimation and
judgement are set out below.
1.Basis of preparation and principal accounting policies
(continued)
Significant judgements
Termination of outsourced manufacturing agreement
We have sought to reach a negotiated conclusion on various
outstanding matters following the termination of the manufacturing
services agreement with our former outsourced manufacturing
partner, Sanmina Corporation. On Friday, 20th December 2019, both
parties issued legal proceedings against the other, with Sanmina
claiming up to GBP8m against Dialight and Dialight counter claiming
up to GBP190m against Sanmina. The basis of the claim filed by
Sanmina Corporation relates to outstanding invoices and residual
inventory they allege they purchased for Dialight. The claim filed
by Dialight is more complex in nature and relates to significant
costs and losses suffered as a direct consequence of Sanmina
Corporation not performing in accordance with the terms of the
manufacturing services agreement. In the unlikely event that
Sanmina's claim is successful, the range of outcomes could be GBP0
- GBP8m. Management have assessed the claim in conjunction with
external legal advice and the judgement is that we are confident of
the merits of our legal position. In the view of management, it is
not probable that the group will have to make a payment. Therefore,
no provision is required and the matter is disclosed as a
contingent liability.
Development and patent costs
The Group capitalises development costs and patent costs
provided they meet all criteria in the respective accounting
policy. Costs are only capitalised when management apply judgement
that they are satisfied as to the ultimate commercial viability of
the projects based on review of the relevant business case. The
capitalised costs are amortised over the expected useful economic
life, which is determined based on the reasonable commercial
prospects of the product and a comparison to similar products being
sold by the Group.
The Group has GBP11.9m (2019: GBP11.8m) of development and
patent costs that relate to the current product portfolio and new
products expected to launch over the next 1-2 years. All of these
are within the Lighting CGU and are tested for impairment at the
CGU level as part of the goodwill testing. However, management
perform a review of each project to see if there are any
indications of specific impairment. Management review all of these
for specific impairment by comparing carrying amount of development
assets with net present value derived from the Board approved
three-year strategic plan.
Inventory reserve
In the previous year, the basis for reserving Lighting and
Obstruction raw materials and sub-assemblies was to reserve for
items greater than 24 months old, whilst for finished goods it was
to reserve for items greater than 12 months old. The basis for
reserving Signals and Components inventory was based on a system
generated calculation using an algorithm based on historical and
forecast usage compared with the quantity on hand. In addition to
the ageing basis, inventory is reviewed regularly by operational
and financial management for useability.
In view of the significant impact the prolonged pandemic has had
on our operations and the consequential logistics and supply chain
challenges it posed on our inventory holding strategy, the Group
has revised the basis of estimate to calculate the inventory
reserve by focusing on usage (historical or forecast usage,
whichever is higher) for all inventory. During this process,
management considered the nature and condition of the inventory on
an item by item and category basis giving due consideration to
external market developments, change in strategy or business model,
regulatory and technology changes.
1.Basis of preparation and principal accounting policies
(continued)
Reserves were made accordingly under different assessment
categories, applying the updated standard costs and historical or
forecast usage. Lighting raw materials and sub-assemblies are
reserved if the quantity on hand exceeds 2 years historic or
forecast usage, or it has not been used in the past 12 months.
Signals and components raw materials and sub-assemblies are
reserved if the quantity on hand exceeds 2 years historic usage.
This took into consideration the longer and different sales cycles
of components, traffic and vehicle within this segment. Items
identified as relating to products where a redesigned version had
been launched were reviewed to ensure that they continued to be
usable. Brackets, packaging, batteries and kits were specifically
identified given they are common parts for our entire product range
and their long useful life. As such they are not considered excess
and no provision was made. Mechanical parts similarly have a long
useful life and mostly do not have an expiration date. A 5-year
usage measure is applied to these items. Any quantity on hand that
is higher than the past 5 years usage is specifically reserved for.
As part of the review process, management applied judgement to
reserve for an additional GBP0.3m taking into consideration the
overall uncertainty and potential impact to the business as a
result of the ongoing pandemic.
Finished goods were reviewed by discreet segments. Inventory on
hand was compared to historical sales, current backlog orders,
sales pipeline and new product holdings. Management judgement was
applied in the categorisation assessment (for example active stock
of existing and new product range, items for rework) for each
discreet segment, which will determine if a reserve is required or
not.
Significant estimates
Inventory reserve
The overall level of inventory in the Group has reduced
significantly during the year. As outlined in the significant
judgement section above, the Group has revised the basis of
estimate to calculate the inventory reserve with focus on usage
(historical or forecast usage, whichever is higher) for raw
materials, sub-assemblies and finished goods.
For raw materials and sub-assemblies, all excess quantity or
items identified by Engineers for partial scrap were provided for
at 50% of the excess quantity. Scrap items were fully provided for.
For items identified to be excessive or obsolete where Supply Chain
recommends for sale through third-party agents, a 50% provision was
made in consideration of the commission payable and the likely
success rate of sale.
Finished goods which are identified to fall within the rework
category are reserved at a range of 10% to 25% where consideration
is given to the cost of reworking the item and the ultimate sale.
Items identified as slow moving (active items but quantity on hand
is excessive considering the current sales and potential orders)
are reserved at a range of 10% to 50% where consideration is given
to the specific situation in each of the region and segments.
Inventory-absorbed overhead costs
The valuation of inventory requires the use of estimates in the
amount of costs to be absorbed into inventory valuation. There are
two elements of cost over which estimates are applied.
Firstly, in relation to the amount of production overheads that
are included in the inventory valuation. The pools of cost related
to production comprise labour and direct overheads attributable to
the production process. They are assessed to ensure that costs not
related to production are excluded. Consistent with last year, the
Group uses the weighted average inventory turns calculated by
comparing the level of inventory on hand with the amount of
production by month. This gives the number of days of overhead that
should be absorbed in inventory. The value of directly attributable
costs over which judgement was exercised was GBP4.3m (2019:
GBP6.3m)
1.Basis of preparation and principal accounting policies
(continued)
and this represents 13% (2019: 14%) of the inventory value. For
every day that the estimate of the days used for the overheads
absorbed changes, it changes the calculation by GBP44k.
Secondly, in relation to the amount of freight costs that are
included in the inventory valuation. The costs represent
transportation costs for raw materials and the labour cost of the
buyers placing the orders. The cost is absorbed into inventory by
comparing the level of inventory on hand with the amount of
material costs in the cost of sales. This gives the number of days
of freight costs that are capitalised. Costs of transporting
finished goods to distribution centers on a global basis are
included in the inventory valuation until the associated finished
goods have been sold outside the Group. The value of freight costs
over which judgement was exercised was GBP2.2m (2019: GBP2.4m) and
this represents 7% (2019: 5%) of the inventory value. For every day
that the estimate of the days used for the overhead absorbed
changes, it changes the calculation by GBP8k.
Goodwill and other intangible assets
The Group tests at least annually whether goodwill has suffered
any impairment. The recoverable amounts of the Group's
cash-generating units (CGU) have been determined based on value in
use calculations, which this year involve a higher inherent level
of estimation due to the uncertainty caused by COVID. These
calculations require the use of estimates and assumptions
consistent with the Board approved three-year strategic plan.
Although the impact of COVID is not expected to impact the
long-term prospects of the business, the impact of a prolonged
global pandemic resulting in a slower recovery and consequently
lower growth rates over the assessment period have reduced the
level of headroom in the Lighting CGU.
(d) Adoption of new and revised standard/ interpretations and
amendments
The following accounting standards, interpretations,
improvements and amendments have become applicable for the current
period and although the Group have adopted them, they have had no
material impact on the Group. These comprise:
- Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate
benchmark Reform.
- Amendments to References to the Conceptual Framework for IFRS
Standards.
- Amendments to IFRS 3: Definition of a Business.
- Amendments to IAS 1 and IAS 8: Definition of Material.
The following accounting standards and amendments that are
applicable to the Group have been issued by the IASB but had either
not been adopted by the European Union or were not yet effective in
the European Union as at 31 December 2020.
- IFRS 17 Insurance Contracts. The current effective date is 1
January 2022. This is not expected to be applicable to the
Group.
- Sale or Contribution of Assets between an Investor and its
Associate or Joint venture (Amendments to IFRS 10 and IAS 28).
These amendments are not expected to be material to the Group, if
adopted.
2. Operating segments
The Group has two reportable operating segments. These segments
have been identified based on the internal information that is
supplied regularly to the Group's chief operating decision maker
for the purposes of assessing performance and allocating resources.
The chief operating decision maker is considered to be the Group
Chief Executive Officer.
The two reportable operating segments are:
- Lighting, which develops, manufactures and supplies highly
efficient LED lighting solutions for hazardous and industrial
applications in which lighting performance is critical and includes
anti-collision obstruction lighting; and
- Signals & Components, which develops, manufactures and
supplies status indication components for electronics OEMs,
together with niche industrial and automotive electronic components
and highly efficient LED signaling solutions for the traffic and
signals markets.
There is no inter-segment revenue and there are no individual
customers that represent more than 10% of revenue.
All revenue relates to the sale of goods. Segment gross profit
is revenue less the costs of materials, labour, production and
freight that are directly attributable to a segment. Overheads
comprise operations management, selling costs plus corporate costs,
which includes share -- based payments.
Segmental assets and liabilities are not reported internally and
are therefore not presented below.
Reportable segments
2020 Lighting Signals and Components Unallocated Total
=============================================== ======== ====================== =========== ======
GBP'm GBP'm GBP'm GBP'm
=============================================== ======== ====================== =========== ======
Revenue 81.7 37.3 - 119.0
------------------------------------------------- -------- ---------------------- ----------- ------
Gross Profit 23.7 10.3 - 34.0
Overhead costs (26.8) (7.7) (5.9) (40.4)
================================================= ======== ====================== =========== ======
Underlying (loss)/profit from operating profit (3.1) 2.6 (5.9) (6.4)
Non-underlying costs (2.4) - - (2.4)
------------------------------------------------- -------- ---------------------- ----------- ------
(Loss)/profit from operating activities (5.5) 2.6 (5.9) (8.8)
Financial expense (1.3)
------------------------------------------------- -------- ---------------------- ----------- ------
Loss before tax (10.1)
Income tax credit 2.3
================================================= ======== ====================== =========== ======
Loss after tax (7.8)
================================================= ======== ====================== =========== ======
2. Operating segments (continued)
2019 Lighting Signals and Components Unallocated Total
=================================================== ======== ====================== =========== ======
GBP'm GBP'm GBP'm GBP'm
=================================================== ======== ====================== =========== ======
Revenue 111.5 39.5 - 151.0
----------------------------------------------------- -------- ---------------------- ----------- ------
Gross profit 31.3 12.6 - 43.9
Overhead costs (34.5) (8.3) (6.1) (48.9)
===================================================== ======== ====================== =========== ======
Underlying (loss)/profit from operating activities (3.2) 4.3 (6.1) (5.0)
Non-underlying costs (6.3) - - (6.3)
----------------------------------------------------- -------- ---------------------- ----------- ------
(Loss)/profit from operating activities (9.5) 4.3 (6.1) (11.3)
Financial expense (1.2)
----------------------------------------------------- -------- ---------------------- ----------- ------
Loss before tax (12.5)
Income tax expense (3.7)
----------------------------------------------------- -------- ---------------------- ----------- ------
Loss after tax (16.2)
----------------------------------------------------- -------- ---------------------- ----------- ------
Other segmental data
2020 2019
------------------------------------- -------- ------------------- ------ -------- -------------------- ------
Lighting Signal & components Total Lighting Signals & components Total
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
------------------------------------- -------- ------------------- ------ -------- -------------------- ------
Depreciation of property, plant and
equipment 2.1 1.0 3.1 1.9 0.7 2.6
Depreciation of right of use assets 1.4 0.6 2.0 1.3 0.4 1.7
Amortisation 2.1 0.9 3.0 1.5 0.5 2.0
Impairment of intangibles assets 0.3 - 0.3 - - -
------------------------------------- -------- ------------------- ------ -------- -------------------- ------
Geographical segments
The Lighting, Signals and Components segments are managed on a
worldwide basis, but operate in three principal geographic areas,
North America, EMEA and Rest of World. The following table provides
an analysis of the Group's sales by geographical market,
irrespective of the origin of the goods. All revenue relates to the
sale of goods.
Sales revenue by geographical market
2020 2019
GBP'm GBP'm
============== ====== ======
North America 89.8 117.8
EMEA 9.9 12.6
Rest of World 19.3 20.6
=============== ====== ======
119.0 151.0
============== ====== ======
3. Non-underlying items
Statutory operating loss included the following non-underlying
costs which are separately disclosed to allow the reader to obtain
a full understanding of the financial information and the best
indication of the underlying performance of the Group. The table
below presents the components of non-underlying profit or loss
recorded within cost of sales and administrative expenses.
3. Non-underlying items (continued)
2020 2019
GBP'm GBP'm
================================================= ====== ======
Non-underlying items:
Redundancy costs 0.9 1.1
Loss on disposal of subsidiary 0.8 2.5
Litigation costs 0.7 -
Write-off receivable from outsource manufacturer - 2.7
Non-underlying items recorded in administrative
expenses 2.4 6.3
================================================== ====== ======
Redundancy costs of GBP0.9m relate to severance payments for the
various initiatives during the year to right-size the cost base,
including the facility exit costs for the UK research and
development centre. Litigation costs of GBP0.7m relate to legal
fees and potential claims for and against the Group. The loss on
disposal of subsidiary relates to the sale of the Group's Brazil
business in November 2020. The revenue of this business was GBP2.1m
with an operating profit of GBP0.4m for the period of ownership
whilst 2019 full year revenue was GBP0.9m with an operating loss of
GBP0.1m.
The net assets and the net loss on disposal of Dialight Do
Brasil Technologia Led Ltda were as follows:
2020
GBP'm
---------------------------------------- -------
Current assets 1.4
Current liabilities (0.6)
======================================== =======
Net assets of the business disposed of 0.8
Loss on disposal of the business (1.1)
======================================== =======
Total consideration paid (0.3)
======================================== =======
Satisfied by:
======================================== =======
Foreign translation (0.2)
Other disposal costs (0.1)
======================================== =======
Total (0.3)
======================================== =======
Proforma unaudited costs
In the prior year GBP10.2m of production costs relating to
in-sourcing were identified separately as unaudited costs. These
were management's best estimate of the cost of in-sourcing and due
to their subjective nature, it was not possible to audit them and
they were presented as proforma unaudited costs. There are no
similar costs in the current year.
4. Financial expense
Recognised in profit and loss
2020 2019
GBP'm GBP'm
Net interest on defined benefit liability 0.1 0.1
Interest expense on financial liabilities,
except lease liabilities 0.6 0.5
Interest expense on lease liabilities 0.6 0.6
Net financing expense recognised in the
consolidated income statement 1.3 1.2
============================================ ====== ======
5. Income tax (credit)/expense
2020 2019
GBP'm GBP'm
-------------------------------------- ------ ------
Current tax expense
Current year 0.3 0.6
Adjustment for prior years (2.9) (0.1)
======================================= ====== ======
Total current tax (2.6) 0.5
--------------------------------------- ------ ------
Deferred tax expense
Origination and reversal of temporary
differences (0.9) (0.9)
Adjustment for prior years 1.2 (0.4)
De-recognition of deferred tax assets
in respect of European losses - 4.5
======================================= ====== ======
Total deferred tax 0.3 3.2
======================================= ====== ======
Total tax (credit)/expense (2.3) 3.7
--------------------------------------- ------ ------
Reconciliation of effective tax rate
2020 2020 2019 2019
% GBP'm % GBP'm
==================================== ====== ====== ====== ======
Loss for the year (7.8) (16.2)
Total income tax (credit)/charge (2.3) 3.7
==================================== ====== ====== ====== ======
Loss before income tax (10.1) (12.5)
==================================== ====== ====== ====== ======
Income tax using the UK corporation
tax rate (19.0) (1.9) (19.0) (2.4)
Non-deductible loss on disposal
of a business 1.0 0.1 4.0 0.5
Reduction in tax rate (1.0) (0.1) - -
Non-deductible expenses 1.9 0.2 1.6 0.2
Current year losses for which
no deferred tax is recognised 9.9 1.0 8.0 1.0
US carry back claim (12.5) (1.3) - -
De-recognition of deferred tax
previously recognised - - 35.9 4.5
Adjustment for prior years (4.0) (0.4) (4.0) (0.5)
Research and development credits (1.0) (0.1) (0.8) (0.1)
Recovery of foreign taxes suffered 1.9 0.2 3.9 0.5
==================================== ====== ====== ====== ======
(22.8) (2.3) 29.6 3.7
==================================== ====== ====== ====== ======
The effective tax rate for the year is 22.8% compared with 29.6%
in the prior year and compared with the standard rate of 19.0%
(2019: 19.0%) in the UK .
The normalised tax rate for the Group in the year is 21.0% (tax
rate before adjustments) and based on a pre-tax loss of GBP10.1m
this would generate a tax credit of GBP2.2m. However, in the year
there is a tax credit of GBP2.3m (22.8%). The major difference of
1.8% is due to the following factors:
-- the current losses in the European Lighting business not
recognised as a deferred tax asset, resulting in GBP1.0m (charge of
9.9%) of tax credit not being recognised in the year. We do not
anticipate this business making sufficient taxable profits in the
short-term to utilise the losses.
5. Income tax (credit)/expense (continued)
-- we have benefited from the stimulus package under the Cares
Act in the US which allows us to get tax relief by carrying back
losses made in 2018 and 2019 for 5 years. This allows us to benefit
from tax recovery at 35% rather than the current rate of 21% that
was used to calculate the recoverable amount in 2019 and this gives
rise to a one-off tax credit of GBP1.3m (credit of 12.5%)
-- a non-deductible loss of GBP0.1m (charge of 1.0%) on disposal
of Dialight Brazil which was sold in November 2020
Tax recognised directly in equity
2020 2019
GBP'm GBP'm
================== ====== ======
Employee benefits (0.3) 0.3
Other 0.3 0.1
=================== ====== ======
Current tax
Current tax is calculated with reference to the profit of the
Company and its subsidiaries in their respective countries of
operation. Set out below are details in respect of the significant
jurisdictions where the Group operates and the factors that
influenced the current and deferred taxation in those
jurisdictions.
UK
The UK companies are subject to a corporate tax rate of 19.0%
(2019: 19.0%). No UK corporation tax rate reductions have been
announced. There are no UK timing differences recognised at 31
December 2020.
US
The majority of the Group's profits arise in the US where the
corporation tax rate is 21% (2019: 21%).
6. Loss per share
Basic loss per share
The calculation of basic loss per share ("EPS") at 31 December
2020 was based on a loss for the year of GBP7.8m (2019: GBP16.2m
loss) and the weighted average number of ordinary shares
outstanding during the year of 32,555,137 (2019: 32,536,701).
Weighted average number of ordinary shares
2020 2019
'000 '000
==================================== ====== ======
Weighted average number of ordinary
shares 32,555 32,537
===================================== ====== ======
2020 2019
Per share Per share
=========== ========== ==========
Basic loss (24.0)p (49.8)p
============ ========== ==========
7. Provisions
Warranty
and claims Lease-restoration Total
GBP'm GBP'm GBP'm
================================ =========== ================= ======
Balance at 1 January 2020 2.0 0.3 2.3
Provisions made during the year 2.0 - 2.0
Provisions used during the year (1.4) (0.1) (1.5)
Effects of foreign exchange (0.1) - (0.1)
================================ =========== ================= ======
Balance at 31 December 2020 2.5 0.2 2.7
================================ =========== ================= ======
The potential claims provision relates to warranty provisions
for sales made over the past seven years, and other claims across
the Group. The warranty provision has been estimated based on
historical warranty data with similar products. The Group expects
to settle the majority of the liability over the next two to three
years.
The table below provides a breakdown of the provisions into
their short-term and long-term portions:
2020 2019
GBP'm GBP'm
============================== ====== ======
Due within one year 1.5 0.9
Due within one and five years 1.1 1.2
Due after five years 0.1 0.2
------------------------------- ------ ------
2.7 2.3
============================== ====== ======
8. Dividends
There were no dividends declared or paid in the 12 months ended
31 December 2020.
9. Cash and cash equivalents
2020 2019
GBP'm GBP'm
========================== ====== ======
Cash and cash equivalents 5.3 0.5
=========================== ====== ======
10. Borrowings
The Group's financing arrangements consisted of a revolving
credit facility with HSBC of GBP25m which matures in February 2023
and has an option for two extensions of one year each, with the
approval of the bank. In order to ensure the availability of
sufficient liquidity, the Group increased its banking facility with
HSBC on 15 June by adding a further GBP10m facility on a 3-year
basis by utilising a combination of GBP8m under COVID-19 Large
Business Interruption Scheme (CLBILS) and a GBP2m commercial loan.
The remaining facility fees of GBP0.3m are amortised over the
tenure of the facility till February 2023.
Loans
GBP'm
===================== ======
At 1 January 2019 5.1
Facility drawdown 11.9
--------------------- ------
At 31 December 2019 17.0
--------------------- ------
Facility drawdown 10.0
Facility repayment (10.3)
--------------------- ------
At 31 December 2020 16.7
--------------------- ------
10. Borrowings (continued)
The GBP25m revolving credit facility term loan runs up till
February 2023 whilst the GBP10m loan will be repaid in equal
installments over 3 years, starting on the 15th January 2021.
Amount
drawn Amount
Interest 31 drawn
rate per Maturity December 31 December
Details of the facilities Tenure annum date 2020 2019
========================== ============= ========= ============ ========= ============
Years % GBP'm GBP'm
========================== ============= ========= ============ ========= ============
GBP25m revolving credit February
facility 3* 3.15 2023 6.7 17.0
========================== ============= ========= ============ ========= ============
GBP8m CLBILS 3 2.11 June 2023(+) 8.0 -
========================== ============= ========= ============ ========= ============
GBP2m commercial loan 3 3.03 June 2023(+) 2.0 -
========================== ============= ========= ============ ========= ============
* The Group's current GBP25m revolving credit facility with HSBC
which matures in February 2023 has an option for two consecutive
one-year extensions, with the approval of the bank
(+) This loan will be repaid in equal installments over 3 years,
starting on the 15th January 2021
As part of the new facility, the original banking covenants of
net debt to EBITDA ratio and interest cover have been replaced by a
new test based on exceeding a 12-month rolling EBITDA level that
was derived from a COVID impacted business plan as agreed with
HSBC, for the testing periods of June 2020 to June 2021. The Group
is compliant with its banking covenant as at 31 December 2020.
For Q4-21
Covenant test For Q3-21 onwards
============== ========================= ========= =========
Ratio Calculation Threshold Threshold
============== ========================= ========= =========
Leverage ratio Net debt/Adjusted EBITDA <3.5x <3.0x
============== ========================= ========= =========
Adjusted EBITDA/Interest >4.0x >4.0x
Interest cover expense
============== ========================= ========= =========
11. Principal exchange rates
2020 2020 2019 2019
Average At balance Average At balance
rate sheet date rate sheet date
================ ======== =========== ======== ===========
US dollar 1.28 1.36 1.28 1.32
Euro 1.12 1.11 1.14 1.18
Canadian dollar 1.72 1.74 1.69 1.72
Mexican Peso 27.51 27.14 24.56 24.93
================ ======== =========== ======== ===========
12. Related party transactions
The ultimate controlling party of the Group is Dialight plc.
Transactions between the Company and its subsidiaries has been
eliminated on consolidation.
13. Reconciliation to non-GAAP performance measures
2020 2019
GBP'm GBP'm
============================================== ====== ======
Loss from operating activities (8.8) (11.3)
Non-underlying items (see note 3) 2.4 6.3
=============================================== ====== ======
Underlying loss from operating activities (6.4) (5.0)
=============================================== ====== ======
Loss from operating activities (8.8) (11.3)
Non-underlying items (see note 3) 2.4 6.3
Depreciation of property, plant and equipment 3.1 2.6
Amortisation of intangible assets 3.0 2.0
Share based payments 0.4 0.3
----------------------------------------------- ------ ------
Underlying EBITDA 0.1 (0.1)
Proforma unaudited costs added back (see note
3) n/a 10.2
----------------------------------------------- ------ ------
Proforma unaudited EBITDA n/a 10.1
Loss from operating activities (8.8) (11.3)
Non-underlying items (see note 3) 2.4 6.3
Depreciation of property, plant and equipment 3.1 2.6
Amortisation of intangible assets 3.0 2.0
Share based payments 0.4 0.3
Net movement on working capital (Inventories,
trade and other receivables, trade and other
payables) as per Consolidated statement of
cash flows 9.0 6.6
Underlying operating cashflow 9.1 6.5
Proforma unaudited costs added back (see note
3) n/a 10.2
----------------------------------------------- ------ ------
Proforma unaudited operating cashflow n/a 16.7
=============================================== ====== ======
Constant currency
The Group's revenues are mainly earned in the US and it presents
certain key metrics on a constant currency basis to remove any
impact of currency fluctuations. The constant currency impact is
calculated by re-translating
the prior year numbers at the exchange rate prevailing in the
current year.
Net debt
Net debt is defined as total Group borrowings less cash. Net
debt of GBP11.4m at the year-end (2019: GBP16.5m) consisted of
borrowings of GBP16.7m (2019: GBP17.0m) less cash of GBP5.3m (2019:
GBP0.5m).
14. Contingencies
As previously reported, we have sought to reach a negotiated
conclusion of various outstanding matters following the termination
of the manufacturing services agreement with our former outsource
manufacturer, Sanmina Corporation. On Friday, 20th December 2019,
both parties issued legal proceedings against the other. The
parties are therefore in formal litigation, with no conclusion
expected before 2022. The basis of the claim filed by Sanmina
Corporation relates to outstanding invoices and to residual
inventory, which they allege that they purchased for Dialight. The
claim filed by Dialight is more complex in nature and relates to
significant costs and losses suffered as a direct consequence of
Sanmina Corporation not performing in accordance with the terms of
the manufacturing services agreement. The Group has sought external
legal advice and is paying for the legal costs as and when it
occurs. As at 31 December 2020, the Group has not made any
provision for future legal costs. The Group is confident of the
merits of its legal position, however in the unlikely event, that
Sanmina's claim is successful, the range of outcomes could be GBP0
- GBP8m.
14. Contingencies (continued)
The claim filed by Dialight alleges that Dialight suffered
significant costs and losses with total damages exceeding GBP190m
suffered as a result of: (a) Sanmina's fraudulent inducement of
Dialight to enter into a manufacturing services agreement (MSA);
(b) Sanmina breaching the terms of the MSA in a wilful and/or
grossly negligent manner (for example in respect of their failure
to appropriately manage supply chain and inventory levels and to
deliver product on time and free of workmanship defects); and, (c)
Sanmina's gross negligence and/or willful misconduct.
During 2011, the Roxboro UK Pension Fund (the "Scheme") was
closed to future accrual. This Scheme is included within pension
asset. As part of the negotiations regarding closure, the Company
agreed to grant a parent company guarantee in respect of all
present and future obligations and liabilities (whether actual or
contingent and whether owed jointly or severally and in any
capacity whatsoever) of Dialight Europe Limited, the principal
employer, to make payments in the Scheme up to a maximum amount
equal to the entire aggregate liability, on the date on which any
liability under the guarantee arises, of every employer (within the
meaning set out in Section 318 of the Pensions Act 2004 and
regulations made thereunder) in relation to the Scheme, were a debt
under Section 75(2) of the Pensions Act 1995 to have become due on
that date. No provision has been made in relation to this
contingency.
The Group operates in certain jurisdictions that are unstable or
have changing political conditions, giving rise to occasional
uncertainty over the tax treatment of items of income and expense.
In addition, from time-to-time certain tax positions taken by the
Group are challenged by the relevant tax authorities, which carry a
financial risk as to the final outcome. The Directors have
considered the potential impact arising from these uncertainties
and risks, on the Group's tax assets and liabilities, both
recognised and unrecognised, and believe that they are not material
to the Financial Statements.
The Group has received two claims from former employees in
France and, whilst recognising the inherent risks of
employee-related litigation in France, the Directors believe that
these two claims are without merit and will be robustly defended,
and are not considered likely to result in any material outflow of
funds from the Group.
15. Principal and emerging risks and uncertainties
The Board is responsible for identifying the nature and extent
of the risks the Group has to manage in order to successfully
pursue its growth strategy and generate shareholder value over the
long term.
The Board uses a risk framework, which is designed to support
the process for identifying, evaluating and managing both financial
and non-financial risk. The Group has identified the following key
risks. This is not an exhaustive list but rather a list of the most
material risks facing the Group. The impact of these risks,
individually or collectively, could potentially affect the ability
of the Group to operate profitably and generate positive cash flows
in the medium to long term. As a result, these risks are actively
monitored and managed, as detailed below.
-- Organic growth - Growth of the business has stagnated over
the past few years driven by the impact of outsourcing production
(reduced supply) and also the COVID-19 impact on demand. If this
continues, we will see further erosion of shareholder value. Growth
needs to be stimulated by having compelling technologies that
hasten the adoption of LED by utilising our products
-- Environmental and geological - The Group's main manufacturing
centre is in Mexico and its main market is North America. Any
impediment to raw materials getting into Mexico or restrictions on
finished goods entering North America related to natural disasters
could have a large impact on profitability. Disruption to global
markets and transport systems arising from geological, biological,
economic and/or political events may impact the Group's ability to
operate and the demand for its products
-- Funding - The Group has a net debt position and there is a
risk related to liquidity. The Group has not paid a dividend since
2015. The Group reports in Sterling; however, the majority of its
revenues and its cost base are in US Dollars. Fluctuations in
exchange rates between Sterling and US Dollar could cause profit
and balance sheet volatility
-- Production capacity and supply chain - Disruption to
production capacity due to impact of bio-hazards or supply chain
disruption. Disruption to supply chain from border friction,
tariffs or impacts on logistics related to bio-hazards
-- Cyber and data systems - Disruption to business systems would
have an adverse impact on the Group. The Group also needs to ensure
the protection and integrity of its data. With significantly more
employees working from home on a part-time basis, there is greater
risk of systems being compromised as well as significant reliance
on platforms such as Zoom and Microsoft Teams in order to operate
the business.
-- Product development strategy - Inability to translate market
requirements into profitable products. Failure to deliver
technologically advanced products and to react to disruptive
technologies.
-- Product risk - The Group gives a ten-year warranty on
Lighting products which are installed in a variety of high-risk
environments. Risks could arise in relation to product failure and
harm to individuals and damage to property.
-- Talent and diversity - The Group performance is dependent on
attracting and retaining high-quality staff across all
functions.
-- Intellectual property - Theft or violation of intellectual
property by third parties or third parties taking legal action for
IPR infringement.
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END
FR KKLFLFXLZBBF
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