TIDMDSCV
RNS Number : 8591Q
discoverIE Group plc
24 June 2020
7am, 24 June 2020
discoverIE Group plc
Preliminary results for the year ended 31 March 2020
Strategy delivering further growth
discoverIE Group plc (LSE: DSCV, "discoverIE", the "Group" or
the "Company"), a leading international designer, manufacturer and
supplier of customised electronics to industry, today announces its
results for the year ended 31 March 2020.
FY FY Growth% CER(2)
2019/20 2018/19 Growth%
Revenue GBP466.4m GBP438.9m +6% +8%
Underlying operating
profit(1) GBP37.1m GBP30.6m +21% +23%
Underlying profit before
tax(1) GBP32.8m GBP27.2m +21%
Underlying EPS(1) 30.2p 27.2p +11%
Reported profit before
tax GBP19.5m GBP19.3m +1%
Reported fully diluted
EPS 16.5p 19.4p -2.9p
Highlights
-- Strong financial and operating performance
o Group sales increased by 8% CER and orders by 6% CER
o Group organic(3) sales grew by 2% and organic orders by 1%
o D&M(4) organic sales grew by 5% and now account for 64% of
Group sales (FY 2018/19: 61%)
o Underlying operating profit increased by 23% CER
o Underlying earnings per share increased by 11%
-- Further good progress on key strategic and performance targets
o Underlying operating margin increased by 100bps to 8.0% (FY
2018/19: 7.0%)
o Our D&M target markets are 72% of D&M sales with 9%
organic growth
o Sales beyond Europe increased to 27% of total sales (FY
2018/19: 21%)
o Excellent cash generation: GBP39.3m operating cash flow(5) up
37%, 106% of underlying operating profit
o ROCE(6) increased to 16.0% (FY 2018/19: 15.4%)
-- Three higher margin, international D&M acquisitions completed
o Hobart and Positek acquired in April 2019 for a combined
GBP16m
o Sens-Tech acquired in October 2019 for GBP58m
o Integrations progressing well
o Well supported equity placings in the year raising a combined
net GBP61m
-- Decisive response to COVID-19
o Swift implementation of working practices to maintain safety
and customer continuity
o In-house technical capability supports customers with
front-line COVID-19 projects
o Prudent actions to manage cost and preserve cash, whilst not
limiting capability
o No final dividend proposed to preserve flexibility
-- Group well positioned for further growth when conditions improve
o Good level of new project design wins
o Record year end order book of GBP159m (+13% CER)
o Gearing reduced to 1.25x at the year end with GBP119m undrawn
under bank facility
o Strong pipeline of acquisition opportunities in
development
o New strategic targets for the next 5 years.
Nick Jefferies, Group Chie f Executive, commented:
"Our focus on long term structural growth markets and strong
operational performance, together with our successful acquisition
strategy, has delivered strong results for the year with a 21%
increase in operating profits and a 37% increase in operating cash
flow.
In response to the COVID-19 pandemic which became evident in the
final quarter of the year, we have taken swift action to ensure the
safe working of employees and trading partners whilst maintaining
operational continuity. We are supporting customer needs in the
medical sector by quickly developing and supplying products for a
range of virus-related medical equipment in over 60 different
projects.
The Group has a strong financial position, a clear strategy and
is performing well. Gearing at the year-end reduced to 1.25x with
significant headroom under our existing facilities. We have taken
decisive measures to preserve cash and reduce operating expenditure
whilst maintaining our capability to respond effectively as
conditions improve.
Customer demand remains resilient with first quarter sales
running 10% lower on an organic basis. The order book remains
strong, and along with the Group's focus on the growth markets of
renewable energy, medical, electrification of transportation and
industrial & connectivity, we expect to outperform underlying
markets during this period of disruption.
The discoverIE business model is resilient and flexible,
underpinned by a clear strategy focused on high quality growth
markets. With a strong funnel of design wins and acquisition
targets, the Group is well positioned for a return to strong growth
as conditions recover."
For further information, please contact:
discoverIE Group plc 01483 544 500
Nick Jefferies - Group Chief Executive
Simon Gibbins - Group Finance Director
Instinctif Partners 020 7457 2020
Mark Garraway
Rosie Driscoll
Notes:
1) 'Underlying Operating Profit', 'Underlying EBITDA',
'Underlying Operating Costs', 'Underlying Profit before Tax' and
'Underlying EPS' are non-IFRS financial measures used by the
Directors to assess the underlying performance of the Group. These
measures exclude acquisition-related costs (amortisation of
acquired intangible assets of GBP9.0m, acquisition costs of
GBP4.0m, the IAS19 pension charge relating to a legacy defined
benefit scheme of GBP0.3m) totalling GBP13.3m. Equivalent
underlying adjustments within the FY 2018/19 underlying results
totalled GBP7.9m. For further information, see note 5 of the
attached summary financial statements.
(2) Growth rates at constant exchange rates ("CER"). The average
sterling rate of exchange strengthened 1% against the Euro compared
with the average rate for last year and weakened 3% against the US
Dollar while strengthening by 4% on average against the three
Nordic currencies.
(3) Organic growth for the Group is calculated at CER and is
shown excluding the first 12 months of acquisitions (Cursor
Controls was acquired last financial year on 16 October 2018;
Hobart and Positek were both acquired on 15 April 2019 and
Sens-Tech was acquired on 16 October 2019).
(4) D&M is the Group's Design & Manufacturing division.
(5) Operating cash flow is defined as underlying EBITDA adjusted
for the investment in, or release of, working capital,less the cash
cost of capital expenditure and IFRS16 costs .
(6) Return on capital employed ("ROCE") is defined as underlying
operating profit as a percentage of net assets plus net debt,
including an annualisation of acquisitions.
(7) Unless stated, growth rates refer to the comparable prior year period.
(8) The information contained within this announcement is deemed
by the Group to constitute inside information as stipulated under
the Market Abuse Regulation, Article 7 of EU Regulation 596/2014.
Upon the publication of this announcement via Regulatory
Information Service, this inside information is now considered to
be in the public domain.
Notes to Editors:
About discoverIE Group plc
discoverIE Group plc is an international group of businesses
that designs, manufactures and supplies innovative components for
electronic applications.
The Group provides application-specific components to original
equipment manufacturers ("OEMs") internationally. By designing
components that meet customers' unique requirements, which are then
manufactured and supplied throughout the life of their production,
a high level of repeating revenue is generated with long term
customer relationships.
With a focus on key markets driven by structural growth and
increasing electronic content, namely renewable energy,
transportation, medical and industrial & connectivity, the
Group aims to achieve organic growth that is well ahead of GDP and
to supplement that with targeted complementary acquisitions.
The Group employs c.4,400 people and its principal operating
units are located in Continental Europe, the UK, China, Sri Lanka,
India and North America.
The Group is listed on the Main Market of the London Stock
Exchange and is in the top quartile of the FTSE Small Cap Index,
classified within the Electrical Components and Equipment
subsector, and has revenues of over GBP450m. Over the last five
years, underlying earnings per share has almost doubled.
CHAIRMAN'S STATEMENT
Despite the effects of the COVID-19 pandemic in the final
quarter, I am pleased to report that the Group has delivered
another strong set of results with further growth in sales,
underlying profits and underlying earnings. Management continued to
make good progress on the Group's strategic and operational
objectives with most nearing or bettering our original targets.
Consequently, new strategic targets are being introduced for the
coming five years as the Group focuses its strategy on the next
stage of development.
Strategy
The Group is a customised electronics business operating
internationally, focusing on structurally growing markets which are
driven by increasing electronic content and where there is an
essential need for our products. The Group's product range is
highly differentiated, being customised for specific
applications.
With key markets being worldwide and major customers operating
internationally, the business is expanding beyond Europe (27% of
Group sales are now outside Europe), as well as within Europe,
building an international electronics group supplying complex,
value-added solutions for international customers.
Acquisitions are important in building discoverIE, having
already made a significant contribution to the development of the
D&M division. Over the last 9 years we have acquired 14
specialist, high margin Design & Manufacturing businesses which
have been integrated successfully and helped to drive our organic
growth. We have a well-developed and disciplined approach to
acquisitions and management continue to develop a pipeline of
opportunities, ready to proceed when conditions allow. In the year,
the Group made three acquisitions, all higher margin D&M
businesses, with 70% of combined sales being in international
markets beyond Europe. Their characteristics are aligned with the
rest of the Group, and each provides scope for further development
in our international target markets.
The increase in Group profitability, together with our capital
expenditure light model, has resulted in further strengthening of
our cash generation. As we continue to grow, we will look to
reinvest our strong free cash flows into accelerating the strategy
and delivering significant value creation for shareholders.
Group Results
Group sales for the year increased by 6% to GBP466.4m and by 8%
at constant exchange rates ("CER").
Underlying operating profit, which excludes any exceptional
items (none this year) and acquisition-related costs, increased by
GBP6.5m to GBP37.1m (up by 21% and up by 23% CER) with underlying
profit before tax increasing by GBP5.6m to GBP32.8m (up 21%). The
strong growth in D&M helped to deliver a 100bps increase in
underlying operating margins to 8.0% (FY 2018/19: 7.0%), despite
investment to support future growth.
Underlying earnings per share for the year increased by 11% to
30.2p (up 3.0p from 27.2p last year). This growth is lower than the
growth in underlying profit before tax of 21% mainly due to the
equity fund raisings during the year which raised nearly 20% of
additional equity share capital.
After underlying adjustments for acquisition-related costs of
GBP13.3m (FY 2018/19: GBP7.9m), profit before tax for the year on a
reported basis was GBP19.5m, in line with last year (FY 2018/19:
GBP19.3m), with fully diluted earnings per share of 16.5p (FY
2018/19: 19.4p). Growth in reported profits and earnings was
limited by the higher value of acquisitions this year, with
resulting higher non-tax deductible acquisition costs.
Cash generation was very strong, with operating cash flow of
GBP39.3m up 37% on last year (FY 2018/19: GBP28.6m), and
representing 106% of underlying operating profit, well ahead of our
85% cash conversion target. Net debt at the year end was GBP61.3m
with a Group gearing ratio of 1.25x. During the year, the term of
the Group's GBP180m syndicated bank facility was extended to June
2024, giving nearly GBP120m of undrawn facility.
In addition, the Group has received confirmation from the Bank
of England, that the Group is eligible in principle, subject to
satisfactory documentation, to participate in HM Treasury's Covid
Corporate Financing Facility. The Group does not believe it will
need to utilise this facility but has the flexibility if conditions
deteriorate materially from current expectations .
Alongside the acquisitions in April and October 2019, the
balance sheet was further strengthened by way of two well-supported
placings, raising net proceeds of GBP60.5m. Together with high
operating cash flows, these have provided the Group with a strong
position from which to manage through the current market
uncertainties. On behalf of the Board, I would like to thank
shareholders for their support.
Acquisitions
On 15 April 2019, the Group acquired Hobart Electronics, a
designer and manufacturer of custom transformers, inductors and
magnetic components, for an initial cash consideration of $15.2m
(GBP11.5m) on a debt free, cash free basis with further contingent
cash consideration of up to $4.0m (GBP3.1m), subject to the
achievement of certain growth targets over the three-year period
ended 31 December 2021. Based in Indiana, US with manufacturing
also in Mexico, Hobart reports to the Noratel Group where
operations are being integrated.
Also on 15 April 2019, the Group acquired Positek, a designer
and manufacturer of customised rugged, high accuracy sensors for an
initial consideration of GBP4.2m on a debt free, cash free basis
with further contingent cash consideration of up to GBP0.4m,
payable subject to the achievement of certain integration and
profit targets in the following 18 months. Based in Cheltenham, UK
and supplying international markets, operationally Positek reports
to the Variohm Group.
On 16 October 2019, the Group acquired Sens-Tech, an Egham, UK
based designer, manufacturer and supplier of specialist sensing and
data acquisition modules, for an initial cash consideration of
GBP58.0m on a debt free, cash free basis with further contingent
cash consideration of up to GBP12.0m, payable subject to the
achievement of certain profit growth targets over a three year
period.
All three businesses have significant alignment with our core
technologies, market and sector focus and are settling in well. We
are delighted to welcome their employees into the Group.
COVID-19
The Group has responded decisively to the coronavirus pandemic,
prioritising the well-being of employees and trading partners,
supporting customers with fast solutions in medical markets,
maintaining business continuity and preserving our resources.
As you will read in the Operating Review, changes were made to
operating procedures and I am pleased to report high levels of
operational continuity being achieved with only a small number of
short term site closures, as required by local government
regulations and all of which have since reopened. At its peak in
early April, there were a dozen confirmed cases of coronavirus
amongst our c. 4,400 employees, all of whom have since
recovered.
I would like on behalf of the Board to thank all our employees
for their flexibility in adapting so effectively to the new
environment.
The pandemic had a limited effect on fourth quarter trading when
our two sites in China were closed for nearly a month, rebounding
quickly upon reopening. 23% of our sales in the year were linked to
trade with China through our manufacturing sites, supplying
customers or purchasing from suppliers there, but the effects of
the closure were limited by flexibility in our manufacturing and
supply chains, switching to alternatives where possible.
At the time of writing, and with the virus having spread
internationally, the Group's dispersed operations are proving
resilient and flexible through the disruption, with first quarter
sales running only 10% down organically on last year. W ith its
focus on high quality growth markets, the Group is well positioned
for a return to growth as conditions recover .
Board Changes
Richard Brooman and Henrietta Marsh retired as Non-Executive
Directors at the Company's annual general meeting on 25 July 2019
after 6 years of service. We thank them for their significant
contributions to the Company's development and wish them well.
Bruce Thompson succeeded Richard as Senior Independent Director
of the Group.
Clive Watson joined the Board on 2 September 2019, also becoming
Chair of the Audit and Risk Committee. Clive retired from Spectris
plc in 2019 after thirteen years as Group Finance Director and also
from Spirax-Sarco Engineering plc where he was Senior Independent
Non-Executive Director and Chair of the Audit and Risk Committee,
having joined in 2009.
Dividend
Considering current circumstances, the Board has decided not to
propose a final dividend. However, recognising the importance of
dividends to shareholders, the Board will look to re-introduce
distributions later this year subject to trading conditions at the
time.
An interim dividend of 2.97 pence per share was paid in January
2020 (H1 2018/19: 2.8 pence per share), an increase of 6%. Over the
last ten years, the full dividend has increased by 7% CAGR.
The Board believes that, as an acquisitive growth company,
maintaining a progressive dividend policy with a long term dividend
cover of over 3 times underlying earnings is appropriate to enable
both dividend growth and a higher level of investment from
internally generated resources.
Employees
On behalf of the Board, I would like to thank everybody at
discoverIE for their commitment and hard work, particularly during
this unprecedented situation when their flexibility, resilience,
initiative and support have demonstrated, beyond all expectations,
their quality and capability.
The Group comprises approximately 4,400 employees in 23
countries around the world. The Board believes that by adopting an
entrepreneurial and decentralised operating environment, together
with rigorous planning, review, support, investment and controls,
the Group has created an ambitious and successful culture.
Summary
By focusing on structural growth markets with complex customer
requirements, the Group has grown into a high quality business with
excellent long-term prospects. To reflect this, the Group has
updated targets for our next five years.
The customised electronics market remains highly fragmented,
providing scope to build the Group's technology capability and
extend its geographic coverage through disciplined acquisitions.
Despite the current challenges posed by COVID-19, the Board and
management are excited by the opportunities ahead to continue
building a global business that attracts and retains high quality
employees, delivers value to our customers, and grows long term
returns for our shareholders.
Malcolm Diamond MBE
Chairman
24 June 2020
OPERATING REVIEW
Overview
The effects of the COVID-19 pandemic have been felt throughout
the Group leading to widespread changes in our operations and our
interactions with customers, suppliers and other third parties. As
covered on page 14, the business has responded decisively, and
embarks upon the challenges with a strong financial position, a
clear strategy and performing well.
We continue to pursue our successful strategy of focussing on
growing opportunities for customised electronic products in
targeted growth markets, namely renewable energy, transportation,
medical and industrial & connectivity. Despite feeling the
effects of the pandemic in the final quarter, the benefits of this
strategy are evident with good levels of organic revenue growth in
the D&M division helping drive a 21% increase in Group
underlying operating profits to GBP37.1m, and an 11% growth in
underlying earnings per share to 30.2p.
Group sales increased by 8% CER and 6% on a reported basis to
GBP466.4m including the translation effect of a slightly stronger
Sterling in the year. Organic sales grew by 5% in the D&M
division and by 2% for the Group overall.
Group orders also performed well, growing organically by 4% in
the D&M division and by 1% organically for the Group overall to
GBP476.4m with a book to bill ratio of 1.02. This resulted in
another record year end order book at 31 March 2020 of GBP159m (up
by 13% CER year-on-year, and up by 7% organically).
Project design wins, essential for future organic growth,
continued at high levels, with an estimated lifetime revenue value
of GBP260m, having increased by 37% over two years.
Group Strategy
Our four target markets of renewable energy, transportation,
medical and industrial & connectivity, are global in scale and
underpinned by long term structural growth factors, customers'
dependence on our products, and a need or opportunity for custom
products. Customers choose our components because they help them to
create differentiated, innovative designs.
Our strategy comprises four elements:
1. Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets;
2. Move up the value chain by continuing to build revenues in the higher margin D&M division;
3. Acquire businesses with attractive growth prospects and strong operating margins;
4. Further internationalise the business by developing in North America and Asia.
These underpin a core objective of generating strong cash flows
and long term sustainable returns.
Target Markets
The four focus target markets, which account for 72% of D&M
turnover and 68% of Group turnover (both up 2ppts from last year):
transportation, medical, renewable energy and industrial &
connectivity are expected to drive the Group's organic revenue
growth well ahead of GDP over the economic cycle and create
acquisition opportunities. Growth in these markets is driven by
increasing electronic content and by global macro trends such as an
ageing affluent population and the increasing need for renewable
sources of energy. This year, organic revenue growth for the Group
in target markets was 6%, with other markets reducing by 7%,
resulting in overall Group organic growth of 2%. In the D&M
division, organic growth in target markets was 9%, with other
markets reducing by 5%, resulting in overall growth of 5%.
i) Medical
Driven by the increasing use of technology in diagnosing,
monitoring and controlling medical conditions, as well as an
increasingly affluent and ageing global population which now
accounts for the majority of healthcare spending in developed
economies, the medical electronics market is forecast to grow by 8%
CAGR 2018-24 according to TechSci Research.
ii) Renewable Energy
The increasing global requirement for clean electricity is
leading to the rapid deployment of sustainable energy generation.
So much so that, according to the International Energy Agency
(IEA), 70% of the growth (2017-23) in global electricity production
will come from renewable energy sources with the proportion of
total energy production rising to 40% globally from 25% currently.
Our focus is on Wind and Solar energy.
iii) Transportation
Transport markets continue to grow across the world. The
electronics content is rising driven by electrification, safety,
intelligence, automation and convenience. Our focus is on mass
transportation markets particularly rail and buses, as well as
vehicle electrification infrastructure. According to Research and
Markets, the global market for smart transportation is forecast to
grow by 16.3% CAGR 2019 to 2024.
iv) Industrial & Connectivity
Technology is creating opportunities for connectivity
everywhere, and is becoming increasingly important in industry. A
report by the research firm Markets-and-Markets expects the overall
market for global IoT (internet of things) connections to grow by
18.7% CAGR 2019-24. Another report by PwC expects the global
semiconductor market for industrial applications to grow by 10.8%
CAGR 2018-22. In addition to our focus on the wireless connectivity
of devices (machine-to-machine) and the associated industrial
markets which benefit from this new connectivity, we have recently
refined our focus in the industrial sector towards new and
sustainable industrial markets with a long-term future such as
smart agriculture and water management.
Engineering-led Sales Model
Our business model has three core capabilities:-
- Engineering - our primary differentiator. By understanding our
customers' design challenges we design and create products that
specifically address their needs.
- Manufacturing - we manufacture on an ongoing basis,
individually designed products to a consistently high standard at
one or more of our production facilities internationally.
- Logistics - we supply our manufactured products
internationally to customers' production locations repeatedly over
the life of their demand, typically for five to seven years.
We apply these capabilities to develop long term, embedded
relationships with our customers as follows:
- Understanding customer needs
We help customers solve their technical challenges to create
more effective, efficient, productive and sustainable equipment and
comply with increasingly stringent environmental, health, safety
and performance requirements.
- Enduring customer relationships
Our sales model creates a unique understanding of customers'
needs and builds long term relationships that last for many
years.
- Engineering - led solutions
By applying our extensive technical knowledge of applications
and design, our engineers create unique products for customers'
specific needs.
- Recurring revenues
Our designs are specified into our customers' system designs for
production, leading to multiple years of repeated monthly demand,
creating stable, recurring revenue streams.
- Regional manufacturing
Manufacturing locations in Europe, Asia and the Americas
provides regional supply for customers, reducing transit times,
costs and environmental impact as well as providing flexibility and
reducing risk of disruption.
Additionally, we acquire businesses with similar
characteristics, building our product capability and international
presence. With many customers operating internationally, it is
necessary for us to have a presence in the major regions of the
world and with the market being highly fragmented, numerous
opportunities exist for us to acquire complementary businesses.
Key Strategic and Performance Indicators
Since 2014, the Group's progress with its strategic objectives
has been measured through key strategic indicators ("KSIs"), and
progress with its financial performance has been measured through
key performance indicators ("KPIs").
Our KSIs were mid-term targets over a three to five year period
from November 2016 with KPIs being three year targets starting in
March 2017. With the KSI targets having been nearly achieved, we
have introduced revised strategic targets for the next five
years.
Key Strategic Indicators
FY14 FY15 FY16 FY17 FY18 FY19 Previous New Targets(2)
FY20 Mid term
Targets
-----
1. Increase share
of Group revenue
from D&M (1) 18% 37% 48% 52% 57% 61% 64% 75% >75%
2. Increase underlying
operating margin 3.4% 4.9% 5.7% 5.9% 6.3% 7.0% 8.0% 8.5% 12.5%
3. Build sales
beyond Europe (1) 5% 12% 17% 19% 19% 21% 27% 30% 40%
4. Target market
sales (1) n/d n/d n/d 56% 62% 66% 68% New 85%
(1) As a proportion of Group revenue
(2) New targets for the five-year period to March 2025
n/d: not previously disclosed:
The Group made good progress towards its strategic objectives
during the year:
- The higher margin D&M division delivered 64% of Group
sales, up 3ppts on last year (FY 2018/19: 61%), generating 84% of
the Group's underlying operating profit contribution up 6ppts on
last year (FY 2018/19: 78%); customer concentration remains low
with no customer accounting for more than 7% of Group sales.
- The increasing scale of the D&M division has helped to
improve the Group operating margin by 1.0ppt in the year to 8.0%
(FY 2018/19: 7.0%). On a proforma basis, the acquisition of the
Sens-Tech business in October 2019 increases Group operating margin
by a further 0.5ppts to 8.5% in line with our mid-term target. Over
the last two years, we have acquired businesses with higher margins
than the D&M division. Accordingly, we have reached our current
operating margin with D&M sales of 64% of Group sales, rather
than the previously modelled 75% which assumed we would acquire
businesses with margins in line with the division as a whole.
- Sales beyond Europe for the year represented 27% of Group
revenue (from 21% for FY 2018/19) improving as a result of the
acquisitions of Hobart, Positek and Sens-Tech (for which c.70% of
combined sales in the year were outside Europe). On an annualised
basis, this rises to 28%. We continue to seek acquisitions with
high quality international revenues.
With our underlying operating margin KSI having been achieved on
an annualised basis, we are setting a new five-year target of
12.5%, from D&M sales of at least 75%. Additionally, we are
introducing a new target of 85% of sales from target markets.
Key Performance Indicators
FY14 FY15 FY16 FY17 FY18 FY19 FY20 Targets
1. Sales growth
Well ahead
CER 17% 36% 14% 6% 11% 14% 8% of GDP
D&M organic 3% 9% 3% (1)% 11% 10% 5%
Group organic 2% 3% 3% (1)% 6% 8% 2%
2. Increase GBP0.3m GBP0.9m GBP3.0m GBP4.6m GBP8.8m GBP10.6m GBP11.4m GBP12m
cross-selling p.a.
3. Underlying
EPS growth 20% 31% 10% 13% 16% 22% 11% >10%
4. Dividend
growth 10% 11% 6% 6% 6% 6% n/a(1) Progressive
5. ROCE (2) 15.2% 12.0% 11.6% 13.0% 13.7% 15.4% 16.0%(3) >15%
>85% of
6. Operating underlying
cash conversion operating
(2) 100% 104% 100% 136% 90% 93% 106% profit
(1) 6% increase in the interim dividend; a final dividend has not been proposed due to COVID-19
(2) Defined in Note 5 of the attached summary financial statements;.
(3) Includes an annualisation of the results of Sens-Tech which was acquired on 16 Oct 19.
The Group has also made further good progress with its KPIs this
year:
- Organic sales growth for the year of 5% in our higher margin
D&M division was well ahead of GDP, reflecting the sustained
focus on higher growth target markets; organic growth overall for
the Group was 2%.
- Cross-selling generated GBP11.4m of Group sales, an increase
of 8% over the prior year. Our target was increased last year from
GBP10m p.a. to GBP12m p.a.
- Underlying EPS growth for the year was 11% (FY 2018/19: 22%)
ahead of our 10% annual target, with growth over the last three
years of 57%. This is well ahead of our annual target and reflects
widespread organic growth, acquisitions and improved operating
efficiency over the period.
- Due to the uncertainty as to the duration and impact of
disruption from COVID-19, as a precautionary measure, the Board has
decided not to propose a final dividend. If conditions permit, the
Board intends to continue with its progressive dividend policy
later in the year.
- Strong growth in underlying operating profit has driven a
0.6ppt increase in return on capital employed to 16.0% (including
an annualised operating profit for Sens-Tech which was acquired on
16 October 2019) compared with the return for FY 2018/19 of 15.4%,
comfortably ahead of our target of exceeding 15%.
- Operating cash flow for the year was 106% of underlying
operating profit, being well ahead of our 85% target. Operating
cash flow has been consistently strong with conversion averaging
over 100% over the last six years.
As we look towards the next five years, we are introducing an
additional KPI, that of free cash flow with a target of being
greater than 85% of underlying profit after tax. This year, we
delivered GBP27.3m of such cash flow (104% of underlying profit
after tax).
Divisional Results
Divisional and Group performances for the year ended 31 March
2020 are set out and reviewed below.
FY 2019/20 FY 2018/19 Revenue CER Organic
growth revenue revenue
growth growth
------------------------------
Revenue Underlying Margin Revenue Underlying Margin
GBPm operating GBPm operating
profit profit
(1) (1)
GBPm GBPm
-------- ----------- ------- -------- ----------- -------
Design &
Manufacturing 297.9 38.1 12.8% 266.2 29.8 11.2% 12% 13% 5%
Custom Supply 168.5 7.3 4.3% 172.7 8.6 5.0% (2%) (1%) (4%)
Unallocated
costs (8.3) (7.8)
-------- ----------- ------- -------- ----------- ------- -------- --------- ---------
Total 466.4 37.1 8.0% 438.9 30.6 7.0% 6% 8% 2%
-------- ----------- ------- -------- ----------- ------- -------- --------- ---------
(1) Underlying operating profit excludes acquisition-related
costs and exceptional costs.
With approximately 88% of Group sales in non-Sterling
currencies, the translation of Group results into Sterling has been
slightly impacted by stronger Sterling year-on-year, with Group
revenue growth reducing from 8% CER to 6% on a reported basis.
Order Book
Orders continued to grow well with the order book reaching a
year-end record high of GBP159m, an increase of 13% CER over last
year and 6% ahead of the half year. On an organic basis, the Group
order book increased by 7% over the prior year, with the D&M
order book growing by 8% organically and the Custom Supply order
book by 6% organically.
Order book growth is driven by repeating revenues from existing
customer projects and the conversion of customer design wins from
new projects into orders. Over 80% of the order book is for
delivery within 12 months from the time of order.
By working with high quality customers in our target markets, we
are building an order book that leads to long term, repeating
revenues.
Design wins
Project design wins are a measurement of new business creation
and a proxy for future organic growth. By working with customers at
an early stage in their project design cycle, we identify
opportunities for custom products.
Design opportunities take typically 18 months to reach
conclusion, at which point they become a design win. Once in
production, the design win is expected to create a recurring
revenue stream for several years.
Design wins in the year continued at a high level with an
estimated lifetime sales value of GBP260m, growing by 37% over the
last two years and with estimated future annual revenues
representing approximately 16% of current revenue. Over 90% of
design wins were within the higher growth target markets in the
D&M division, and 80% for the Group as a whole.
Design & Manufacturing ("D&M") Division
The D&M division designs, manufactures and supplies highly
differentiated, innovative components for electronic applications.
Over 80% of the products are manufactured in-house, with the
division's principal manufacturing facilities being in China,
India, Mexico, the Netherlands, Poland, Slovakia, Sri Lanka,
Thailand and the UK.
During the year, the expansion of our magnetic components
production facility in China was completed which has increased
Myrra's Asian footprint by around 70%. Additionally, the production
facility in Bangalore, India, which opened two years ago, is being
doubled in size, driven by good levels of domestic market growth as
expected, but also by the relocation of some existing Chinese
production that is destined for the US and which could otherwise be
subject to import tariffs.
The benefit of new revenue from design wins of previous years
and strong demand from our key target markets delivered good
organic growth in the division. Sales grew organically by 5% with
orders growing by 4% organically, continuing the momentum of
previous years with sales and orders growing organically by around
28% over the last three years. Growth this year was led by Asia
(+26%), followed by the Nordic region (+7%) and Germany (+6%).
North America was grew by 2% while the UK declined by 4% as Brexit
concerns led to customers destocking, and Rest of Europe reduced by
9% reflecting the more challenging conditions experienced during
the year. Asia and the US now account for 37% of D&M revenues
(2018/19: 29%), up from 22% four years ago.
Organic sales growth of 5%, combined with an 8% sales increase
from acquisitions, resulted in overall sales increasing by 13% CER.
Including a 1% reduction in revenue due to the impact of currency
translation, reported divisional revenue increased by 12% to
GBP297.9m (FY 2018/19: GBP266.2m).
D&M revenue accounted for 64% of Group revenue (FY 2018/19:
61%) and generated 84% of the Group's underlying profit
contribution, up 6ppts on last year (FY 2018/19: 78%).
Underlying operating profit of GBP38.1m was GBP8.3m (+28%)
higher than last year (FY 2018/19: GBP29.8m) and up GBP8.7m CER
(+30%), while the underlying operating margin of 12.8% was 1.6pts
higher than last year (FY 2018/19: 11.2%). The increase in
underlying profits and margin was principally driven by three
acquisitions during the year with higher margins than the Group's
average: Sens-Tech, Positek and Hobart, together with 6 months
profit contribution from Cursor Controls which was acquired in the
prior year.
Hobart Electronics
In April 2019, the Group acquired Hobart Electronics, an
Indiana, US headquartered business founded in 1969 which designs,
manufactures, and supplies customised transformers, inductors and
magnetic components for niche applications. As well as
manufacturing sites in Indiana and Arizona, it has two larger
manufacturing sites in Mexico and employs around 260 people. Over
90% of revenues are generated from customers in North America. The
markets served by Hobart include energy infrastructure and
industrial, which collectively account for approximately 74% of
sales. Following acquisition, Hobart now operates as part of
Noratel's US business within the D&M division.
The business was acquired for an initial cash consideration of
$15.2m (GBP11.5m) on a debt free, cash free basis, with a further
contingent cash consideration of up to $4.0m (GBP3.1m) payable
subject to the achievement of certain growth targets over the three
year period ended 31 March 2022.
Positek
Also in April 2019, the Group acquired Positek, a Cheltenham, UK
based designer and manufacturer of rugged, high accuracy linear,
rotary, tilt and submersible sensors, supplying international
markets with 60% of sales into the Industrial sector. Positek,
which was founded in 1992, sells products worldwide that are
renowned for their quality, precision and robustness. Approximately
50% of revenues are generated from customers in Europe, 20% from
customers in North America, 15% from customers in Asia Pacific and
15% in the UK. Following acquisition, Positek now operates as part
of the Variohm business within the D&M division.
The business was acquired for an initial cash consideration of
GBP4.2m on a debt free, cash free basis, with further contingent
cash consideration of up to GBP0.4m, payable subject to the
achievement of certain integration and profit targets in the 18
months following acquisition.
Sens-Tech
In October 2019, the Group acquired Sens-Tech, an Egham, UK
based business, originally a spin out from Thorn EMI in 1994,
specialising in X-ray detection and data acquisition modules. These
systems are typically used in industries that have high regulatory
and certification requirements, such as medical imaging, safety and
security applications, and leads to long product life cycles with
high barriers to entry. Sens-Tech sells worldwide, with
approximately 51% of its revenues generated from customers in North
America, 29% from Europe, 17% from Asia with the balancing 3% from
the UK and the rest of the world. Following acquisition, Sens-Tech
operates within the D&M division.
The business was acquired for an initial cash consideration of
GBP58.0m on a debt free, cash free basis, with a further contingent
cash consideration of up to GBP12.0m payable subject to the
achievement of certain profit growth targets over the three year
period ending 31 March 2022.
Custom Supply Division
The Custom Supply division provides customised electronic,
photonic and medical products for technically demanding
applications in industrial, medical and healthcare markets. The
business operates similarly to the D&M division, but with
products that are mostly sourced from third party suppliers rather
than manufactured in-house. As such, operating margins are lower
than in D&M. Additionally, the division acts as a sales channel
through which to grow sales from the D&M division.
The division comprises two businesses, Acal BFi and Vertec. Acal
BFi supplies industrial markets and accounts for most of Custom
Supply divisional revenue. It supplies products from a group of
manufacturers (including the Group's D&M businesses) to
customers in five technology areas: Communications & Sensors,
Power & Magnetics, Electromechanical & Cabling,
Microsystems, and Imaging & Photonics. The business operates
across Europe, with centralised warehousing, purchasing and
finance, supplier contact management and IT systems. Vertec
supplies exclusively sourced medical imaging and radiotherapy
products into medical and healthcare markets in the UK and South
Africa. During the year, our smallest business unit, RSG, was
integrated into Acal BFi in the Custom Supply division from
D&M.
The division's sales in the year were 4% lower organically with
orders 2% lower as market conditions toughened in the second half,
although the book to bill ratio for the year remained positive at
1.01. The division saw good growth in Italy and Benelux offset by
falls in Germany, France and the UK.
Including the impact of the transfer of RSG from D&M and
integration into Acal BFi, reported divisional revenue reduced by
2% to GBP168.5m (FY 2018/19: GBP172.7m), and by 1% CER. Underlying
operating profit of GBP7.3m was GBP1.3m lower than last year (FY
2018/19: GBP8.6m), while the underlying operating margin was 4.3%
compared with 5.0% last year.
Cross-selling
Cross-selling is the sale of products by one discoverIE Group
company to customers of another Group company. For newly acquired
businesses, access to a greater number of potential new customers
provides an effective route to expanding their customer base and
geographic reach.
Typically, it takes three years for cross-selling to become
established within a business unit, due to project lead-in cycles,
and then develops into a significant additional source of revenue,
as evidenced by the Group's longer standing acquisitions. This
year, cross-selling revenues, which now account for 2.4% of Group
sales, were up 8% to GBP11.4m from the previous year (FY 2018/19:
GBP10.6m), compared with our revised target of GBP12m.
Acquisitions
Niche electronic components is a highly fragmented market with
many opportunities to acquire and consolidate.
Typically, the businesses we acquire are led by entrepreneurial
leaders who wish to remain following acquisition. We encourage this
as it helps to retain a decentralised, entrepreneurial culture.
We acquire businesses that are successful and profitable with
good growth prospects with long-term growth drivers aligned with
the Group's target markets. We support investment for growth and
develop operational performance according to the requirements of
each business unit. Depending upon the circumstances, we add value
in some of or all the following areas:
- Internationalising sales channels and expanding the customer
base, including via Group cross-selling initiatives (see
above);
- Developing and expanding the product range;
- Investing in management capability ('scaling up') and succession planning;
- Capital investment in manufacturing & infrastructure;
- Improving manufacturing efficiency;
- Enabling growth with larger customers;
- Infrastructure efficiencies, such as warehousing and freight;
- Finance and administrative support, such as treasury, banking,
legal, pension, tax & insurance, risk & control; and
- Expanding the business through further acquisitions.
Acquisition performance
The Group has successfully completed 14 acquisitions in the
D&M division since 2011, which have contributed to growth in
revenues in the division from GBP15m in FY13 to GBP298m in FY20,
with Group underlying operating margins increasing from 3.1% to
8.0% over the same period. The Group's operating model is well
established and has facilitated the smooth integration of acquired
businesses, including Cursor Controls, Hobart, Positek and
Sens-Tech, all acquired in the last 2 years.
We measure acquisition return on investment ("ROI") as operating
profit attributable to every business each year, divided by its
acquisition cost (including earn outs, expenses of acquisition and
integration costs). The Group, which has a weighted average cost of
capital ("WACC") of c.9%, targets an acquisition EBIT ROI of 15% by
the end of the third year of ownership. The ROI of the acquired
businesses owned for at least two years was 18.6%, up 1.4ppts on
last year on a like for like basis, with an average ROI over the
life of those acquisitions of 17%.
COVID-19
The following section outlines the Group's position and actions
that have been taken in response to the coronavirus pandemic.
The effects of the virus became evident in the fourth quarter,
initially in China, with our two design and manufacturing sites in
Guangdong province closed for almost a month, before rebounding
quickly upon reopening with only a limited effect on overall
trading. Approximately 23% of our sales in the year were linked to
trade with China, but the effects of the closures were limited by
flexibility in our manufacturing and supply chains. It is estimated
that this disruption led to a loss of sales in the quarter of GBP4m
in the D&M division, reducing D&M organic growth in the
fourth quarter by 5ppts, and 3ppts for the Group organically.
Since then, in the first quarter of the new financial year,
COVID-19 has spread internationally and whilst China has continued
its strong recovery, the effects have been felt across all other
regions of the business. Revenues in the first quarter have been
relatively resilient, reducing by 10% organically to date, better
than the wider market and a reflection of the specialised products
and markets we supply. The order book remains strong, with the
three month order book in the D&M division remaining at levels
consistent with the prior year. As with previous downturns, the
uncertain conditions led to a reduction in longer term orders,
which we expect to recover as conditions improve.
Operations
Each of our businesses is implementing an operating plan
developed for their business.
The Group comprises 47 operating companies in 23 countries, with
27 manufacturing facilities in 17 of those countries across Europe,
UK, Asia and the Americas. Six facilities (Sri Lanka, California
and two each in China and India) were required by government
mandate to close for a period. All six have since re-opened with
initially limited but increasing capacity. All other sites have
remained open, several with essential supplier status and a number
operating at reduced capacity during the disruption.
With a decentralised structure , the Group has been able to
adapt quickly to the evolving circumstances and adopt new ways of
working, with each of our businesses implementing an operating plan
developed to suit its local market and welfare requirements. At its
peak, over 650 employees were working from home and across all our
locations there has been an overriding priority to establish safe
working practices such as split working shifts with no overlap and
appropriate distancing measures. These initiatives include:
- Increased frequency site cleaning
- Hand sanitation at entry and exit points
- Closure of canteens
- Face to face meetings replaced by calls and video conferencing
- Cancellation of all non-essential business travel
Customers
Enormous effort has been deployed supporting customers in the
rapid development and supply of key components for virus related
medical products with over 60 customer projects having been
developed during the March to May period. For example:
- Customer ventilator projects: designing and supplying custom
components such as pressure sensors and switches. For instance, our
team of engineers designed-in a power unit for a ventilator
manufacturer taking just one week from design to receipt of first
order;
- Temperature sensing projects: specifying and supplying sensors
for human temperature screening;
- Fluid / chemical analysers: key components for the sensing and analysis of body fluids;
- Air purification projects: power units for hospital air purification units;
- Hospital bed projects: power units and drive controllers for mechanised hospital beds;
- Various other projects such as high-performance power units to
ensure hospital power supply continuity in the event of mains
outages.
Cash conservation and cost reduction
Whilst our financial position is strong, we have taken prudent
action to preserve cash and reduce operating expenses with several
initiatives, including:
- Deferral of non-essential capital expenditure and other discretionary spend
- Deferral of bonuses and pay rises, together with a new hiring freeze
- 20% salary reduction for the Board and Group Executive Committee for three months
- Increased focus on working capital efficiency
- All acquisitions deferred, but pipeline development continues
Additionally, the Board is not proposing a final dividend but
intends to re-introduce distributions in respect of the first half
of the new year subject to trading conditions at the time.
Balance sheet and liquidity
The Group's financial position remains strong with a committed
syndicated bank facility of GBP180m with the term of that facility
being extended to June 2024 during this year. With year-end net
debt of GBP61.3m, the Group has almost GBP120m of undrawn committed
facility, gearing of 1.25x and interest cover of 13.5x. The
financial covenants in the facility are gearing (net debt /
underlying EBITDA including pre-acquisition EBITDA of acquisitions)
of not more than three times and interest cover of not less than
four times.
In addition, the Group has received confirmation from the Bank
of England, that the Group is eligible in principle, subject to
satisfactory documentation, to participate in HM Treasury's Covid
Corporate Financing Facility. The Group does not believe it will
need to utilise this facility but has the flexibility if conditions
deteriorate materially from current expectations .
Summary and Outlook
Our focus on long term structural growth markets and strong
operational performance, together with our successful acquisition
strategy, has delivered strong results for the year with a 21%
increase in operating profits and a 37% increase in operating cash
flow.
In response to the COVID-19 pandemic which became evident in the
final quarter of the year, we have taken swift action to ensure the
safe working of employees and trading partners whilst maintaining
operational continuity. We are supporting customer needs in the
medical sector by quickly developing and supplying products for a
range of virus-related medical equipment in over 60 different
projects.
The Group has a strong financial position, a clear strategy and
is performing well. Gearing at the year-end reduced to 1.25x with
significant headroom under our existing facilities. We have taken
decisive measures to preserve cash and reduce operating expenditure
whilst maintaining our capability to respond effectively as
conditions improve.
Customer demand remains resilient with first quarter sales
running 10% lower on an organic basis, reflecting the specialised
and critical nature of our products as well as the benefits of our
long term growth sector focus. The order book remains strong, with
the three-month order book in the D&M division at a level
consistent with the prior year. As with previous downturns, longer
term orders have slowed in the short term, with the first quarter
book to bill ratio running at 0.85:1, and we expect this to recover
as conditions improve. June orders and sales are tracking ahead of
those in May. We remain confident that with the Group's operational
flexibility, diversified customer base and focus on the growth
sectors of renewable energy, medical, transportation and industrial
& connectivity, we will outperform underlying markets during
this period of disruption.
The discoverIE business model is resilient and flexible,
underpinned by a clear strategy focused on high quality growth
markets. With a strong funnel of design wins and acquisition
targets, the Group is well positioned for a return to strong growth
as conditions recover.
Nick Jefferies
Group Chief Executive
24 June 2020
FINANCE REVIEW
Orders, Revenue and Gross Profit
Group revenue for the year increased by 6% over last year to
GBP466.4m, and by 8% CER, the difference reflecting the translation
impact of Sterling strength on average since last year. Organic
revenue increased by 2% (with D&M increasing 5% partly offset
by Custom Supply reducing by 4%), while the acquisitions of Cursor
Controls last year, and Hobart, Positek and Sens-Tech this year
contributed an additional 6% growth in revenues.
FY %
GBPm 2019/20 FY 2018/19
Reported revenue 466.4 438.9 6%
FX translation impact (5.1)
----------- ---
Underlying revenue (CER) 466.4 433.8 8%
Acquisitions (25.5) -
Organic revenue 440.9 433.8 2%
Group orders increased by 6% CER with a book to bill ratio of
1.02 (H1: 1.02, H2: 1.02). Organically, orders were up 1% for the
year with an increase in D&M of 4% partly offset by a 2%
reduction in Custom Supply.
With approximately 88% of Group sales in non-Sterling
currencies, the translation of Group results into Sterling was
impacted by its average strength since last year. While Sterling
strengthened 1% against the Euro during the year, and 4% against
Nordic currencies on average, it weakened 3% against the US
dollar.
Gross profit for the year of GBP156.7m increased by 8% over last
year (FY2018/19: GBP145.0m) with gross margin for the year of 33.6%
being 0.6ppts ahead of last year (FY 2018/19: 33.0%).
The Group's gross margin has increased by around 7ppts in the
last 11 years since the Group's strategy was introduced, a
reflection of the differentiated nature of our products and the
significant organic and inorganic growth of our higher margin
D&M division.
Underlying Operating Costs
Reported costs were up 9% as detailed below. Excluding
underlying adjustments, Group underlying operating costs increased
by 6% CER. Adjusting for the pre-acquisition costs of Hobart,
Positek and Sens-Tech acquired this year, and Cursor Controls
acquired during last year, underlying operating costs increased by
1% organically. This reflects investment in D&M businesses with
a 5% uplift in divisional operating expenses including GBP1.4m
invested to support future growth initiatives, offset by 5%
operating cost savings in Custom Supply where sales reduced by 4%
in the year.
As a percentage of sales, underlying operating costs for the
year reduced by 0.4ppts to 25.6% (FY 2018/19: 26.0%), a reflection
of ongoing sales growth and tight cost control.
GBPm FY 2019/20 FY 2018/19 %
Organic operating costs 114.9 113.3 1%
Acquisition operating
costs 4.7
----------- ---
Underlying operating
costs (CER) 119.6 113.3 6%
FX translation 1.1
Underlying adjustments
Acquisition-related
costs 4.0 1.8
Amortisation of acquired
intangibles 9.0 5.9
Exceptional items - (0.2)
IAS 19 pension administration
cost 0.3 0.4
----------- ---
Reported operating
costs 132.9 122.3 9%
----------- ---
GBPm FY 2019/20 FY 2018/19
Selling and distribution
costs 58.1 57.7
Administrative expenses 74.8 64.6
----------- -----------
Reported operating
costs 132.9 122.3
----------- -----------
Selling and distribution costs, and administrative expenses both
include the additional operating costs of the recently acquired
businesses. Underlying adjustments, which are included in the
financial statements within administrative expenses, are discussed
below.
Group Operating Profit and Margin
Group underlying operating profit for the year was GBP37.1m, up
GBP6.5m (+21%) on last year, and up 23% CER, with a Group
underlying operating margin of 8.0%, up 1.0ppt on last year.
Reported Group operating profit for the year (after accounting
for the underlying adjustments discussed below) was GBP23.8m, an
increase of GBP1.1m (+5%) compared with last year (FY 2018/19:
GBP22.7m). Growth in reported operating profits was lower than
underlying growth due to an increase in the number of acquisitions
this year compared with last year (three compared with one), and so
a greater level of acquisition costs and amortisation of acquired
intangibles.
GBPm FY 2019/20 FY 2018/19
Operating Net Finance Profit Operating Net Finance Profit
Profit Costs before profit Costs before
tax tax
---------- ---------- ------------ --------
Underlying 37.1 (4.3) 32.8 30.6 (3.4) 27.2
Underlying adjustments
Acquisition-related
costs (4.0) - (4.0) (1.8) - (1.8)
Amortisation of acquired
intangibles (9.0) - (9.0) (5.9) - (5.9)
Exceptional items - - - 0.2 - 0.2
IAS 19 pension cost (0.3) - (0.3) (0.4) - (0.4)
Reported 23.8 (4.3) 19.5 22.7 (3.4) 19.3
Underlying Adjustments
Underlying adjustments for the year comprise:
acquisition-related costs of GBP4.0m (FY 2018/19: GBP1.8m); the
amortisation of acquired intangibles of GBP9.0m (FY 2018/19:
GBP5.9m); and the IAS19 legacy pension cost of GBP0.3m (FY 2018/19:
GBP0.4m).
Acquisition-related costs of GBP4.0m comprised expenses related
to the acquisition of Hobart and Positek in April 2019 and
Sens-Tech in October 2019 of GBP1.8m, accruals for contingent
consideration of GBP2.0m in relation to acquired businesses (mainly
Sens-Tech and Cursor Controls) together with integration costs of
GBP0.2m. The GBP3.1m increase in the amortisation charge since last
year relates to the amortisation of intangibles identified as part
of the acquisitions of Hobart, Positek and Sens-Tech this year and
Cursor Controls last year. The total annualised amortisation cost
for next year is expected to be around GBP11.0m including a full
annualisation of amortisation for Sens-Tech which was acquired in
October 2019.
Net Finance Costs
Net finance costs were GBP4.3m (FY 2018/19: GBP3.4m). This
year's charge comprises underlying finance costs (being interest
and facility fees arising from the Group's banking facilities) of
GBP3.7m (FY 2018/19: GBP3.4m), and an IFRS 16 interest charge of
GBP0.6m, the first year following its introduction.
Underlying finance costs for the year of GBP3.7m were GBP0.3m
higher than last year, due to increased commitment fees following
the extension of our banking facility by GBP60m in February 2019,
and higher average monthly net debt following the Sens-Tech
acquisition in October 2019. Underlying interest rates on the
overall facility have though reduced under the terms of the
extended facility.
Underlying Tax Rate
The underlying effective tax rate for the year was 20%. This was
approximately 5ppts lower than last year due mainly to increased
profitability in the UK following the UK acquisitions of Sens-Tech
and Positek during the year, and the use of certain unrecognised
losses.
The overall effective tax rate of 27% was higher than the
underlying effective tax rate mainly due to acquisition costs being
largely non-deductible for corporate tax purposes.
Profit Before Tax and EPS
Underlying profit before tax for the year was GBP32.8m, an
increase of GBP5.6m (21%) compared with last year. This increase
resulted in underlying diluted earnings per share for the year of
30.2p, up 11% on last year.
After the underlying adjustments discussed above, reported
profit before tax of GBP19.5m was broadly in line with last year
(FY2018/19: GBP19.3m), with reported fully diluted earnings per
share of 16.5p, compared with 19.4p last year. This reduction
related to the c.20% of new equity issued during the year at the
time of our three acquisitions.
GBPm FY 2019/20 FY 2018/19
PBT EPS PBT EPS
------ ------ ------
Underlying 32.8 30.2p 27.2 27.2p
Underlying adjustments
Acquisition-related
costs (4.0) (1.8)
Amortisation of acquired
intangibles (9.0) (5.9)
Exceptional items - 0.2
IAS 19 pension cost (0.3) (0.4)
Reported 19.5 16.5p 19.3 19.4p
Working Capital
Working capital at 31 March 2020 was GBP70.9m (FY2018/19:
GBP67.2m) equivalent to 14% of annualised final quarter sales at
CER. This ratio was in line with last year despite higher sales in
the D&M division which, as a manufacturer, holds raw material
and more finished goods than in Custom Supply, due to geographic
spread of manufacturing sites and hence has lower stock turns (3.7
times in D&M compared with 10.9 times in Custom Supply). This
in turn results in higher working capital as a percentage of sales
in the D&M division (18% in D&M compared with 11% in Custom
Supply).
Group stock turns were 5.2, 0.1 turns better than last year,
despite the increasing percentage of D&M sales. Group trade
debtor days and trade creditor days outstanding at 31 March 2020
were at 52 days (down 2 days since last year) and 63 days
(consistent with last year) respectively.
ROCE for the year (return on capital employed, as defined in
note 5 to the attached summary financial statements) including an
annualisation of our Sens-Tech acquisition, was 16.0%, up 0.6ppts
on last year driven by increased profitability and operating
efficiency. This is ahead of our target to achieve a ROCE of at
least 15%.
Cash Flow
Net debt at 31 March 2020 was GBP61.3m, compared with GBP63.3m
at 31 March 2019. Excluding acquisition spend during the year of
GBP75.9m and equity issuance of GBP60.5m, net debt reduced by
GBP17.4m during the year, equating to 47% of underlying operating
profits, demonstrating continuing strong cash generation by the
Group.
FY FY
2019/20 2018/19
Net debt at 1 April (63.3) (52.4)
Free cash flow (see table
below) 27.3 19.2
Acquisition-related cash
flow (75.9) (24.2)
Equity issuance 60.5 0.1
Dividends (8.1) (6.7)
Foreign exchange impact (1.8) 0.7
Net debt at 31 March (61.3) (63.3)
Net acquisition cash flows, (including associated costs of
acquisitions) of GBP75.9m comprised GBP58.4m for the acquisition of
Sens-Tech, GBP16.5m for the acquisitions of Hobart and Positek, and
an earnout payment in respect of the 2016 Contour acquisition of
GBP1.0m.
Dividend payments increased by GBP1.4m (+21%) to GBP8.1m
following the 6% increase of the final dividend last year and the
two c.10% equity placings in April 2019 and October 2019 to
maintain a strong balance sheet.
Operating cash flow and free cash flow (see definitions in note
5 to the summary financial statements) for the year compared with
last year are shown below.
FY
GBPm 2019/20 FY 2018/19
Underlying profit before
tax 32.8 27.2
Net finance costs 4.3 3.4
Non-cash items(1) 13.5 6.4
--------- -----------
Underlying EBITDA 50.6 37.0
Working capital 1.6 (3.2)
Capital expenditure (6.3) (5.2)
IFRS 16 (6.6) -
-----------
Operating cash flow 39.3 28.6
Finance costs (3.7) (3.4)
Taxation (6.4) (3.8)
Legacy pension (1.8) (1.7)
Executive Share option
exercises (0.1) (1.6)
Net exceptional receipt - 1.1
--------- -----------
Free cash flow 27.3 19.2
-----------
(1) Non-cash items are depreciation, amortisation and share
based payments, plus GBP6.6m IFRS 16 depreciation for FY
2019/20.
Underlying EBITDA of GBP50.6m includes the add back of IFRS 16
depreciation of GBP6.6m; excluding this, it was 18% higher than
last year. Working capital reduced by GBP1.6m reflecting GBP2.0m
early payments from customers and a lower growth in the last
quarter. This compares with an investment of GBP3.2m last year
reflecting the stronger organic growth that year.
Capital expenditure of GBP6.3m, 1.4% of Group sales (FY2018/19:
1.2%), was GBP1.1m higher than last year with increased investment
in the D&M division. On a divisional basis, capital expenditure
was 1.9% of divisional sales in D&M and 0.2% of divisional
sales in Custom Supply.
Operating cash flow of GBP39.3m, which was up 37% on last year,
represents 106% of underlying operating profit, well ahead of our
85% conversion target. Free cash flow (after finance costs,
taxation, legacy pension and exceptional costs) was GBP27.3m, up
42% on last year and at 104% of underlying profit after tax, was
again well ahead of our target of 85%. We have introduced free cash
flow as a new KPI for the next five-year period, as we look to
evolve into a business which is self-sufficient in the funding of
acquisitions.
Banking Facilities
The Group has a revolving credit facility of GBP180m with a
syndicate of six banks. During February 2020, the Group exercised
its option to extend the term of the facility to June 2024. In
addition, the Group has a GBP60m accordion facility which it can
use to extend the total facility up to GBP240m, subject to banking
approval. The syndicated facility is available both for
acquisitions and for working capital purposes.
With net debt at 31 March 2020 of GBP61.3m, the Group's gearing
ratio was 1.25 times (FY 2018/19: 1.7 times), being defined as net
debt divided by underlying EBITDA (annualised for acquisitions)
with our longer term target gearing range being between 1.5 and 2.0
times. Interest cover was 13.5 times.
Balance Sheet
Net assets of GBP200.5m at 31 March 2020 were GBP65.8m higher
than at the end of the last financial year (31 March 2019:
GBP134.7m). The increase primarily relates to the two equity
issuances during the year to strengthen the balance sheet plus the
net profit for the year partly offset by the payment of dividends.
The movement in net assets is summarised below:
GBPm FY 2019/20
Net assets at 31 March
2019 (restated) 134.7
Net profit after tax 14.3
Dividend paid (8.1)
Currency net assets -
translation impact (4.6)
Gain on defined benefit
scheme (inc tax) 1.9
Equity issuance 60.5
Share based payments
(inc tax) 1.8
Net assets at 31 March
2020 200.5
Defined Benefit Pension Scheme
The Group's IAS19 pension position associated with its legacy
defined benefit pension scheme improved during the year by GBP4.3m,
from a GBP2.5m deficit at 31 March 2019 to a GBP1.8m surplus at 31
March 2020. This partly results from contributions of GBP1.8m made
by the Group; and also from increased corporate bond yields,
reductions in future RPI expectations and updated demographic
assumptions during the year. Annual payments of GBP1.8m remain
payable (growing by 3% each year in accordance with the plan agreed
with the pension trustees in 2019) until September 2022. The next
triennial valuation will be as at 31 March 2021.
Brexit Update
discoverIE does not anticipate a material direct tariff impact
from Brexit. As an international Group, only 12% of sales are in
the UK with minimal trade between the UK & Eurozone. The
majority of sales in the UK are of products manufactured outside
the EU, predominantly in Asia and the US, and are thus unaffected.
WTO rules, were they to apply, for products traded between the EU
and the UK and vice versa, would only be expected to have a minimal
effect.
Changes have been made to some warehousing and logistics to hold
a buffer stock in the country of demand to minimise the effects of
any border disruption.
Indirect risk remains in terms of softening customer demand as a
result of ongoing uncertainty, and also from the impact from a
depreciation of Sterling which would increase import costs.
Risks and Uncertainties
The principal risks faced by the Group are covered in more
detail in the Group's Annual Report, which will be published
shortly. These risks include the economic environment, particularly
linked to the impact of COVID-19; the impact arising from the UK's
decision to leave the European Union; the performance of acquired
companies; loss of major customers or suppliers; technological
change; major business disruption; cyber security; inventory
obsolescence; product liability; liquidity and debt covenants;
exposure to adverse foreign currency movements; obligations in
respect of a legacy defined benefit pension scheme; loss of key
personnel; and non-compliance with legal and regulatory
requirements.
The Group's risk management processes cover identification,
impact assessment, likely occurrence and mitigation actions. Some
level of risk, however, will always be present. The Group is well
positioned to manage such risks and uncertainties, if they arise,
given its strong balance sheet and committed banking facility of
GBP180m.
Simon Gibbins
Group Finance Director
24 June 2020
Consolidated income statement
for the year ended 31 March 2020
2020 2019
notes GBPm GBPm
------------------------------- ----- ------- -------
Revenue 466.4 438.9
Cost of sales (309.7) (293.9)
------------------------------- ----- ------- -------
Gross profit 156.7 145.0
Selling and distribution costs (58.1) (57.7)
Administrative expenses (74.8) (64.6)
------------------------------- ----- ------- -------
Operating profit 23.8 22.7
Finance income 0.6 0.5
Finance costs (4.9) (3.9)
------------------------------- ----- ------- -------
Profit before tax 19.5 19.3
Tax expense (5.2) (4.7)
------------------------------- ----- ------- -------
Profit for the year 14.3 14.6
------------------------------- ----- ------- -------
Earnings per share 9
Basic 17.0p 20.0p
Diluted 16.5p 19.4p
------------------------------- ----- ------- -------
Supplementary income statement information
2020 2019
Underlying Performance Measures notes GBPm GBPm
-------------------------------------------------------------------------- ----- ----- -----
Operating profit 23.8 22.7
Add back: Exceptional items - (0.2)
Acquisition costs 4.0 1.8
Amortisation of acquired intangible assets 9.0 5.9
IAS 19 pension administrative charge 0.3 0.4
-------------------------------------------------------------------------- ----- ----- -----
Underlying operating profit 37.1 30.6
-------------------------------------------------------------------------- ----- ----- -----
Profit before tax 7 19.5 19.3
Add back: Exceptional items - (0.2)
Acquisition costs 4.0 1.8
Amortisation of acquired intangible assets 9.0 5.9
Total IAS 19 pension charge 0.3 0.4
-------------------------------------------------------------------------- ----- ----- -----
Underlying profit before tax 7 32.8 27.2
-------------------------------------------------------------------------- ----- ----- -----
Underlying earnings per share 11 30.2p 27.2p
-------------------------------------------------------------------------- ----- ----- -----
Consolidated statement of comprehensive income
for the year ended 31 March 2020
2020 2019
GBPm GBPm
------------------------------------------------------------ ----- -----
Profit for the year 14.3 14.6
------------------------------------------------------------- ----- -----
Other comprehensive income/(loss):
Items that will not be subsequently reclassified
to profit or loss:
Actuarial gain on defined benefit pension scheme 2.4 0.1
Deferred tax charge relating to defined benefit pension
scheme (0.5) -
------------------------------------------------------------- ----- -----
1.9 0.1
------------------------------------------------------------ ----- -----
Items that may be subsequently reclassified to profit
or loss:
Exchange differences on translation of foreign subsidiaries (4.6) (1.1)
(4.6) (1.1)
------------------------------------------------------------ ----- -----
Other comprehensive loss for the year, net of tax (2.7) (1.0)
------------------------------------------------------------- ----- -----
Total comprehensive income for the year, net of tax 11.6 13.6
------------------------------------------------------------- ----- -----
Consolidated statement of financial position
as at 31 March 2020
2020 2019
notes GBPm GBPm
------------------------------ ----- ------- -------
Non-current assets
Property, plant and equipment 25.2 24.4
Intangible assets - goodwill 13 117.3 85.3
Intangible assets - other 64.9 34.4
Right of use assets 14 21.1 -
Defined benefit surplus 16 1.8 -
Deferred tax assets 6.1 5.1
------------------------------ ----- ------- -------
236.4 149.2
------------------------------ ----- ------- -------
Current assets
Inventories 68.4 66.2
Trade and other receivables 90.1 88.7
Current tax assets 2.1 1.3
Cash and cash equivalents 36.8 22.9
------------------------------ ----- ------- -------
197.4 179.1
------------------------------ ----- ------- -------
Total assets 433.8 328.3
------------------------------ ----- ------- -------
Current liabilities
Trade and other payables (87.6) (87.7)
Other financial liabilities (4.3) (1.7)
Lease liabilities 14 (5.3) -
Current tax liabilities (5.5) (5.5)
Provisions (0.9) (1.1)
------------------------------ ----- ------- -------
(103.6) (96.0)
------------------------------ ----- ------- -------
Non-current liabilities
Trade and other payables (3.1) (0.2)
Other financial liabilities (93.8) (84.5)
Lease liabilities 14 (14.7) -
Pension liability 16 - (2.5)
Provisions (4.7) (2.7)
Deferred tax liabilities (13.4) (7.7)
------------------------------ ----- ------- -------
(129.7) (97.6)
------------------------------ ----- ------- -------
Total liabilities (233.3) (193.6)
------------------------------ ----- ------- -------
Net assets 200.5 134.7
------------------------------ ----- ------- -------
Equity
Share capital 15 4.4 3.7
Share premium 138.8 106.9
Merger reserve 22.7 2.9
Currency translation reserve (2.2) 2.4
Retained earnings 36.8 18.8
------------------------------ ----- ------- -------
Total equity 200.5 134.7
------------------------------ ----- ------- -------
These financial statements were approved by the Board of
Directors on 24 June 2020 and signed on its behalf by:
Nick Jefferies Simon Gibbins
Group Chief Executive Group Finance Director
Consolidated statement of changes in equity
for the year ended 31 March 2020
Attributable to equity holders of the Company
Currency
Share Merger translation Retained Total
capital Share premium reserve reserve earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- ------------- -------- ------------ --------- -------
At 1 April 2018 3.6 106.9 2.9 3.5 9.9 126.8
------------------------------- -------- ------------- -------- ------------ --------- -------
Profit for the year - - - - 14.6 14.6
Other comprehensive loss - - - (1.1) 0.1 (1.0)
------------------------------- -------- ------------- -------- ------------ --------- -------
Total comprehensive income - - - (1.1) 14.7 13.6
Shares issued (note 15) 0.1 - - - - 0.1
Share-based payments including
tax - - - - 0.9 0.9
Dividends (note 8) - - - - (6.7) (6.7)
------------------------------- -------- ------------- -------- ------------ --------- -------
At 31 March 2019 3.7 106.9 2.9 2.4 18.8 134.7
------------------------------- -------- ------------- -------- ------------ --------- -------
Profit for the year - - - - 14.3 14.3
Other comprehensive loss - - - (4.6) 1.9 (2.7)
------------------------------- -------- ------------- -------- ------------ --------- -------
Total comprehensive income - - - (4.6) 16.2 11.6
Shares issued (note 15) 0.7 31.9 27.9 - - 60.5
Share-based payments including
tax - - - - 1.8 1.8
Transfer to retained earnings - - (8.1) - 8.1 -
Dividends (note 8) - - - - (8.1) (8.1)
------------------------------- -------- ------------- -------- ------------ --------- -------
At 31 March 2020 4.4 138.8 22.7 (2.2) 36.8 200.5
------------------------------- -------- ------------- -------- ------------ --------- -------
The GBP27.9m merger reserve arising during the year is available
for distribution and GBP8.1m was transferred to retained earnings
for the payment of the dividend.
Consolidated statement of cash flows
for the year ended 31 March 2020
2020 2019
notes GBPm GBPm
---------------------------------------------------------- ----- ------ ------
Net cash flow from operating activities 12 37.4 22.4
Investing activities
Acquisition of shares in subsidiaries (net of cash/(debt)
acquired) (72.6) (21.3)
Acquisition related contingent consideration (1.0) (1.3)
Purchase of property, plant and equipment (5.3) (4.2)
Purchase of intangible assets - software (1.0) (1.2)
Proceeds from disposal of property, plant and equipment - 0.2
Interest received 0.5 0.4
---------------------------------------------------------- ----- ------ ------
Net cash used in investing activities (79.4) (27.4)
---------------------------------------------------------- ----- ------ ------
Financing activities
Net proceeds from the issue of shares 60.5 0.1
Proceeds from borrowings 41.9 17.2
Repayment of borrowings (31.3) (1.2)
Payment of lease liabilities (6.0) -
Interest paid on lease liabilities (0.6) -
Dividends paid 8 (8.1) (6.7)
Net cash generated from financing activities 56.4 9.4
---------------------------------------------------------- ----- ------ ------
Net increase in cash and cash equivalents (1) 14.4 4.4
Cash and cash equivalents at 1 April 20.8 16.2
Effect of exchange rate fluctuations (0.4) 0.2
---------------------------------------------------------- ----- ------ ------
Cash and cash equivalents at 31 March 34.8 20.8
---------------------------------------------------------- ----- ------ ------
Reconciliation to cash and cash equivalents in the
consolidated statement of financial position
Net cash and cash equivalents shown above 34.8 20.8
Add back: bank overdrafts 2.0 2.1
---------------------------------------------------------- ----- ------ ------
Cash and cash equivalents presented in current assets
in the consolidated statement of financial position 36.8 22.9
---------------------------------------------------------- ----- ------ ------
1 Further information on the consolidated statement of cash
flows is provided in notes 11 and 12.
Notes to the Group financial statements
for the year ended 31 March 2020
1. Publication of non-statutory accounts
The preliminary results were authorised for issue by the Board
of Directors on 24 June 2020. The financial information set out
above does not constitute the Company's statutory accounts for the
years ended 31 March 2020 or 2019, but is derived from those
accounts. Statutory accounts for 2019 have been delivered to the
Registrar of Companies whereas those for 2020 will be delivered
following the Company's Annual General Meeting. The auditors have
reported on those accounts; their report was unqualified and did
not contain a statement under section 237 (2) or (3) of the
Companies Act 2006.
2. Basis of preparation
The financial information in this statement is prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted for use in the European Union and as applied in
accordance with the provisions of the Companies Act 2006. They have
been prepared on a historical cost basis, except as otherwise
stated.
The consolidated financial statements are presented in pounds
sterling and all values are rounded to the nearest hundred thousand
except as otherwise indicated.
3. Going concern
In line with IAS1 'Presentation of financial statements' and
revised guidance on 'risk management, internal control and related
financial and business reporting', management has taken into
account all available information about the future for a period of
at least, but not limited to, 12 months from the date of approval
of the financial statements when assessing the group's ability to
continue as a going concern.
The Group's business activities, together with factors which may
adversely impact its future development, performance and position,
are set out in the Strategic Report on pages 4 to 69 of the Annual
Report and Accounts. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in
the Finance Review section of the Strategic Report on pages 40 to
45 of the Annual Report and Accounts.
The Group's forecasts and projections, taking account of the
sensitivity analysis of changes in trading performance, show that
the Group is well placed to operate within the level of its current
committed facilities for the foreseeable future.
The Viability Base Case, as stated on page 48 of the Annual
Report and Accounts has been subjected to sensitivity analysis
involving flexing a number of the underlying main assumptions, both
individually and in conjunction. The sensitivities take into
account the principal risks and uncertainties set out on pages 50
to 55 of the Annual Report and Accounts. notably COVID-19 pandemic,
economic downturn, Brexit, loss of key customers and suppliers,
underperformance of acquired businesses, major business disruption,
liquidity and debt covenants and foreign currency.
In respect of COVID-19, the Directors have modelled 'severe but
plausible' downside scenarios to the Viability Base Case. The
Directors prepared these scenarios based on an underlying analysis
of the potential further impact of COVID-19 this year and future
years additional to that already factored into the Viability Base
Case.
These downsides include a much longer term, and deeper impact
with a further double-digit organic sales growth downside to the
Viability Base Case in FY2020/21. Downside sales impact was varied
by market sector with organic falls in the year ranging above 30%
in some markets. A further downside was also applied the following
year with FY2021/22 experiencing a mid-single digit organic sales
decline below the downside sales position in FY2020/21.
Additionally, gross margin was materially reduced and working
capital materially increased.
Even after factoring in these significant additional downsides
to the Viability Base Case, there remains good headroom in our
banking covenants and significant liquidity. This is supported by
the fact that the Group sells a wide portfolio of different
products across a diverse set of industries and geographies, has a
global supply chain network, and has well-established relationships
with its customers. As a consequence, the Directors believe that
the Group is well placed to manage its principal risks and
uncertainties as disclosed on pages 50 to 55 of the Strategic
Report in the Annual Report and Accounts.
The Directors are confident that the Company and the Group have
sufficient resources to continue in operational existence for at
least 12 months from the date of approval of the financial
statements. Accordingly, they continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
The Annual Report and Accounts will be published on 15 July
2020.
4. New accounting standards and financial reporting
requirements
New standards applied
The following standards and interpretations, which have been
issued by the IASB, became effective during the current year end
and have been adopted by the Group:
Effective
International Accounting Standards (IAS/IFRS/IFRIC) date (1)
----------------------------------------------------- ---------
IFRS 16 Leases 1 January
2019
IFRIC 23 Uncertainty over Income Tax Treatments 1 January
2019
1 Period beginning on or after
IFRS 16, 'Leases'
IFRS 16 'Leases' replaces IAS 17 and relates to the
classification, measurement and recognition of leases. The impact
of adoption of IFRS 16 is material on the consolidated financial
statements and is disclosed in note 17.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 provides guidance on the accounting for current and
deferred tax liabilities and assets in circumstances in which there
is uncertainty over income tax treatments. The Interpretation
requires:
-- The Group to determine whether uncertain tax treatments
should be considered separately, or together as a group, based on
which approach provides better predictions of the resolution;
-- The Group to determine if it is probable that the tax
authorities will accept the uncertain tax treatment; and
-- If it is not probable that the uncertain tax treatment will
be accepted, measure the tax uncertainty based on the most likely
amount or expected value, depending on whichever method better
predicts the resolution of the uncertainty. This measurement is
required to be based on the assumption that each of the tax
authorities will examine amounts they have a right to examine and
have full knowledge of all related information when making those
examinations.
The adoption of IFRIC 23 had no material impact on corporate tax
liabilities.
New standards not yet applied
There are no other IFRSs or IFRIC interpretations that are not
yet effective that would be expected to have a material impact on
the Group in the current or future reporting years.
5. Underlying profits and earnings
These financial statements include alternative performance
measures that are not prepared in accordance with IFRS. These
alternative performance measures have been selected by management
to assist them in making operating decisions because they represent
the underlying operating performance of the Group and facilitate
internal comparisons of performance over time.
Alternative performance measures are presented in these
financial statements as management believe they provide investors
with a means of evaluating performance of the Group on a consistent
basis, similar to the way in which management evaluates
performance, that is not otherwise apparent on an IFRS basis, given
that certain strategic non-recurring, infrequent or non-cash items
that management does not believe are indicative of the underlying
operating performance of the Group are included when preparing
financial measures under IFRS. The Directors consider there to be
the following alternative performance measures:
Underlying operating profit
"Underlying operating profit" is defined as operating profit
excluding acquisition related expenditure (namely amortisation of
acquired intangible assets, acquisition costs and the IAS19 pension
administration charge relating to the Group's legacy defined
benefit pension scheme) and exceptional items.
Acquisition costs comprise all attributable costs in connection
with business acquisitions and related integration into the Group.
They include contingent consideration where it is treated as an
expense and movement in contingent consideration where it is
treated as purchase price outside of the 12 month measurement
period.
Underlying EBITDA
"Underlying EBITDA" is defined as underlying operating profit
with depreciation, amortisation and equity settled share-based
payment expense added back.
Underlying profit before tax
"Underlying profit before tax" is defined as profit before tax
excluding acquisition related expenditure (namely amortisation of
acquired intangible assets, acquisition costs and the total IAS19
pension charge relating to the Group's legacy defined benefit
pension scheme) and exceptional items.
Underlying effective tax rate
"Underlying effective tax rate" is defined as the effective tax
rate on underlying profit before tax.
Underlying earnings per share
"Underlying earnings per share" is calculated as underlying
profit before tax reduced by the underlying effective tax rate,
divided by the weighted average number of ordinary shares (for
diluted earnings per share purposes) in issue during the
period.
Operating cash flow
"Operating cash flow is defined as underlying EBITDA adjusted
for the investment in, or release of, working capital, less the
cash cost of capital expenditure and IFRS16 costs ."
Free cash flow
"Free cash flow" is defined as net cash flow before dividend
payments, net proceeds from equity fund raising, the cost of
acquisitions and proceeds from business disposals.
Return On Capital Employed ("ROCE")
"ROCE" is defined as underlying operating profit as a percentage
of net assets plus net debt, including an annualisation for
acquisitions.
Organic basis
Reference to 'organic' basis included in the Chairman's
statement, Operating Review and Finance Review of the Strategic
Report means at constant exchange rates ("CER") and excluding the
first 12 months of acquisitions (Cursor Controls was acquired on 16
October 2018, Hobart and Positek on 15 April 2019 and Sens-Tech on
16 October 2019).
6. Operating segment information
The Group organises its businesses into two divisions, Design
& Manufacturing and Custom Supply.
-- The Design & Manufacturing division manufactures custom
electronic products that are uniquely designed or modified from a
standard product for a specific customer requirement. The products
are manufactured at one of our in-house manufacturing facilities
or, in some cases, by third party contractors.
-- The Custom Supply division provides technically demanding,
customised electronic, photonic and medical products to the
industrial, medical and healthcare markets, both from a range of
high-quality, international suppliers (often on an exclusive basis)
and from discoverIE's Design & Manufacturing division.
These two divisions have been assessed as the reportable
operating segments of the Group. Within each reportable operating
segment are aggregated businesses units with similar
characteristics such as the method of acquiring products for sale
(manufacturing versus distribution), the nature of customers and
products, risk profile and economic characteristics.
Management monitors the operating results of its business units
separately for the purpose of making decisions about resource
allocation and performance assessment. Segment performance is
reported and evaluated based on operating profit or loss earned by
each segment without allocation of central administration costs
including directors' salaries, investment revenue and finance
costs, and income tax expense.
Segment revenue and results
Design Custom
& Manufacturing Supply Unallocated Total
2020 GBPm GBPm GBPm GBPm
------------------------------------------- ---------------- ------- ----------- -----
Revenue 297.9 168.5 - 466.4
------------------------------------------- ---------------- ------- ----------- -----
Result
Underlying operating profit/(loss) 38.1 7.3 (8.3) 37.1
Acquisition costs (3.8) (0.2) - (4.0)
Amortisation of acquired intangible assets (9.0) - - (9.0)
IAS 19 pension charge - - (0.3) (0.3)
------------------------------------------- ---------------- ------- ----------- -----
Operating profit/(loss) 25.3 7.1 (8.6) 23.8
------------------------------------------- ---------------- ------- ----------- -----
Design Custom
& Manufacturing Supply Unallocated Total
2019 GBPm GBPm GBPm GBPm
------------------------------------------- ---------------- ------- ----------- -----
Revenue 266.2 172.7 - 438.9
------------------------------------------- ---------------- ------- ----------- -----
Result
Underlying operating profit/(loss) 29.8 8.6 (7.8) 30.6
Exceptional items 1.1 - (0.9) 0.2
Acquisition costs (1.8) - - (1.8)
Amortisation of acquired intangible assets (5.9) - - (5.9)
IAS 19 pension charge - - (0.4) (0.4)
------------------------------------------- ---------------- ------- ----------- -----
Operating profit/(loss) 23.2 8.6 (9.1) 22.7
------------------------------------------- ---------------- ------- ----------- -----
7. Underlying profit before tax
2020 2019
GBPm GBPm
-------------------------------------------------------------------------- ---- ----- -----
Profit before tax 19.5 19.3
Add back Acquisition Costs (a) 4.0 1.8
Amortisation of acquired intangible assets (b) 9.0 5.9
Total IAS 19 pension charge (c) 0.3 0.4
Exceptional Items (d) - (0.2)
Underlying profit before tax 32.8 27.2
-------------------------------------------------------------------------------- ----- -----
The tax impact of the underlying profit adjustments above is a
credit of GBP1.4m (2019: GBP2.0m).
a. In the year there were GBP4.0m of acquisition costs. Costs of
GBP1.5m were incurred in relation to the acquisition of Hobart,
Positek and Sens-Tech and GBP0.3m in relation to ongoing
acquisitions. Contingent consideration of GBP2.0m was charged in
relation to current and past acquisitions. Costs of GBP0.2m were
incurred in relation to the integration of RSG into the Custom
Supply division.
In the prior year there were GBP1.8m of acquisition costs. Costs
of GBP0.9m were incurred in relation to the acquisition of Cursor
Controls. Contingent consideration of GBP0.5m was charged in
relation to past acquisitions. GBP0.4m was incurred in relation to
the post year-end acquisitions of Hobart and Positek.
b. Amortisation charge for intangible assets recognised on
acquisition of GBP9.0m being amortisation of acquired customer
relationships, patents and brands. The equivalent charge last year
was GBP5.9m. The increase relates to the four acquisitions during
the last two years (Cursor Controls in October 2018, Hobart and
Positek in April 2019 and Sens-Tech in October 2019).
c. Pension costs related to the Group's legacy defined benefit pension scheme (see note 16).
d. There were no exceptional charges this year. Last year there
was net exceptional income of GBP0.2m comprising exceptional income
of GBP1.1m partly offset by an exceptional charge of GBP0.9m
incurred in relation to the equalisation of Guaranteed Minimum
Pensions (GMPs) in the Sedgemoor Group Pension Fund. The
exceptional income of GBP1.1m related to a fraud, perpetrated
against the Group last year in a small US subsidiary leading to new
subsidiary management and tightened Group controls. Insurance
receipts of GBP2.6m were recovered, offset by the fraud cost
incurred during last year of GBP1.5m (out of the total cost of the
fraud of GBP4.0m).
8. Dividends
Dividends recognised in equity as distributions to equity 2020 2019
holders in the year: GBPm GBPm
------------------------------------------------------------ ------- -------
Equity dividends on ordinary shares:
Final dividend for the year ended 31 March 2019 of 6.75p
(2018: 6.35p) 5.4 4.6
Interim dividend for the year ended 31 March 2020 of 2.97p
(2019: 2.80p) 2.7 2.1
------------------------------------------------------------ ------- -------
Total amounts recognised as equity distributions during
the year 8.1 6.7
------------------------------------------------------------ ------- -------
2020 2019
Proposed for approval at AGM: GBPm GBPm
------------------------------------------------------------ ------- -------
Equity dividends on ordinary shares:
------------------------------------------------------------ ------- -------
Final dividend for the year ended 31 March 2020 of 0.0p
(2019: 6.75p) - 5.4
------------------------------------------------------------ ------- -------
Summary
Dividends per share declared in respect of the year 2.97p 9.55p
Dividends per share paid in the year 9.72p 9.15p
Dividends paid in the year GBP8.1m GBP6.7m
------------------------------------------------------------ ------- -------
9. Earnings per share
Basic earnings per share is calculated by dividing the net
profit for the year attributable to ordinary equity holders of the
parent by the weighted average number of ordinary shares
outstanding during the year.
Diluted earnings per share is the basic earnings per share after
allowing for the dilutive effect of the conversion into ordinary
shares of the weighted average number of options outstanding during
the year.
The following reflects the income and share data used in the
basic and diluted earnings per share computations:
2020 2019
GBPm GBPm
---------------------------------------------------------------- ---------- ----------
Profit for the year attributable to equity holders of the
parent: 14.3 14.6
---------------------------------------------------------------- ---------- ----------
Number Number
---------------------------------------------------------------- ---------- ----------
Weighted average number of shares for basic earnings per
share 83,997,130 72,979,791
Effect of dilution - share options 2,878,352 2,419,122
---------------------------------------------------------------- ---------- ----------
Adjusted weighted average number of shares for diluted earnings
per share 86,875,482 75,398,913
---------------------------------------------------------------- ---------- ----------
Basic earnings per share 17.0p 20.0p
Diluted earnings per share 16.5p 19.4p
---------------------------------------------------------------- ---------- ----------
Underlying earnings per share is calculated as follows:
2020 2019
GBPm GBPm
---------------------------------------------------------------- ---------- ----------
Net profit for the year 14.3 14.6
Exceptional items - (0.2)
Acquisition costs 4.0 1.8
Amortisation of acquired intangible assets 9.0 5.9
IAS 19 pension charge 0.3 0.4
Tax effect of the above (1.4) (2.0)
---------------------------------------------------------------- ---------- ----------
Underlying profit 26.2 20.5
---------------------------------------------------------------- ---------- ----------
Number Number
---------------------------------------------------------------- ---------- ----------
Weighted average number of shares for basic earnings per
share 83,997,130 72,979,791
Effect of dilution - share options 2,878,352 2,419,122
---------------------------------------------------------------- ---------- ----------
Adjusted weighted average number of shares for diluted earnings
per share 86,875,482 75,398,913
---------------------------------------------------------------- ---------- ----------
Underlying earnings per share 30.2p 27.2p
---------------------------------------------------------------- ---------- ----------
At the year end, there were 3,306,166 ordinary share options in
issue that could potentially dilute underlying earnings per share
in the future, of which 2,878,352 are currently dilutive (2019:
2,629,936 in issue and 2,419,122 dilutive).
10. Business combinations
Acquisitions in the year ended 31 March 2020
Acquisition of Hobart
On 15 April 2019, the Group completed the acquisition of 100% of
the share capital and voting equity interests of Coil-Tran
Corporation and 85% of the share capital and voting equity
interests of Coil-Tran de Mexico SA de CV (trading as Hobart
Electronics). The fair value of the non-controlling interest in
Coil-Tran de Mexico is assessed as immaterial.
Hobart Electronics ("Hobart") was acquired for an initial cash
consideration of GBP11.5m ($15.2m) on a debt free, cash free basis,
before expenses, funded from the Group's existing debt facilities.
In addition, further contingent cash consideration of up to GBP3.1m
($4.0m) is payable subject to achieving certain operational and
profit growth targets during the three-year period ending 31 March
2022.
Hobart is a US based designer and manufacturer of custom
transformers, inductors and magnetic components.
The provisional fair value of the identifiable assets and
liabilities of Hobart at the date of acquisition were:
Provisional
fair value
recognised
at acquisition
GBPm
------------------------------- -----------------
Property, plant and equipment 0.1
Intangible assets - other 5.4
Inventories 1.9
Trade and other receivables 0.8
Cash and cash equivalents 0.3
Trade and other payables (0.9)
Current tax liabilities (0.2)
Provisions (current) (0.2)
Total identifiable net assets 7.2
Provisional goodwill arising
on acquisition 5.3
--------------------------------- ----------------
Total investment 12.5
--------------------------------- ----------------
Discharged by
Cash 11.5
Contingent consideration 1.0
--------------------------------- ----------------
12.5
------------------------------- ----------------
Included in the GBP5.3m of goodwill recognised above are certain
intangible assets that cannot be individually separated and
reliably measured from the acquiree, due to their nature. These
include the value of expected operational benefits.
Net cash outflows in respect of the acquisition comprise:
Total
GBPm
------------------------------------------------ ------
Cash consideration 11.5
Transaction costs of the acquisition (included
in operating cash flows) (1) 0.4
Net cash acquired (0.3)
-------------------------------------------------- ------
11.6
------------------------------------------------ ------
1 Acquisition costs of GBP0.2m and GBP0.3m were expensed as
incurred in the years ended 31 March 2020 and 31 March 2019
respectively. These were included within administrative expenses
(note 7).
Included in cash flow from investing activities is the cash
consideration of GBP11.5m and the net cash acquired of GBP0.3m.
From the date of acquisition to 31 March 2020, Hobart
contributed GBP9.9m to revenue and GBP0.5m to profit after tax of
the Group.
Acquisition of Positek
On 15 April 2019, the Group completed the acquisition of 100% of
the share capital and voting equity interests of Positek Limited
("Positek").
Positek was acquired for an initial cash consideration of
GBP4.2m on a debt free, cash free basis, before expenses, funded
from the Group's existing debt facilities. In addition further
contingent cash consideration of up to GBP0.4m is payable subject
to achievement of certain integration objectives and profit target
for the 12 month period ending 30 September 2020.
Positek is a UK based designer and manufacturer of rugged, high
accuracy linear rotary tilt and submersible sensors supplying the
international markets.
The provisional fair value of the identifiable assets and
liabilities of Positek at the date of acquisition were:
Provisional
fair value
recognised
at acquisition
GBPm
---------------------------------------- -----------------
Intangible assets - other 1.8
Inventories 0.3
Trade and other receivables 0.2
Cash and cash equivalents 1.1
Trade and other payables (0.1)
Current tax liabilities (0.2)
Deferred tax liabilities (non-current) (0.3)
------------------------------------------ ----------------
Total identifiable net assets 2.8
Provisional goodwill arising on
acquisition 2.7
------------------------------------------ ----------------
Total investment 5.5
------------------------------------------ ----------------
Discharged by
Cash 5.3
Contingent consideration 0.2
------------------------------------------ ----------------
5.5
---------------------------------------- ----------------
Included in the GBP2.7m of goodwill recognised above are certain
intangible assets that cannot be individually separated and
reliably measured from the acquiree, due to their nature. These
include the value of expected operational benefits. None of the
goodwill recognised is expected to be deductible for corporate tax
purposes.
Net cash outflows in respect of the acquisition comprise:
Total
GBPm
------------------------------------------------ ------
Cash consideration 5.3
Transaction costs of the acquisition (included
in operating cash flows) (1) 0.2
Net cash acquired (1.1)
-------------------------------------------------- ------
4.4
------------------------------------------------ ------
1Acquisition costs of GBP0.1m and GBP0.1m were expensed as
incurred in the years ended 31 March 2020 and 31 March 2019
respectively. These were included within administrative expenses
(note 7).
Included in cash flow from investing activities is the cash
consideration of GBP5.3m and the net cash acquired of GBP1.1m.
From the date of acquisition to 31 March 2020, Positek
contributed GBP1.8m to revenue and GBP0.5m to profit after tax of
the Group.
Acquisition of Sens-Tech
On 16 October 2019, the Group completed the acquisition of 100%
of the share capital of Xi-Tech Limited and its subsidiary,
Sens-Tech Limited ("Sens-Tech").
Sens-Tech was acquired for an initial cash consideration of
GBP58.0m on a debt free, cash free basis, before expenses, funded
from the Group's existing debt facilities and a placement of
shares. In addition, further contingent cash consideration of up to
GBP12m is payable subject to the achievement of certain profit
growth targets over a three year period ending 31 March 2022. The
fair value of the contingent consideration will be recognised in
the consolidated income statement over the performance period from
the acquisition date.
Sens-Tech, is a UK based business specialising in X-ray
detection and data acquisition modules supplying international
markets.
The provisional fair value of the identifiable assets and
liabilities of Sens-Tech at the date of acquisition were:
Provisional
fair value
recognised
at acquisition
GBPm
---------------------------------------- -----------------
Intangible assets - other 32.4
Inventories 2.0
Trade and other receivables 2.6
Cash and cash equivalents 12.8
Trade and other payables (1.2)
Current tax liabilities 0.2
Deferred tax liabilities (non-current) (6.2)
------------------------------------------ ----------------
Total identifiable net assets 42.6
Provisional goodwill arising on
acquisition 27.4
------------------------------------------ ----------------
Total investment 70.0
------------------------------------------ ----------------
Discharged by
Cash 70.0
Contingent consideration -
---------------------------------------- ----------------
70.0
---------------------------------------- ----------------
Included in the GBP27.4m of goodwill recognised above are
certain intangible assets that cannot be individually separated and
reliably measured from the acquiree, due to their nature. These
include the value of expected operational benefits. None of the
goodwill recognised is expected to be deductible for corporate tax
purposes.
Net cash outflows in respect of the acquisition comprise:
Total
GBPm
------------------------------------------------ -------
Cash consideration 70.0
Transaction costs of the acquisition (included
in operating cash flows) (1) 1.2
Net cash acquired (12.8)
-------------------------------------------------- -------
58.4
------------------------------------------------ -------
1 Acquisition costs of GBP1.2m were expensed as incurred in the
year ended 31 March 2020 and were included within administrative
expenses (note 7).
Included in cash flow from investing activities is the cash
consideration of GBP70.0m and the net cash acquired of
GBP12.8m.
From the date of acquisition to 31 March 2020, Sens-Tech
contributed GBP8.7m to revenue and GBP1.0m to profit after tax of
the Group. If the business combination had taken place at the
beginning of the year, the consolidated profit after tax for the
Group would have been GBP16.7m and the consolidated revenue for the
Group would have been GBP476.4m.
11. Movements in cash and net debt
1 April Non cash 31 March
2019 Cash flow changes 2020
Year to 31 March 2020 GBPm GBPm GBPm GBPm
-------------------------- ------- --------- -------- --------
Cash and cash equivalents 22.9 13.5 0.4 36.8
Bank overdrafts (2.1) 0.9 (0.8) (2.0)
-------------------------- ------- --------- -------- --------
Net cash 20.8 14.4 (0.4) 34.8
-------------------------- ------- --------- -------- --------
Bank loans under one year - (2.7) (0.1) (2.8)
Bank loans over one year (85.9) (7.9) (1.2) (95.0)
Capitalised debt costs 1.8 - (0.1) 1.7
-------------------------- ------- --------- -------- --------
Total loan capital (84.1) (10.6) (1.4) (96.1)
-------------------------- ------- --------- -------- --------
Net debt (63.3) 3.8 (1.8) (61.3)
-------------------------- ------- --------- -------- --------
Bank loans over one year above include GBP94.8m (2019: GBP83.1m)
drawn down against the Group's revolving credit facility.
1 April Non cash 31 March
2018 Cash flow changes 2019
Year to 31 March 2019 GBPm GBPm GBPm GBPm
-------------------------- ------- --------- -------- --------
Cash and cash equivalents 21.9 1.0 - 22.9
Bank overdrafts (5.7) 3.4 0.2 (2.1)
-------------------------- ------- --------- -------- --------
Net cash 16.2 4.4 0.2 20.8
-------------------------- ------- --------- -------- --------
Bank loans under one year (1.0) 1.2 (0.2) -
Bank loans over one year (68.5) (17.2) (0.2) (85.9)
Capitalised debt costs 0.9 - 0.9 1.8
-------------------------- ------- --------- -------- --------
Total loan capital (68.6) (16.0) 0.5 (84.1)
-------------------------- ------- --------- -------- --------
Net debt (52.4) (11.6) 0.7 (63.3)
-------------------------- ------- --------- -------- --------
Supplementary information to the statement of cash flows
2020 2019
Underlying Performance Measure GBPm GBPm
------------------------------------- ------ ------
Increase/(decrease) in net cash 3.8 (11.6)
Add: Business combinations 75.9 24.2
Dividends paid 8.1 6.7
Less: Net proceeds from share issue (60.5) (0.1)
------------------------------------- ------ ------
Free cash flow 27.3 19.2
Net finance costs 3.7 3.4
Taxation 6.4 3.8
Legacy pension scheme funding 1.8 1.7
Executive options issuance 0.1 1.6
Exceptional cash flow - (1.1)
------------------------------------- ------ ------
Operating cash flow 39.3 28.6
------------------------------------- ------ ------
12. Reconciliation of cash flows from operating activities
2020 2019
GBPm GBPm
--------------------------------------------------------- ----- -----
Profit for the year 14.3 14.6
Tax expense 5.2 4.7
Net finance costs 4.3 3.4
Depreciation of property, plant and equipment 4.8 4.6
Depreciation of right of use assets 6.6 -
Amortisation of intangible assets - other 9.6 6.5
Loss on disposal of property, plant and equipment 0.1 0.1
Change in provisions (0.3) 0.2
Pension scheme funding (1.8) (1.7)
IAS 19 pension administration charge 0.3 1.3
Impact of equity-settled share-based payment expense and
associated taxes 1.3 (0.5)
--------------------------------------------------------- ----- -----
Operating cash flows before changes in working capital 44.4 33.2
Decrease/(increase) in inventories 2.7 (6.6)
Decrease/(increase) in trade and other receivables 1.9 (4.9)
(Decrease)/increase in trade and other payables (1.0) 8.3
--------------------------------------------------------- ----- -----
Decrease/(increase) in working capital 3.6 (3.2)
--------------------------------------------------------- ----- -----
Cash generated from operations 48.0 30.0
Interest paid (4.2) (3.8)
Income taxes paid (6.4) (3.8)
--------------------------------------------------------- ----- -----
Net cash flow from operating activities 37.4 22.4
--------------------------------------------------------- ----- -----
13. Intangible assets - goodwill
Cost GBPm
----------------------------------- ------
At 1 April 2018 113.8
Arising from business combinations 9.0
Exchange adjustments (0.7)
----------------------------------- ------
At 31 March 2019 122.1
Arising from business combinations 35.4
Exchange adjustments (3.4)
----------------------------------- ------
At 31 March 2020 154.1
----------------------------------- ------
Impairment GBPm
----------------------------------- ------
At 31 March 2019 and 31 March 2020 (36.8)
----------------------------------- ------
Net book value at 31 March 2020 117.3
----------------------------------- ------
Net book value at 31 March 2019 85.3
----------------------------------- ------
The carrying value of goodwill is analysed as follows:
2020 2019
GBPm GBPm
----------------------- ----- -----
Custom Supply
Acal BFi 9.9 9.6
Medical 0.6 0.6
Design & Manufacturing
Stortech 3.6 3.6
Hectronic 0.6 0.6
MTC 1.9 2.0
Myrra 5.3 5.1
Noratel 25.9 29.8
Foss 5.1 5.6
Flux 0.6 0.6
Contour 7.7 7.7
Variohm 6.0 6.0
Santon 5.3 5.1
Cursor Controls 9.0 9.0
Hobart 5.7 -
Positek 2.7 -
Sens-Tech 27.4 -
----------------------- ----- -----
117.3 85.3
----------------------- ----- -----
The movement in goodwill compared to prior year relates to the
movement in foreign exchange with the exception of Hobart, Positek
and Sens-Tech which were acquired in the year (refer to note 10 for
details). Hobart was also subject to a foreign exchange
movement.
14. Leases
14.1 Leasing arrangements
The Group leases manufacturing and warehousing facilities,
offices and various items of plant, machinery, equipment and
vehicles.
Manufacturing and warehouse facilities generally have lease
terms between 3 and 10 years. Lease contracts generally include
extension and termination options and variable lease payments,
which are discussed further above in 'Significant accounting
judgements and estimates' in note 17.4.
14.2 Carrying value of right of use assets
Set out below are the carrying amounts of right-of-use assets
("ROU") recognised and movements during the year:
Land and Plant and
Buildings machinery Total
GBPm GBPm GBPm
At 31 March 2019 - - -
Change in accounting policy 17.8 2.9 20.7
----------------------------- ----------- ----------- --------
At 1 April 2019 (revised) 17.8 2.9 20.7
Additions/modifications 5.8 1.0 6.8
Depreciation charge (5.0) (1.6) (6.6)
Exchange adjustments 0.1 0.1 0.2
At 31 March 2020 18.7 2.4 21.1
----------------------------- ----------- ----------- --------
14.3 Carrying value of lease liabilities
Set out below are the carrying amounts of lease liabilities and
the movements during the year:
Total
GBPm
At 31 March 2019 -
Change in accounting policy (19.8)
------------------------------ ------- --- -------------------
At 1 April 2019 (revised) (19.8)
Additions (5.5)
Lease modifications (0.6)
Interest for the year (0.6)
Lease payments 6.6
Exchange adjustments (0.1)
At 31 March 2020 (20.0)
------------------------------ ------- --- -------------------
31 March 1 April
2020 2019
GBPm GBPm
----------------------------- --- ---- ------------ -------
Current liabilities 5.3 5.7
Non-current liabilities 14.7 14.1
---------------------------------------- ------------ -------
20.0 19.8
--- ---- ------------ -------
14.4 Amounts recognised in the consolidated income
statement:
2020
GBPm
--------------------------------------------- ----------
Depreciation of ROU assets 6.6
Interest expense (included in finance cost) 0.6
7.2
--------------------------------------------- ---------
14.5 Extension and termination options
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. For a description of judgements and estimates associated
with extension and termination options, see note 17.4.
Variable lease payments based upon an index or rate are
accounted for once rental amounts are changed.
15. Share capital
2020 2020 2019 2019
Allotted, called up and fully paid Number GBPm Number GBPm
------------------------------------- ---------- ----- ---------- -----
Ordinary shares of 5p each 88,705,915 4.4 73,358,847 3.7
------------------------------------- ---------- ----- ---------- -----
During the year, 15.3m shares were issued raising GBP60.5m (of
which GBP0.7m was share capital, with the balance allocated to
share premium account and merger reserve as set out below).
On 18 April 2019, 7,309,867 shares were issued for a gross
consideration of GBP29.2m before costs and GBP28.2m after costs.
The shares were issued at 400 pence per share, a discount of 3.85
per cent to the closing share price of 416 pence per share on 15
April 2019. The shares were issued under a cash box structure and
accordingly, GBP0.3m was share capital with the balance of GBP27.9m
being allocated to a merger reserve. This amount is fully available
for distribution.
On 17 October 2019, 8,034,840 shares were issued for a gross
consideration of GBP33.3m before costs and GBP32.3m after costs.
The shares were issued at 415 pence per share, a discount of 3.9
per cent to the closing share price of 432 pence per share on 16
October 2019. GBP0.4m was share capital with the balance of
GBP31.9m being allocated to share premium account.
During the year to 31 March 2020, employees exercised 2,361
share options under the terms of the various share option schemes
(2019: 1,940,991).
16. Pension
The pension liability relates to the Sedgemoor Group Pension
Fund, which was brought into the Group on the acquisition of the
Sedgemoor Group in 1999. The fund, which is a defined benefit
scheme, is operated as a 'paid up' pension scheme with only
pensioners and deferred members.
Based upon the results of the triennial funding valuation at 31
March 2018, the Sedgemoor Scheme's Trustees agreed with Sedgemoor
Limited on behalf of the participating employers to continue the
participating employers' contributions under the deficit recovery
plan agreed at the previous valuation at 31 March 2015. This
required contributions of GBP1.8m p.a. over the year to 31 March
2020 with future contributions increasing by 3% each April payable
over the period to 30 September 2022. There is a risk that adverse
experience could lead to a requirement for additional contributions
to recover any deficit that arises.
A pension scheme asset has been recognised as the employer has
an unconditional right to receive a surplus arising on the wind-up
of the scheme.
The results of the triennial funding valuation as at 31 March
2018 were updated to the accounting date by an independent
qualified actuary in accordance with IAS 19.
The pension asset at 31 March 2020 was GBP1.8m (2019: GBP2.5m
liability) and the total pension charge was GBP0.3m (2018:
GBP0.4m).
17. Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 Leases
on the Group's financial statements.
17.1 Impact on the consolidated statement of financial
position
The change in accounting policy affected the following items in
the statement of financial position on 1 April 2019:
GBPm
Right of use assets Increase 20.7
Lease liabilities Increase 19.8
--------------------- ---------- -----
There was no impact on retained earnings at 1 April 2019.
Lease liabilities
On adoption of IFRS 16 the Group recognised liabilities in
relation to leases which had previously been classified as
operating leases under the principles of IAS17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's incremental borrowing
rate as at 1 April 2019.
The lease liabilities at 31 March 2020 and 1 April 2019 were as
follows:
31 March 1 April
2020 2019
GBPm GBPm
Current liabilities (5.3) (5.7)
Non-current liabilities (14.7) (14.1)
(20.0) (19.8)
------------------------- ---------- --------
Lease liabilities recorded at 1 April 2019 can be reconciled to
operating lease commitments as at 31 March 2019 as follows:
1 April
2019
GBPm
-------------------------------------------------------------------- --------
Operating lease commitments as at 31 March 2019 16.4
Add: Adjustments as a result of a different treatment of extension
and termination options 4.9
Gross future lease cash flows 21.3
Effect of discounting (1.5)
Lease liability recognised as at 1 April 2019 19.8
-------------------------------------------------------------------- --------
The Group has not made use of the exemptions for leases of
low-value assets and short-term leases (leases shorter than 12
months).
Right of use assets
The Group has not restated prior year comparators, with right of
use assets being set equal to lease liabilities at the date of
transition in line with the simplified approach under IFRS 16.
Values have been adjusted for the cost of any restoration
obligations and by the amount of prepaid or accrued lease payments
relating to leases recognised in the statement of financial
position as at 31 March 2019. These adjustments amounted to
GBP0.9m. There were no onerous lease contracts that would have
required an adjustment to the right of use assets at the date of
application.
The recognised right of use assets relate to the following types
of assets:
31 March 1 April
2020 2019
GBPm GBPm
Land and buildings 18.7 17.8
Plant and equipment 2.4 2.9
Total 21.1 20.7
--------------------- ---------- --------
Properties are depreciated over the shorter of the lease term or
useful life and plant and equipment over periods of two to five
years.
17.2 Impact on the consolidated income statement and earnings
per share
For the year ended 31 March 2020 Underlying operating profit was
unchanged as a result of applying IFRS 16. Profit before tax was
GBP0.6m lower due to interest expenses being higher at the
beginning of the lease term.
The impact on the income statement and earnings per share for
the year was:
GBPm
------------------------------ -------
Lease expense 6.6
Depreciation (6.6)
------------------------------ -------
Underlying operating profit 0.0
Interest (0.6)
------------------------------ -------
Underlying profit before tax (0.6)
------------------------------ -------
Underlying EPS (0.7)p
------------------------------ -------
There was no impact on underlying profit by operating segments
for the year.
17.3 Impact on the consolidated statement of cash flows
Payments in respect of leases which were previously recognised
within cash flows from operating activities are now recorded within
cash flow from financing activities, separated between payment of
interest and payment of principal elements. This has resulted in a
net nil impact on cash flow but increased net cash flow from
operating activities and decreased net cash generated from
financing activities by GBP6.6m.
17 .4 Judgements and estimates
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. The extension and termination options held are
exercisable only by the Group and not by the lessor. In determining
the lease term, management considers all facts and circumstances
that create an economic incentive to exercise an extension option,
or not exercise a termination option. Extension options (or periods
after termination options) are only included in the lease term if
the lease is reasonably certain to be extended (or not terminated).
The assessment is reviewed if a significant event or a significant
change in circumstances occurs which affects this assessment and
that is within the control of the lessee.
17 .5 Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- Reliance on previous assessments on whether leases were onerous
-- The use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease
18. Exchange rates
The profit and loss accounts of overseas subsidiaries are
translated into sterling at average rates of exchange for the year
and consolidated statements of financial position are translated at
year end rates. The main currencies are the US Dollar, the Euro and
the Norwegian Krone. Details of the exchange rates used are as
follows:
Year to 31 March Year to 31 March
2020 2019
----------------
Closing Average Closing Average
rate rate rate rate
---------------- -------- -------- -------- --------
US Dollar 1.2360 1.2722 1.3090 1.3139
Euro 1.1281 1.1448 1.1651 1.1340
Norwegian Krone 12.9847 11.4639 11.2536 10.9175
---------------- -------- -------- -------- --------
19. Events after the reporting date
There were no matters arising, between the statement of
financial position date and the date on which these financial
statements were approved by the Board of Directors, requiring
adjustment in accordance with IAS10, Events after the reporting
period. The following important non-adjusting event should be
noted:
COVID-19
The impact of COVID-19 has been fully considered in both the
Going Concern assessment of the Group which is included in note 2
to the Group's financial statements and in the Viability Statement
on page 48. This did not have any impact on the judgements made in
the preparation of the financial statements and conclusions reached
as at 31 March 2020.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SEIEFDESSEDM
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