REG - 600 Group PLC - Final Results
The 600 Group plc
De-risked business well-placed for the future
Results for the year ended 28 March 2020
The 600 Group PLC ("the Group"), the diversified industrial engineering company (AIM: SIXH), today announces its results for year ended 28 March 2020.
Financial highlights
· Revenue from continuing operations increased by 3.1% to $67.2m (2019: $65.2m)
· Group profit before tax and adjusting items of $1.1m (2019: $4.1m)
· Loss before tax after adjusting items of $0.63m (2019: profit $4.3m)
· Given the current uncertainty, no dividend recommended for remainder of the year
Strategic & operational highlights
· Results impacted by difficult trading environment
o Challenging market conditions compounded by the significant disruption caused by the Coronavirus pandemic in the second half
o Decisive action taken to reduce costs and keep the workforce and technical competencies together so that the Group can react quickly as markets improve
· Group de-risked
o Receipt of surplus from the successful pension scheme buy out and the sale of the Gamet business and property, has stabilised Group debt levels
o Rationalisation of UK Machine Tool division has reduced operational risk and future capital expenditure requirements
o Move into higher specification work through the acquisition of Control Micro Systems supports gross margin, advances capabilities and brings reduced cyclical customers into the Group
· Group restructure
o Decision taken to expand and enhance operations in the US with new office in Orlando, Florida
o As a result, certain management functions will relocate to Orlando during the course of 2021 but the Group will remain London listed
o Synergies between laser businesses in Ohio and Florida will be realised throughout 2021
o Group CFO, Neil Carrick, has decided that for personal reasons he will be unable to relocate to Orlando and will leave 600 Group at the end of the next AGM
o New CFO appointed with effect from conclusion of AGM
· Macro-economic uncertainty continues but positive long-term fundamentals
o Whilst there continues to be reduced activity, orders have returned to acceptable levels
o Continue to focus on operational efficiencies and increased operational flexibility
o Opportunities to grow and enhance customer offering through investment in new, higher end product capabilities and diversification into new markets
Paul Dupee, Executive Chairman of the Group, commented:
"The Group made significant strides forward in the first half of the year, eliminating the Group's UK final salary pension scheme, significantly de-risking the Group's balance sheet, opening of the new European Technology Centre and acquiring Control Micro Systems, a highly complementary business to the Group's existing laser division, which brings ever more sophisticated, value-added and custom solutions in the use of industrial lasers.
"We have taken the decision to expand our growth in Orlando, Florida. Orlando leads the US in photonics technology and we see exciting opportunities in the region. As a result of the Group's relocation of certain functions, Neil Carrick has decided to leave the business. I would like to personally thank him for all his hard work and great contribution during his time with 600 Group. I am pleased to announce that G.Mitchell (Mitch) Krasny, CPA, will succeed Neil. Mitch brings with him a great wealth of financial and operational experience.
"I would like to thank all our employees for their ongoing support, commitment and dedication to the Group during these difficult times. Their adaptability has helped us to respond quickly and mitigate the impact.
"Despite the short-term end-market weaknesses and macroeconomic uncertainty, the Board continues to believe in the long-term fundamentals of the Group; in brand promotion, investment in new, higher end product capabilities and diversification into new markets and selective acquisitions. We have taken decisive action to ensure that as market conditions improve, we can react quickly."
Enquiries:
The 600 Group PLC
Tel: 01924 415000
Paul Dupee, Executive Chairman
Instinctif Partners
Tel: 0207 457 2020
Mark Garraway
Rosie Driscoll
Spark Advisory Partners Limited (NOMAD)
Tel: 020 3368 3553
Matt Davis
WH Ireland (Broker)
Tel: 020 7220 1666
Harry Ansell
Chairman's statement
Overview
The Group made significant strides forward in the first half of the FY20 year, eliminating the Group's UK final salary pension scheme, significantly de-risking the Group's balance sheet, opening the European Technology Centre in May 2019 as the new home of the re-launched Colchester Machine Tool Solutions and in June 2019 acquiring Control Micro Systems (CMS), a business highly complementary to the Group's existing laser division and bringing ever more sophisticated, value-added and custom solutions in the use of industrial lasers.
The second half of the year has, unfortunately, been dominated by the downturn in economic conditions, led by the global slowdown in the auto industry, concerns over a trade war between the USA and China and the significant worldwide disruption from the Coronavirus pandemic.
Divisional overview
The benefits of the rationalisation of the UK Machine Tool division resulted in much improved performance for the year with revenues up 14% and increased operating margins. The final phase of this process was completed in the second half of the year with the sale of the Gamet bearings business and its associated freehold property. This rationalisation has also reduced operational risk and future capital expenditure requirements. The US Machine Tool business, however, suffered in an industry wide slowdown of some 12% and in addition with the Coronavirus pandemic affecting all areas in the last few months of the financial year, the Machine Tool division overall was unable to match the performance of the prior year.
The Industrial Laser division for the first time in over a decade encountered a contracting market place with global laser sales falling in the region of 12% and increased competition and price deflation in the standard laser sector of the industry. The acquisition of CMS helped revenue from June onwards and the existing TYKMA Electrox brand made significant moves into more custom and higher specification work where its strengths in design and proprietary software provide greater opportunities for growth and enhanced margins. The acquisition of CMS has significantly enhanced capabilities and brought reduced cyclical customers into the Group. Whilst the move into higher specification work helped maintain gross margins it could not compensate for the fall in volumes in the standard product and the general market issues created in the last few months of the period by the Coronavirus pandemic. As a result, operating profit was lower than the prior year.
Response to COVID-19
The Group has responded quickly to the Coronavirus pandemic adopting short time and home working. To help mitigate the financial effects, the Group has used government stimulus packages, post March 2020, including loans under the USA Government Paycheck Protection Program and the UK Coronavirus Large Business Interruption Scheme (CLBILS). Some staff have been furloughed under the UK Coronavirus Job Retention Scheme and many employees accepted temporary salary reductions. The Board has taken action to reduce overheads and deferred all non-critical capital expenditure.
The de-risking of the Group with the receipt of the surplus from the successful pension scheme buy out and the sale of the Gamet business and property has helped stabilise debt levels. Group debt is currently at $13.8m, excluding lease liabilities but including the government loan assistance, which is broadly in line with that at the end of March 2020 and the Group is covenant compliant with adequate banking facilities.
Given the current circumstances no dividend will be paid this year.
Group restructure
The Board has taken the decision to expand and enhance growth and oversight of the operations in the US by opening an office in Orlando, Florida. Orlando leads the US in photonics technology. Consequently, certain management functions will relocate there during the course of 2021. The Group will also continue to realise the synergies between the laser businesses in Ohio and Florida throughout 2021. The Group will remain UK domiciled and listed in London.
Neil Carrick, CFO, has decided that for personal reasons he will be unable to relocate to Orlando and will leave 600 Group. Neil joined the business in 2011 and has made a great contribution since his arrival, particularly in overseeing the buyout of the UK pension scheme and strengthening the Group's financial position. I would like to personally thank him for all his hard work. He leaves the business well-placed for the future.
I am pleased to announce that G. Mitchell (Mitch) Krasny, CPA, formerly CFO of technology companies, Ucell and Kcell, subsidiaries of Telia Company, Bulgaria Telecom, TV 3 Russia and CFO Eastern Europe and Russia for Millicom and Metromedia International will succeed Neil and be appointed a Director with effect from the end of the next Annual General Meeting. Mitch brings over 35 years of financial and operational experience in public and private companies.
To ensure an orderly handover, Neil will stay with the business and remain a Director until the conclusion of the next Annual General Meeting, which is expected to be held no later than 31 December 2020.
People
Our people are central in continuing the improvement of our business and their safety has been paramount in the recent months. I would like to thank all our employees for their ongoing support, commitment and dedication to The 600 Group during these difficult times. I am hopeful that the sacrifices made will help us to keep our teams together and come out of this well placed to reap the benefits when markets return to some normality.
Outlook
Despite the short-term end-market weaknesses and macroeconomic uncertainty created by the Coronavirus pandemic, the Board continues to believe in the long-term fundamentals of the Group; in brand promotion, investment in new, higher end product capabilities and diversification into new markets and selective acquisitions. Whilst there continues to be reduced activity, the level of order backlog has returned to acceptable levels, given the circumstances, compared to the previous year. The Board have taken decisive action to reduce costs and to keep the workforce and technical competencies together to ensure the Group can react quickly as markets improve.
Paul Dupee
Executive Chairman
19 November 2020
Strategic report
Our businesses
The 600 Group PLC ("the Group") is a leading engineering group with a world class reputation in the design, manufacture and distribution of industrial laser systems and design and distribution of machine tools and associated precision engineered components. The Group operates from locations in North America, Europe and Australia selling into more than 100 countries worldwide.
Group businesses serve customers across a very broad range of industry sectors, from medical, pharmaceutical and education through to automotive, aerospace and defence equipment. A large proportion of revenue is derived from sales via third party distribution channels who support these industries locally.
The Group products are noted for their quality and reliability and consequently the Group benefits from a high degree of loyalty and repeat business. Given the large number of customers and established distributors in many countries there are no major sales concentrations of customers or products. In the year ended 28 March 2020 the top 20 customers, of which 15 were distributors, contributed 26% (2019 - 27%) of revenues.
Revenues
Revenues are generated across many diverse geographical territories:
Percentage of worldwide revenues
(by destination)
2020
%
2019
%
United States of America
66
65
United Kingdom
17
15
Europe (excluding UK)
7
10
Rest of the World
10
10
Total
100
100
Macroeconomic and industry trends
Industrial laser systems
Industry use of industrial lasers for material processing has continued to expand worldwide. Laser systems have now become a mainstream manufacturing process covering the areas of laser machining, including cutting and drilling, marking, ablation and a host of other niche applications. One of the main drivers of this industry has been legislation and the continual increase in the requirement for traceability of products in all industries from aerospace and transport to medical and pharmaceutical.
The global industrial laser market is estimated to be in the region of $5bn but given this is just the laser sources, the actual market for systems incorporating these lasers and associated equipment and software is estimated to be much larger in the region of $15-$20bn. The industry had seen mid-single digit increases until 2019 when a fall was recorded. Metal cutting is by far the largest application by value and the market is dominated by China which is the largest producer and consumer of industrial lasers. The fall in the overall market in 2019 is estimated to be in the region of 12% and largely driven by Chinese decline in cutting systems which mirrors the decline in machine tools, both of which are heavily influenced by Chinese demand.
The laser marking and micro-materials processing subset of the market (in which the Group competes) is smaller than the macro-materials processing subset and has seen low single digit growth in recent years. Growth is underpinned by enhanced performance in the speed, cost and quality of the systems being implemented compared to other techniques as well as by legislative changes driving a requirement for greater traceability. The industry subset occupied by the Group has however seen a proliferation of vendors and selling price pressure at the lower commodity end of the market and whilst unit volumes have continued to increase, revenue has been held back. It is for this reason the Group has focused on the higher end custom products where its strengths in design and proprietary software provide greater opportunities to grow and enhance margin and where the acquisition of CMS during the year has significantly enhanced these capabilities.
The Coronavirus pandemic industry predictions for the laser industry are similar to machine tools with a rapid decline followed by recovery later in 2020 and a return to normal growth through 2021.
Machine tools and precision engineered components
The worldwide machine tool industry was estimated by Oxford Economics at nearly $85bn in annual sales in its Spring 2020 report. The market continues to be driven by the investment intentions of manufacturers and is sensitive to changes in the economic and financial climate. Demand responds to economic trends which typically lag the main cycle of the economy. 2019 had already seen a global decline of 10% in machine tool consumption and the industry has been severely affected by the Coronavirus pandemic, with estimates of a fall of 28% in World machine tool consumption in the calendar year 2020. However, growth is expected to return in 2021 with a predicted rebound of 33% improvement.
The global market is dominated by China with consumption of $29bn but this is largely served domestically with China also being the largest producer. The USA is the second largest consumer of machine tools at $9.6bn followed by Germany at $7.8bn.
Our main markets
The main markets we operate in are the USA, Europe and Australia. All these markets had already seen a degree of demand weakness towards the end of 2019 led by Global automotive weakness and the GM strike in the USA and then Boeing's decision to halt production of its 737 MAX aircraft in January 2020. The Global effects of the Coronavirus pandemic have impacted all areas in which the Group operates and it remains to be seen if the predicted pick up in 2021 becomes reality. In addition the possibility of disruption remains due to the ongoing Brexit issues in the UK, and concerns in the USA over tariffs and a trade war with China.
Activity in the 2019/20 financial year
Industrial laser systems
The existing TYKMA Electrox business continued to see increased competition and price deflation in the lower end standard products sector and although there was a significant increase in custom higher specification sales and a further improvement in gross margins, this was not sufficient to offset the effects of the volume decline from the standard products. The standard product business was also affected by the overall decline in the laser market for the first time in over a decade with Europe and the Far East sales being affected in particular by the decline in the automotive sector. The US market weakened with trade war concerns with China, the General Motors strike and latterly Boeing halting aircraft production. The Coronavirus pandemic further compounded these problems and affected the last few months of the financial year and into the FY21 year.
The acquisition of Control Micro Systems Inc. (CMS) in June 2019 significantly enhanced the Laser Division's competencies in the more sophisticated value-add custom solutions for customers. The business brought vision and robotic capabilities and industry leading positions in the high growth precision medical equipment and pharmaceuticals markets. Whilst these industries are less affected by the capital goods cycles the economic conditions and effects of the Coronavirus pandemic slowed the pace of new projects in this part of the business. The sales organisation has integrated well with the existing business and engineering and software capabilities are being shared to improve services and capabilities for customers.
The UK spares and service operation and legacy Electrox business was integrated into the new European Technology Centre machine tools operation which now supports both the UK and Europe. A direct sales operation was established in the UK based in this facility which provides a permanent showroom to demonstrate the full range of laser machines.
Results for the financial year were as follows:
2020
$ 000
2019
$ 000
Revenues
23,695
20,592
Underlying operating profit
1,689
2,563
Underlying operating margin
7.1%
12.4%
Underlying operating profit is before adjusting items, which are explained in note 14 Alternative Performance Measurers and set out in note 3.
Machine tools and precision engineered components
This division operates from sites in the UK, USA, and Australia providing solutions for metal processing through the design and development of machine tools sold under the brand names Colchester, Harrison and Clausing and the design and supply of precision engineering components under the brand name Pratt Burnerd. There are also spares, accessories and service operations which support the significant number of machines sold over the Group's long history of supplying quality equipment. Sales are made worldwide, with a mix of direct sales and distribution in North America, Europe, and Australia and a network of distributors in all other key end-user markets.
The machine tools division's overall revenue was down on the prior year by 2.4%, but this was against the backdrop of a Global industry fall of over 10% in the year to December 2019 and the beginning of the Coronavirus pandemic shutdowns in the last few months of the financial year. Consequently, operating margins reduced to 7.4% from the prior year's 8.1%.
The UK operation performed very well in its first full year of business as the re-launched "Colchester Machine Tool Solutions" from the new site in West Yorkshire. The new European Technology Centre integrates a modern, open plan office environment, enhanced manufacturing and warehousing space as well as serving as a dedicated year-round product showroom, demonstration and customer training capability to showcase the business' increasingly innovative product range.
Revenue was up 14% and operating margins improved again from 6.7% to 7.9%. The business had a good order book at the start of 2020 as a result of increased direct sales in the UK which allowed it to continue to operate fairly normally until the end of April when the business then took advantage of Government assistance and furloughed a number of employees as orders reduced with many customers shutting down or restricting site access.
The move of premises was part of the restructuring of the UK operation which saw a de-risking of operations and reduction in the requirement for ongoing capital expenditure by the outsourcing of further manufacturing. The process was completed towards the end of the year with the sale of the Gamet Bearings operation and its associated property based in Colchester. The revenue and trading results of this operation have been excluded from the ongoing trading and disclosed as a discontinued operation in the Consolidated Income Statement. The assets held for sale were separately disclosed at their expected fair value in the Statement of Financial Position at 30 March 2019.
The US machine tool business struggled in a weak market place affected by concerns over tariffs and a trade war with China, the General Motors strike late in 2019 and the Boeing delay to production of its 737 MAX aircraft in January 2020. As a result of COVID shutdowns in the USA, orders started to reduce towards the end of the FY20 financial year and action has been taken to reduce costs and take advantage of Government schemes. As a result of the near 10% fall in revenues in FY20, operating margins reduced to 8.1% from the previous year's 9.3%.
The Australian machine tools business also struggled in an Asian market that bore the brunt of the Global machine tool contraction in addition to difficult economic conditions within Australia. Consequently, a small operating loss was generated for the year. The business is restructuring following a number of retirements and will aim to leverage the Colchester Machine Tool Solutions rebranding in areas where the brand name remains well known.
The financial results of these activities were as follows:
2020
$ 000
2019
$ 000
Revenues
43,511
44,575
Underlying operating profit
3,216
3,610
Underlying operating margin
7.4%
8.1%
Group Results
Revenue from continuing operations increased by 3.1% to $67.2m (2019: $65.2m) and Group profit before tax and adjusting items was $1.1m (2019: $4.1m). The loss before tax after adjusting items was $0.63m (2019: profit $4.3m).
Changes in accounting standards
The Group has adopted the new leasing accounting standard in the year, IFRS 16, which has required all former operating leases to now be recognised on the balance sheet as right of use assets and a corresponding liability created for the future payments. The new standard has been adopted from 31 March 2019 under the modified retrospective approach and therefore comparative figures have not been restated. The rental payments for these leases are no longer reported in the Consolidated Income Statement and are replaced by depreciation of the right of use asset and an interest charge on the lease liabilities. Full details of the effects of this change can be found in note 11.
Adjusting items
The directors have highlighted transactions which are material and unrelated to the normal trading activity of the Group.
In the opinion of the directors the disclosure of these entries should be reported separately for a better understanding of the underlying trading performance of the Group. These underlying figures are used by the Board to monitor business performance, form the basis of bonus incentives and are used for the purposes of the bank covenants.
These non-GAAP measures are explained in note 14 alternative performance measures and set out in note 3. All adjusting items are taken into account in the GAAP figures in the Income Statement.
The buy-out of the Group pension scheme was completed in April 2019 and a profit of $0.8m has been recorded in the Income Statement as the final cash refund of surplus of $5.2m, net of tax, was higher than originally expected.
As a result of the outsourcing of manufacturing in the UK, the existing premises were vacated and a sublet was in the process of being completed when the premises flooded in February 2020. Given this issue and the uncertainty over economic conditions as a result of the Coronavirus pandemic it is not known if a sub-let can now be achieved and consequently the right of use asset has been impaired resulting in a further charge in the year of $0.4m. A further provision has been recognised in the year relating to the unavoidable costs associated with the ongoing lease, resulting in a charge of $0.4m.
Acquisition costs on CMS and abortive costs on a further two acquisitions in the year were $0.7m and costs in relation to duty and tariff misdeclarations between 2016 and 2019 which were discovered in TYKMA were $0.3m. Amortisation of the intangible assets acquired through the CMS deal of $0.3m is also included in adjusting items.
In the prior year before the buy-out of the Group pension scheme was completed the trustees undertook a number of exercises to reduce the liabilities of the scheme which had an actuarial cost of $1.28m. Given these had a beneficial effect on the ultimate buy-out cost of the scheme they were supported by the Group. This amount was shown in adjusting items within operating profit in the prior year.
In the prior year a credit of $1.26m was recorded in financial income in respect of the final salary pension scheme. No cash was paid to or received from the scheme in respect of this transaction which arose as a pension accounting entry under the required standard due to the surplus in the scheme recorded in the balance sheet.
In the prior year the carrying value of the amortised cost of the loan notes was re-assessed and a net credit of $0.82m arose in financial income as a result of the extension of these instruments by a further two years. The current year includes amortisation cost of $0.5m as an adjusting item in financial expense.
An amount of $0.5m (2019 $0.96m) has been recorded to reduce the value of the Gamet assets sold in line with proceeds of sale.
Taxation
As a result of adjustments to deferred taxes and taxable losses in the current year there is a credit for taxation of $1.2m (2019 charge of $0.07m) on pre adjusting items profit.
The UK businesses continue to benefit from substantial previous tax losses and no taxation is payable in the UK. There are substantial unrecorded deferred tax assets in the UK that are released onto the balance sheet as existing recorded losses are utilised which will help maintain a lower tax charge. There remains an unrecognised deferred tax asset of over $2m in addition to the recognised asset of $2m in respect of UK tax losses at the year end. The US businesses are subject to Federal taxation on their profits at the rate of 21% but also suffer State taxes which increases their overall composite rate to 25%.
Net profit and earnings per share
The total continuing amount attributable to equity holders of the parent for the current financial year amounted to a profit of $0.6m (2019: $4.2m profit) with pre-adjusting items profit of $2.3m (2019: $4m). The total loss including the effects of the Gamet discontinued operation is $0.4m (2019: profit $3.1m).
Underlying basic earnings from continuing operations before adjusting items and related taxation were 1.97 cents (equivalent to 1.55p) per share (2019: 3.53 cents, equivalent to 2.69p) and basic earnings per share were a profit of 0.51 cents (equivalent to 0.40p) (2019: 3.75 cents profit, equivalent to 2.88p) see note 7.
Financial position and utilisation of resources
Cash flow
Cash generated from operations before working capital movements was $3.1m (2019: $4.8m).
Working capital remains under control and stock levels were unchanged from the prior year despite the acquisition of CMS during the year. Trade receivables and payables decrease reflects the deterioration in trading conditions in the last quarter of the year which was exacerbated by the start of the Coronavirus pandemic.
Interest paid (excluding the effect of lease accounting) reduced slightly to $1.1m (2019: $1.2m) although the largest component of this is fixed, being the interest on the £8.5m ($9.6m) 8% loan notes.
Capital expenditure consisted of the final stages of development work on the upgrading of the industrial laser division proprietary software of $0.4m, demonstration and showroom equipment for the laser business of $0.1m, and machine shop equipment and fixtures to finalise the new European Technology Centre in the UK for $0.3m. The development and fit out expenditure will not repeat and the sale of the Gamet business and outsourcing of manufacturing has significantly reduced future capital expenditure requirements.
The business and asset sale of the discontinued Gamet Bearings operation was concluded in October 2019 with the receipt of $0.45m and the Colchester property sale completed in February 2020 with a further $0.5m of proceeds received.
The $10m consideration for CMS was funded by $4m of the $5.2m of pension scheme refund along with the utilisation of existing credit lines and a new $3.25m 5-year term loan from Bank of America plus the issue of $1m of shares to the CMS founder, Tim Miller, who remains with the business.
Dividends of $1.1m were paid during the year (2019: $1.1m).
Net borrowings
Group net debt at 28 March 2020 excluding lease liabilities is largely unchanged on the prior year at $14.2m (2019 $14.5m)and comprised net bank indebtedness of $4.8m (2019: $5m) and the discounted amount outstanding on the loan notes of $9.4m (2019: $9.5m). The loan notes are shown net of un-amortised discounting and costs and also amounts disclosed in equity reserve which amount to $0.2m in the current financial year (2019: $0.2m).
Working capital facilities totaling $10.6m were renewed with HSBC and Bank of America during the year and are due to be reviewed in the normal course over the next few months and are expected to be continued on the same basis. An additional term loan of $3.25m was taken out to help fund the acquisition of CMS in June 2019. The mortgage on the Gamet building of $0.3m was repaid on the sale of the property in February 2020. The Group maintains a mixture of term loans and revolving working capital facilities with maturities between 1 and 4 years. Headroom on bank facilities was $8.7m at the year-end (2019: $8.7m) and all financial covenants in place were met during the year.
Subsequent to the year end the Group has taken advantage of Government schemes and has received $2.2m of loans across our three USA businesses under the Paycheck Protection Program. These loans may be forgiven dependent on expenditure on certain items and employment numbers with any amount not forgiven repayable as a 2 year loan at 1% interest rate. The UK machine tools business received a $1.5m loan under the Coronavirus Large Business Interruption Loan Scheme with a 3 year bullet repayment in September 2023 and 1.92% interest.
The £8.5m ($9.6m) 8% loan notes maturity was extended to February 2022 at the end of February 2019 and the warrants of equal value to subscribe for new ordinary shares at 20p were similarly extended to the same date.
Gearing (excluding lease accounting) amounted to 50% of aggregate net assets (2019: 49%).
Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement on pages 1 to 2 and the Strategic Report on pages 3 to 9.
The financial position of the Group, liquidity, cash flows and borrowing facilities are described in the Strategic Report. Note 26 to the Financial Statements also sets out the Group's objectives, policies and processes for measuring and managing its capital and financial risk management. Details of its financial instruments, exposure to foreign exchange, credit and interest rate risk is also covered in note 26. Further details on the Group's cash and bank borrowings are included in notes 18,19 and 25 of the financial statements.
The UK bank facilities with HSBC have no specific financial covenants. Trade loans and invoice financing need to be backed by the assets they are funding. There are no covenants in respect of the new Coronavirus Large Business Interruption Loan scheme (CLBILS) taken out in August 2020.The borrowings with Bank of America are subject to adjusted EBITDA to a fixed charge and to senior debt and an overall asset cover test. The short term trade and credit facilities are due to be reviewed over the coming months and are expected to continue in the ordinary course of business on the same terms.
The Director's believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and assumptions, which take account of reasonably possible changes in trading activity and considering the existing banking facilities, including discussion with the Bank of America on the possibility of covenant adjustments should this be required, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months following the date of approval of the financial statements.
The continuing uncertainty of the impact of the Covid-19 pandemic on the Group has been considered as part of the Group's adoption of the going concern basis. Whilst all facilities remain open there are reduced working hours and staffing levels in place in certain areas. Operating costs have been reduced, government employment assistance schemes and government loans have been utilised where available.
As part of their assessment the Directors have considered downside scenarios that reflect the current unprecedented uncertainty in the worldwide markets the Group operates in and which are considered to be severe but plausible. Revenue deductions of 25% against the 2020 financial year and 30% against the pre pandemic 2019 year have been considered against which mitigating actions of headcount reduction, utilisation of government assistance, pay reductions and cash preservation actions including reductions in capital expenditure and deferral of taxation have been applied.
The results of these scenarios show that there is sufficient liquidity in the businesses for a period of at least 12 months from the date of approval of these financial statements. Lenders remain supportive and have indicated a willingness to assist with covenant changes in the event that flexibility may be required in the short term.
In the most severe case where revenue falls are greater than 30% and lenders elect not to provide covenant flexibility, and trigger a repayment of outstanding debt, then without further mitigating actions or additional funding the Group maybe unable to realise assets and discharge liabilities in the normal course of business.
Having undertaken this work, the Directors are of the opinion that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the consolidated financial statements.
Retirement benefits
The UK pension scheme buy-out was completed in late April 2019 and the remaining surplus in the scheme of $8.3m repaid to the Group after deduction of 35% tax with the Group receiving the net $5.2m at the end of May 2019. As a result of the accounting surplus on the UK scheme at 30 March 2019 being $7.5m, a profit on disposal of the pension scheme of $0.8m is recorded in the consolidated income statement in adjusting items and associated taxation of $0.3m is recognised through other comprehensive income.
The US retiree health scheme and pension fund deficits increased slightly to $1.3m (2019: $1.2m).
Key performance indicators (KPI's)
The Group monitors performance against key financial objectives that the Directors judge to be effective in measuring the delivery of strategic aims and managing and controlling the business. These focus at Group level on revenue and underlying operating profit.
At individual business unit level, KPI's also include working capital control, and customer related performance measures such as on-time delivery and minimisation of warranty concerns.
These key performance indicators are measured and reviewed against budget projections and prior year on a regular basis and this enables the business to set and communicate its performance targets and monitor its performance against these targets. Revenue targets are to outperform the market forecasts by 1% (3% market forecast for 2020) and achieve a 10% underlying operating margin target.
The Group's recent performance on these financial KPI's is set out as follows:
KPI
2020
2019
Revenue (annual growth rate)
3.1%
1.9%
Underlying operating margin (% of revenue)
4.1%
8.1%
All figures are pre adjusting items
These KPI's are used to assess performance and manage the business and have been discussed in the strategic report and divisional commentary on pages 3 to 5.
Principal risks
The Board of Directors has identified the main categories of business risk in relation to the implementation of the Group's strategic aims and objectives, and has considered reasonable steps to prevent, mitigate or manage these risks.
Macro-economic - the Group's businesses are active in markets which can be cyclical in nature as the overall level of market demand is dependent upon capital investment intentions. Economic or financial market conditions determine global demand and could adversely affect our customers, distributors, operations, suppliers, and other parties with whom we transact. Such factors as the ongoing Brexit issues and the concerns over a trade war between the USA and China and the Coronavirus pandemic during the financial year are examples of factors which have resulted in changes in demand. The Directors seek to ensure that overall risk is mitigated by avoiding excessive concentration of exposure to any given geographical or industry segment, or to any individual customer. Market conditions, lead indicators and industry forecasts are monitored for any early warning signs of changes in overall market demand, and measures to exploit opportunities or manage elevated risks are taken as appropriate. Key business risks are set out in the strategic review.
Production and supply chain - the continuity of the Group's business activities is dependent upon the cost-effective supply of products for sale from our own facilities, and those of our key vendors. Supply can be disrupted by a variety of factors including raw material shortages, labour disputes and unplanned machine down time. Delays in the shipment of goods as a result of Brexit may affect lead times and create some disruption. In particular, the Directors are mindful that a small number of key manufacturing outsource partners are located in relatively close proximity to each other in Taiwan.
Taiwan is ranked by Gardner Research as the eighth largest producer nation of machine tools, with global production valued at almost US $2.1 billion. Taiwanese suppliers represent approximately one third of the total cost of sales for the Group. Group businesses mitigate such risk by carefully selecting high quality vendors and maintaining long term constructive and open relationships. The effectiveness of such mitigation would be limited, however, in certain catastrophic circumstances (for example, extreme weather or seismic activity in the vicinity), against which the Group carries appropriate insurance. Additionally, supply sources in India have been developed as a consequence and an increasing amount of product is now made in the USA as well.
Laws and regulations - Group businesses may unknowingly fail to comply with all relevant laws and regulations in the countries in which they operate and contract business. There is a risk of breach of legal, safety, environmental or ethical standards which can be more difficult to identify, comprehend, or monitor in certain territories than others. The Directors believe that they have taken all reasonable steps to ensure that operations are conducted to high ethical, environmental and health and safety standards. Controls are in place to keep regulatory and other requirements under careful review, and scrutinise any identified instances of elevated risk.
Information Technology ("IT") - Group IT systems and the information they contain are subject to security risks including the unexpected loss of continuity from virus or other issues, and the deliberate breach of security controls for commercial gain or mischief. Any such occurrences could have a significant detrimental effect on the Group's business activities. These risks are mitigated by the utilisation of physical and embedded security systems, regular back-ups and comprehensive disaster recovery plans.
Market risks
The Group's main exposure to market risk arises from increases in input costs in so far as it is unable to pass them on to customers through price increases. The Group does not undertake any hedging activity in this area and all materials and utilities are purchased in spot markets. The Group seeks to mitigate increases in input costs through a combination of continuous improvement activities to minimise increases in input costs and passing cost increases on to customers, where this is commercially viable.
The Group is also aware of market risk in relation to the dependence upon a relatively small number of key vendors in its supply chain. This risk could manifest in the event of a commercial or natural event leading to reduced or curtailed supply. The Group seeks to mitigate these risks by maintaining transparent and constructive relationships with key vendors, sharing long term plans and forecasts, and encouraging effective disaster recovery planning. Alternative sources of supply in different geographic regions have also been put in place.
Other risks and uncertainties
Pension funding risk was a significant risk to the Group, but this has largely been eliminated by the buy-out of the UK final salary scheme. There remains a small closed pension arrangement in the USA and a requirement to provide health insurance cover to a limited extent to a number of retired people in the USA. The Directors regularly review the performance of the pension scheme and any recovery plan. Proactive steps are taken to identify and implement cost effective activities to mitigate the pension scheme liabilities and insurance premium of the retiree health scheme.
The remaining main risks faced by the Group are to its reputation as a consequence of a significant failure to comply with accepted standards of ethical and environmental behaviour.
The Directors have taken steps to ensure that all of the Group's global operations are conducted to the highest ethical and environmental standards. Regulatory requirements are kept under review, and key suppliers are vetted in order to minimise the risk of the Group being associated with a company that commits a significant breach of applicable regulations.
Neil Carrick
Finance Director
19 November 2020
Consolidated income statement
For the 52-week period ended 28 March 2020
Before
After
Before
After
Adjusting
Adjusting
Adjusting
Adjusting
Adjusting
Adjusting
Items
Items
Items
Items
Items
Items
52 weeks
52 weeks
52 weeks
52 weeks
52 weeks
52 weeks
ended
ended
ended
ended
ended
ended
28 March
28 March
28 March
30 March
30 March
30 March
2020
2020
2020
2019
2019
2019
Notes
$000
$000
$000
$000
$000
$000
Continuing
Revenue
2
67,206
-
67,206
65,167
-
65,167
Cost of sales
(43,491)
(254)
(43,745)
(41,641)
-
(41,641)
Gross profit
23,715
(254)
23,461
23,526
-
23,526
Net operating expenses
(20,988)
(1,742)
(22,730)
(18,269)
(1,786)
(20,055)
Profit on disposal of pension scheme
-
809
809
-
-
-
Operating profit/(loss)
2,727
(1,187)
1,540
5,257
(1,786)
3,471
Financial income
4
5
22
27
35
2,077
2,112
Financial expense
4
(1,664)
(536)
(2,200)
(1,236)
-
(1,236)
Profit/(loss) before tax
1,068
(1,701)
(633)
4,056
291
4,347
Income tax (charge)/credit
5
1,228
-
1,228
(66)
(48)
(114)
Profit for the period on continuing activities
2,296
(1,701)
595
3,990
243
4,233
attributable to equity holders of the parent
Loss on discontinued operations
(417)
(543)
(960)
(146)
(961)
(1,107)
Profit/(loss) for the period attributable to the equity holders of the parent
1,879
(2,244)
(365)
3,844
(718)
3,126
Basic earnings per share - continuing activities
7
1.97c
0.51c
3.53c
3.75c
Diluted earnings per share - continuing activities
7
1.92c
0.50c
3.50c
3.71c
Basic earnings per share
7
1.61c
(0.31c)
3.40c
2.77c
Diluted earnings per share
7
1.57c
(0.31c)
3.37c
2.74c
Company Number 00196730
As explained in note 3, the directors have highlighted adjusting items which are material and unrelated to the normal trading activity of the group. The "before adjusting items" column in the consolidated income statement shows non-GAAP measures. The "after adjusting items" column shows the GAAP measures.
The Group has initially applied IFRS16 using the modified retrospective method. Under this method, the comparative information is not restated. See note 11.
Consolidated statement of comprehensive income
For the 52-week period ended 28 March 2020
52-week
52-week
period ended
period ended
28 March
30 March
2020
2019
Notes
$000
$000
(Loss)/profit for the period
(365)
3,126
Other comprehensive income/(expense)
Items that will not be reclassified to the Income Statement:
Remeasurement of defined benefit asset
(36)
(43,083)
Property revaluation
199
-
Deferred taxation
(282)
15,071
Total items that will not be reclassified to the Income Statement:
(119)
(28,012)
Items that are or may in the future be reclassified to the Income Statement:
Foreign exchange translation differences
(606)
(3,005)
Total items that are or may in the future be reclassified to the Income Statement:
(606)
(3,005)
Other comprehensive expense for the period, net of income tax
(725)
(31,017)
Total comprehensive expense for the period
(1,090)
(27,891)
Attributable to:
Equity holders of the Parent Company
(1,090)
(27,891)
Consolidated statement of financial position
As at 28 March 2020
As at
As at
28 March 2020
30 March 2019
Notes
$000
$000
Non-current assets
Property, plant and equipment
4,060
3,435
Goodwill
13,174
10,329
Other Intangible assets
3,868
1,110
Right of use assets
11
9,060
-
Deferred tax assets
4,415
4,578
34,577
19,452
Current assets
Inventories
19,054
19,030
Trade and other receivables
8
8,084
9,163
Employee Benefits
-
7,459
Taxation
8
222
294
Deferred tax assets
1,148
-
Assets classified as held for sale
-
1,108
Cash and cash equivalents
2,878
948
31,386
38,002
Total assets
65,963
57,454
Non-current liabilities
Employee benefits
(1,261)
(1,239)
Loans and other borrowings
(11,654)
(10,173)
Lease liabilities
11
(8,344)
-
(21,259)
(11,412)
Current liabilities
Trade and other payables
9
(8,298)
(8,095)
Lease liabilities
11
(1,608)
-
Deferred tax liabilities
(236)
(2,541)
Provisions
10
(590)
(447)
Loans and other borrowings
(5,414)
(5,316)
(16,146)
(16,399)
Total liabilities
(37,405)
(27,811)
Net assets
28,558
29,643
Shareholders' equity
Called-up share capital
1,803
1,746
Share premium account
3,828
2,885
Revaluation reserve
1,348
1,149
Equity reserve
201
201
Translation reserve
(7,130)
(6,524)
Retained earnings
28,508
30,186
Total equity
28,558
29,643
Consolidated statement of changes in equity
As at 28 March 2020
Ordinary
Share
share
premium
Revaluation
Translation
Equity
Retained
capital
account
reserve
reserve
reserve
Earnings
Total
$000
$000
$000
$000
$000
$000
$000
At 31 March 2018
1,746
2,885
1,149
(3,519)
201
56,131
58,593
Profit for the period
-
-
-
-
-
3,126
3,126
Other comprehensive income:
Foreign currency translation
-
-
-
(3,005)
-
-
(3,005)
Net defined benefit asset movement
-
-
-
-
-
(43,083)
(43,083)
Deferred tax
-
-
-
-
-
15,071
15,071
Total comprehensive income
-
-
-
(3,005)
-
(24,886)
(27,891)
Transactions with owners:
Dividend
-
-
-
-
-
(1,104)
(1,104)
Credit for share-based payments
-
-
-
-
-
45
45
Total transactions with owners
-
-
-
-
-
(1,059)
(1,059)
At 30 March 2019
1,746
2,885
1,149
(6,524)
201
30,186
29,643
Loss for the period
-
-
-
-
-
(365)
(365)
Other comprehensive income:
Foreign currency translation
-
-
-
(606)
-
-
(606)
Property revaluation
-
-
199
-
-
-
199
Net defined benefit movement
-
-
-
-
-
(36)
(36)
Deferred tax
-
-
-
-
-
(282)
(282)
Total comprehensive income
-
-
199
(606)
-
(683)
(1,090)
Transactions with owners:
Share capital subscribed for
57
943
-
-
-
-
1,000
Dividend
-
-
-
-
-
(1,088)
(1,088)
Credit for share-based payments
-
-
-
-
-
93
93
Total transactions with owners
57
943
-
-
-
(995)
5
At 28 March 2020
1,803
3,828
1,348
(7,130)
201
28,508
28,558
Consolidated cash flow statement
As at 28 March 2020
52-week
52-week
period ended
period ended
28 March 2020
30 March 2019
Notes
$000
$000
Cash flows from operating activities
(Loss)/profit for the period
(365)
3,126
Adjustments for:
Amortisation
325
73
Depreciation
651
540
Depreciation of right of use assets
1,254
-
Net financial expense/(income)
4
2,173
(876)
Non-cash adjusting items
879
2,238
Loss/(profit) on disposal of property, plant and equipment
32
(461)
Loss on assets held for resale
127
-
Profit on disposal of pension fund
(809)
-
Equity share option expense
93
45
Income tax (credit)/expense
5
(1,228)
114
Operating cash flow before changes in working capital and provisions
3,132
4,799
Decrease/(increase) in trade and other receivables
2,587
(451)
Decrease/(increase) in inventories
67
(730)
Decrease in trade and other payables
(973)
(352)
Employee benefits contributions
(78)
(13)
Proceeds from Pension fund disposal
5,213
-
Cash generated by operations
9,948
3,253
Interest paid
(1,141)
(1,236)
Lease interest
(375)
-
Income tax received/(paid)
-
(125)
Net cash flows from operating activities
8,432
1,892
Cash flows used in investing activities
Interest received
5
1
Proceeds from sale of property, plant and equipment
57
514
Proceeds from assets held for sale
926
-
Payment for acquisition of subsidiary, net of cash acquired
15
(6,072)
-
Purchase of property, plant and equipment
(649)
(1,245)
Development and IT software expenditure capitalised
(351)
(1,399)
Proceeds from sale of development expenditure
-
639
Net cash flows used in investing activities
(6,084)
(1,490)
Cash flows used in financing activities
Dividends paid
6
(1,088)
(1,104)
Proceeds from external borrowing
1,928
2
Lease payments
(1,212)
-
Net finance (expenditure)/income
-
59
Net cash flows used in financing activities
(372)
(1,043)
Net increase/(decrease) in cash and cash equivalents
12
1,976
(641)
Cash and cash equivalents at the beginning of the period
948
1,676
Effect of exchange rate fluctuations on cash held
(46)
(87)
Cash and cash equivalents at the end of the period
2,878
948
Notes
1.Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), as adopted for use by the European Union (EU) effective at 28 March 2020, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The Financial information set out in this preliminary announcement does not constitute the company's Consolidated Financial Statements for the financial years ended 28 March 2020 or 30 March 2019 but is derived from those Financial Statements. Statutory Financial Statements for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered following the company's AGM.
The Auditors, BDO LLP, have reported on those financial statements. Their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their reports and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.
The Statutory accounts are available on the Company's website and will be posted to shareholders who have requested a copy and thereafter by request to the company's registered office.
2. Segment information
IFRS 8 - "Operating Segments" requires operating segments to be identified on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance. The chief operating decision maker has been identified as the Executive Directors. The Executive Directors review the Group's internal reporting in order to assess performance and allocate resources.
The Executive Directors consider there to be two continuing operating segments being machine tools and precision engineered components and industrial laser systems.
The Executive Directors assess the performance of the operating segments based on a measure of underlying operating profit/(loss). This measurement basis excludes the effects of adjusting items from the operating segments. "Head Office and unallocated" represent central functions and costs.
The following is an analysis of the Group's revenue and results by reportable segment:
Continuing
52 Weeks ended 28 March 2020
Machine
tools
& precision
engineered
components
Industrial laser systems
Head Office
& unallocated
Total
Discontinued
Segmental analysis of revenue
$000
$000
$000
$000
$000
Group Total
Total revenue
43,511
23,695
-
67,206
830
68,036
o
Segmental analysis of operating profit/(loss) before Adjusting Items
3,216
1,689
(2,178)
2,727
(417)
2,310
Adjusting Items
-
(254)
(933)
(1,187)
(543)
(1,730)
Group operating profit/(loss)
3,216
1,435
(3,111)
1,540
(960)
580
o
Other segmental information:
Reportable segment assets
35,073
14,164
16,726
65,963
-
65,963
Reportable segment liabilities
(18,085)
(6,990)
(12,330)
(37,405)
-
(37,405)
Fixed asset additions
368
330
302
1,000
-
1,000
Depreciation and amortisation
901
883
446
2,230
-
2,230
Continuing
52 Weeks ended 30 March 2019
Machine
tools
& precision
engineered
components
Industrial laser systems
Head Office
& unallocated
Total
Discontinued
Segmental analysis of revenue
$000
$000
$000
$000
$000
Group Total
Total revenue
44,575
20,592
65,167
1,572
66,739
o
Segmental analysis of operating profit/(loss) before Adjusting Items
3,610
2,563
(916)
5,257
(146)
5,111
Adjusting Items
(1,355)
-
(431)
(1,786)
(961)
(2,747)
Group operating profit/(loss)
2,255
2,563
(1,347)
3,471
(1,107)
2,364
o
Other segmental information:
Reportable segment assets
28,126
9,492
18,728
56,346
1,108
57,454
Reportable segment liabilities
(11,131)
(4,496)
(12,184)
(27,811)
-
(27,811)
Fixed asset additions
686
559
-
1,245
-
1,245
Depreciation and amortisation
275
292
46
613
-
613
Inter-segment pricing is determined on an arm's length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.
Disaggregation of revenue is shown by origin, destination and product group in the following two tables:
Disaggregation of revenue by origin
2020
2019
$000
%
$000
%
UK
16,453
24.5
14,249
21.8
North America
48,094
71.6
47,387
72.8
Australasia
2,659
3.9
3,531
5.4
67,206
100.0
65,167
100.0
Disaggregation of revenue by destination:
2020
2019
$000
%
$000
%
Gross sales revenue:
UK
11,500
17.1
9,507
14.6
Other European
5,032
7.5
6,951
10.7
North America (USA)
43,804
65.2
42,534
65.2
Africa
538
0.8
644
1.0
Australasia
2,561
3.8
3,370
5.2
Central America
1,101
1.6
126
0.2
Middle East
1,346
2.0
485
0.7
Far East
1,324
2.0
1,550
2.4
67,206
100.0
65,167
100.0
Disaggregation of revenue by product group:
2020
2019
$000
%
$000
%
Sector
CNC lathes
6,282
9.4
4,761
7.3
Conventional lathes
13,968
20.8
13,941
21.4
CNC other
1,351
2.0
1,209
1.9
Conventional other
9,126
13.6
11,587
17.8
Workholding
6,611
9.8
7,062
10.8
Spares & service
3,120
4.6
5,620
8.6
Lasers
23,263
34.6
19,814
30.4
Laser spares and service
3,485
5.2
1,173
1.8
Total
67,206
100.0
65,167
100.0
Timing of revenue recognition
Products and services transferred at a point in time
57,811
65,167
Products and services transferred over time
9,395
-
Total
67,206
65,167
There are no customers that represent 10% or more of the Group's revenues.
Assets and liabilities related to contracts with customers:
The group has recognised the following assets and liabilities related to contracts with customers.
2020
2019
$000
$000
Current contract liabilities relating to deposits from customers
385
538
2020
2019
$000
$000
Current contract assets relating to amounts due from customers
246
-
Remaining performance obligations
The vast majority of the groups' contracts are for the delivery of goods within the next 12 months for which the practical expedient in paragraph 121(a) of IFRS 15 applies.
The following table shows how much of the revenue recognised in the current reporting year relates to carried forward contract liabilities:
2020
2019
$'000
$'000
Revenue recognised that was included in the contract liability balance at the beginning of the year
538
1,244
3. adjusting ITEMS
The directors have highlighted transactions which are material and unrelated to the normal trading activity of the Group.
In the opinion of the directors the disclosure of these transactions should be reported separately for a better understanding of the underlying trading performance of the Group. These underlying figures are used by the Board to monitor business performance, form the basis of bonus incentives and are used for the purposes of the bank covenants.
These non-GAAP measures are explained in note 14 alternative performance measures and set out below. All adjusting items are taken into account in the GAAP figures in the Income Statement.
The items below correspond to the table below;
a) The buy-out of the Group pension scheme was completed in April 2019 and a profit of $0.8m was recorded as the amount received was higher than the carrying value of the asset previously recognised. During the year ended March 2019 the trustees undertook a number of exercises to reduce the liabilities of the scheme which had an actuarial cost. Given these had a beneficial effect on the ultimate buy out cost of the scheme they were supported by the Group and a charge of $1.28m plus $0.08m of associated legal costs was included as a result of work by the Trustees of the UK pension scheme and the Group in reducing pension liabilities.
b) As a result of the outsourcing of manufacturing in the UK in the prior year, the existing premises were vacated, and a sublet was in the process of negotiation. However due to flooding at the site these negotiations failed to be completed and as a result a right of use asset impairment charge of $0.4m has been recognised in the year, in addition to a provision for associated unavoidable costs, including amortisation and interest under IFRS 16 totaling $0.4m. In the prior year an onerous lease charge of $0.4m was recognised and was subsequently incorporated into the right of use asset impairment on adoption of IFRS 16.
c) A credit of $22K (2019: credit of $1.26m) is recorded in financial income in respect of the final salary pension scheme. No cash was paid to or received from the scheme in respect of this transaction which arises as a pension accounting entry under the required standard due to the surplus in the scheme recorded in the balance sheet.
d) The net adjustment to the carrying value of the amortised loan note costs on their extension in the prior year is shown as a credit of $0.8m in financial income with the corresponding charge of $0.5m for the year shown in financial expense. These are non cash movements and relate to the discounting of the loan notes and associated costs which unwind over the term of the notes.
e) A charge of $0.7m was incurred as a result of the acquisition of Control Micro Systems Inc for legal and professional fees.
f) A charge of $0.3m arose as a result of amortisation of intangible assets acquired through the Control Micro Systems Inc deal.
g) In the prior period a charge of $0.96m has been recorded against the value of the Gamet Bearings assets held for sale to bring their carrying value into line with the expected proceeds of sale, less costs to sell. In the current year a charge has been incurred of $0.5m which included additional costs of the closure of the Gamet business in October 2019 as well as a loss on disposal as a result of receiving less than originally anticipated.
h) A charge of $0.3m was expensed in cost of sales relating to US duty and tariff charges from prior years
Adjusting items
2020
2019
$000
$000
Items included in cost of sales:
US Tariffs & Duty charges relating to prior years (h)
(254)
-
(254)
-
Items included in operating expenses:
Pensions charge (a)
-
(1,277)
Pensions legal costs (a)
-
(78)
Onerous lease provision (b)
-
(431)
Unavoidable lease costs (b)
(378)
-
Right of use asset impairment (b)
(392)
-
Acquisition costs (e)
(684)
-
Amortisation of intangible assets acquired (f)
(288)
-
Profit on sale of pension (a)
809
(933)
(1,786)
Items included in financial (income)/expense:
Pensions interest on surplus (c)
22
1,255
Adjustment to loan notes (d)
-
822
Financial income
22
2,077
Amortisation of Loan notes and costs (d)
(536)
-
Total adjusting items before tax
(1,701)
291
Income tax on adjusting items
-
(48)
Total adjusting items after tax
(1,701)
243
Loss on discontinued activity (g)
(543)
(961)
4. Financial income and expense
2020
2019
$000
$000
Bank and other interest
5
35
Interest on employee benefit surplus
22
1,255
Loan note and net adjustment
-
822
Financial income
27
2,112
Bank overdraft and loan interest
(315)
(236)
Other loan interest
(918)
(948)
Loan note interest
(536)
-
Other finance charges
-
(1)
Finance charges
(12)
(6)
Lease interest
(375)
-
Interest on employee benefit liabilities
(44)
(45)
Financial expense
(2,200)
(1,236)
5. Taxation
2020
$000
2019
$000
Current tax:
- UK Corporation tax at 19% (2019: 19%):
Overseas taxation:
- current period
151
77
Total current tax credit
151
77
Deferred taxation:
- current period
891
92
- effect of rate change in UK
143
-
- prior period
43
(283)
Total deferred taxation credit/(charge)
1,077
(191)
Taxation credited/(charged) to the income statement
1,228
(114)
The rate for deferred tax in UK was changed from 17% to 19% in the current year. The rate for Federal tax in the USA is 21%.
Tax reconciliation
The tax (credit)/charge assessed for the period is higher than (2019: lower than) the standard rate of corporation tax in the UK of 19% (2019: 19%). The differences are explained below:
2020
2019
$000
$000
(Loss)/profit before tax
(633)
4,347
(Loss)/profit before tax multiplied by the standard rate of corporation tax
in the UK of 19% (2019: 19%)
(120)
826
Effects of:
- income not taxable and/or expenses not deductible
68
274
- overseas tax rates
55
14
- pension fund surplus taxed at higher rate
-
3
- US state taxes
60
166
- utilisation of discontinued business losses
(243)
(140)
- deferred tax prior period adjustment
(43)
-
- impact of rate change in the UK on deferred tax
(143)
290
- tax losses utilised not previously recognised
(4)
(912)
- additional deferred tax recognised on losses in the period
(858)
(124)
- R&D claims in the USA (prior periods)
-
(283)
Taxation (credited)/charged to the income statement
(1,228)
114
6. Dividends
No dividends have been proposed this year. In the prior year a final dividend of 0.5p was paid on 30 September 2019 to holders on the register at 30 August 2019.
2020
2019
$000
$000
Final Dividend paid September 2019 (0.5p/share)
725
-
Interim Dividend paid January 2020 (0.25p/share)
363
-
Final Dividend paid September 2018 (0.5p/share)
-
736
Interim Dividend paid December 2018 (0.25p/share)
-
368
Total
1,088
1,104
7. Earnings per share
The calculation of the basic earnings per share of 0.51c (2019: 3.75c) is based on the earnings for the financial period attributable to the Parent Company's shareholders of a profit of $595,000 (2019: $4,233,000) and on the weighted average number of shares in issue during the period of 116,450,053 (2019: 112,973,341). At 28 March 2020, there were 8,400,000 (2019: 7,500,000) potentially dilutive shares on option with a weighted average effect of 2,877,486 (2019: 1.191,415) shares giving a diluted earnings per share of 0.50c (2019: 3.71c).
2020
2019
Weighted average number of shares
Issued shares at start of period
112,973,341
112,973,341
Effect of shares issued in the year
3,476,712
-
Weighted average number of shares at end of period
116,450,053
112,973,341
Weighted average number of the 8,400,000 (2019: 7,500,000) potentially dilutive shares
2,877,486
1,191,415
Total weighted average diluted shares
119,327,539
114,164,756
Total post tax earnings - continuing operations
595
4,233
Total post tax earnings including discontinued operations
(365)
3,126
Basic EPS
0.51c
3.75c
Diluted EPS
0.50c
3.71c
Total including discontinued operations
Basic EPS
(0.31c)
2.77
Diluted EPS
(0.31c)
2.74
Underlying earnings
$000
$000
Total post tax earnings - continuing operations
595
4,233
Adjusting items - per note 3
1,701
(243)
Underlying earnings after tax
2,296
3,990
Underlying basic EPS
1.97c
3.53c
Underlying diluted EPS
1.92c
3.50c
8. Trade and other receivables
2020
2019
$000
$000
Trade receivables
6,153
7,599
Other debtors
772
540
Other prepayments
913
1,024
Contract assets
246
-
8,084
9,163
2020
2019
$000
$000
Taxation
222
294
9. Trade and other payables
2020
2019
$000
$000
Current liabilities:
Trade payables
3,424
4,292
Social security and other taxes
576
199
Other creditors
1,468
1,323
Accruals
2,445
1,743
Contract liabilities
385
538
8,298
8,095
10. Provisions
Unavoidable
lease costs
Onerous lease
Warranties
Dilapidations
Total
$000
$000
$000
$000
$000
Provision carried forward at 30 March 2019
-
429
18
-
447
Exchange differences
-
(23)
(2)
-
(25)
Charged to income statement
378
-
-
-
378
Transferred on adoption of IFRS 16
-
(406)
-
-
(406)
On acquisition of subsidiary
-
-
120
150
270
Utilised in the period
(74)
-
-
-
(74)
Provision carried forward at 28 March 2020
304
-
136
150
590
The timing of warranty payments are uncertain in nature. The warranty provisions are calculated based on historical experience of claims received, taking into account recent sales of items which are covered by warranty. The provision relates mainly to products sold in the last twelve months. The typical warranty period is now twelve months.
Onerous lease provisions
Following the move of the UK business to the new facility in Elland the old premises were in the process of being sub-let when they were flooded and consequently the right of use asset has been fully impaired, the provisions at the year end includes expected unavoidable costs for the remainder of the lease.
11. LEASES
The Group has initially adopted IFRS 16 Leases from 31 March 2019. The effect of initially applying this standard is to increase both the assets and liabilities of the Group through the recognition on the balance sheet of the operating leases in respect of rented properties, plant and machinery and vehicles.
The group has adopted IFRS 16 using the modified retrospective approach from 31 March 2019 and therefore has not restated comparatives for the 2019 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 31 March 2019.
Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 31 March 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 31 March 2019 was 3.69%.
$000
Operating lease commitments disclosed as at 30 March 2019
13,093
Discounted using the lessee's incremental borrowing rate at the date of initial application
(3,328)
Other short term operating leases
(87)
Lease liability recognised as at 31 March 2019
9,678
Of which are:
Current lease liabilities
1,199
Non-current lease liabilities
8,479
Lease liability recognised as at 31 March 2019
9,678
At the date of acquisition CMS held $1.477m of right of use assets, all of which related to building leases.
The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 30 March 2019.
The right of use assets relate to the following asset types:
Plant and
Property
Vehicles
machinery
Total
$000
$000
$000
$000
Cost or valuation
At 30 March 2019
-
-
-
-
Effect on transition to IFRS 16
9,584
27
67
9,678
Exchange differences
(315)
(1)
(1)
(317)
Additions during period
-
76
-
76
Addition on acquisition
1,477
-
-
1,477
At 28 March 2020
10,746
102
66
10,914
Depreciation
At 30 March 2019
-
-
-
-
Effect on transition to IFRS 16
429
-
-
429
Exchange difference
(59)
-
-
(59)
Impairment charged in the period
230
-
-
230
Charge for period
1,177
56
21
1,254
At 28 March 2020
1,777
56
21
1,854
Net book value
At 28 March 2020
8,969
46
45
9,060
At 30 March 2019
-
-
-
-
The lease liabilities at the year-end were as follows:
Current
$000
Non-current
$000
28 March 2020
Total
$000
Lease liabilities
1,608
8,344
9,952
Lease liabilities
1,608
8,344
9,952
During the year lease payments amounted to $1.525m, of which $375K was in respect of interest charges. The undiscounted payments under the leases fall due as follows:
28 March 2020
$000
Up to one year
1,608
One to five years
5,562
Over five years
4,426
Total undiscounted payments due under leases
11,596
The change in accounting policy affected the following items in the balance sheet on 31 March 2019:
31 March 2019
$000
Right of use assets
9,678
Lease liabilities
(9,678)
Net impact upon retained earnings
-
The introduction of IFRS16 did not have an impact upon the Group's recognised deferred tax balances.
Impact on segment disclosures and earnings per share
Adjusted EBITDA, segment assets and segment liabilities for March 2020 all increased as a result of the change in accounting policy. Lease liabilities are now included in segment liabilities. The impact on the segments affected by the change in policy are:
Adjusted EBITDA
$000
Segment assets
$000
Segment liabilities
$000
Machine Tools & Precision Engineered Components
904
7,174
(7,290)
Industrial Laser Systems
430
1,886
(1,925)
Head Office & unallocated
191
-
(601)
Total
1,525
9,060
(9,816)
EBITDA for the period was increased by $1.52m and Basic Earnings per share was reduced by 0.01c for the twelve months to 28 March 2020 as a result of the adoption of IFRS 16. At year end the right of use asset in the Head Office segment had been fully impaired as per note 3.
Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
· the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
· reliance on previous assessments on whether leases are onerous;
· the accounting for operating leases with a remaining lease term of less than 12 months as at 31 March 2019 as short-term leases;
· the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application: and
· the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.
The Group's leasing activities and how these are accounted for.
The Group leases various factories, equipment and cars. Rental contracts are typically made for fixed periods of 3 to 5 years for equipment and 5-15 years for properties. These may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until the 2019 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. From 31 March 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments (where they exist within a lease):
· fixed payments (including in-substance fixed payments), less any lease incentives receivable;
· variable lease payments that are based on an index or a rate;
· amounts expected to be payable by the lessee under residual value guarantees;
· the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
· payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
Right-of-use assets are measured at cost comprising the following:
· the amount of the initial measurement of lease liability;
· any lease payments made at or before the commencement date less any lease incentives received;
· any initial direct costs; and
· restoration costs.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise small items of workshop equipment, office furniture and machines.
12. RECONCILIATION OF NET CASH FLOW TO NET DEBT
2020
2019
$000
$000
(Decrease)/increase in cash and cash equivalents
(952)
(641)
(Increase)/decrease in debt and finance leases
(341)
(61)
(Increase)/decrease in net debt from cash flows
(1,293)
(702)
Net debt at beginning of period
(14,541)
(15,600)
Effect of transition to IFRS 16
(9,755)
-
Cash and debt through acquisition
1,451
-
Loan note credit/(amortisation)
(421)
982
Lease liabilities increase
(74)
-
Exchange effects on net funds
491
779
Net debt at end of period
(24,142)
(14,541)
13. Analysis of net DEBT
At
30 March
Exchange
Effect on transition
o Cash and debt on
At
30 March
2019
movement
to IFRS 16
acquisition
Other
Cash flows
2020
$000
$000
$000
$000
$000
$000
$000
Cash at bank and in hand
818
(39)
-
2,928
-
(952)
2,755
Term deposits (included within cash and cash equivalents on the balance sheet)
130
(7)
-
-
-
123
948
(46)
-
2,928
-
(952)
2,878
Debt due within one year
(5,189)
41
-
-
-
(266)
(5,414)
Debt due after one year
(572)
17
-
-
-
(1,662)
(2,217)
Loan notes due after one year
(9,517)
501
-
-
(421)
-
(9,437)
Finance leases
(211)
-
211
-
-
-
-
Lease liabilities
-
(22)
(9,966)
(1,477)
(74)
1,587
(9,952)
Total
(14,541)
491
(9,755)
1,451
(495)
(1,293)
(24,142)
14. Alternative performance measures
The Directors assess the performance of the Group by a number of measures and frequently present results on an 'underlying' basis, which excludes adjusting items. The Directors believe the use of these 'non-GAAP measures' provide a better understanding of the underlying performance of the Group. In addition, discontinued operations are excluded from underlying figures.
In the review of performance reference is made to 'underlying profit' or 'profit before adjusting items', and in the Consolidated Income Statement the Group's results are analysed between Before adjusting items and After adjusting items.
Adjusting items are detailed in note 3 and are disclosed separately on the basis that this presentation gives a clearer picture of the underlying performance of the group.
These measures are used by the Board to assess performance, form the basis of bonus incentives and are used in the Group's banking covenants. In addition, the Board makes reference to orders and order book or backlog. This represents orders received from customers for goods and services and the amount of such orders not yet fulfilled.
Underlying operating profit
2020
$000
2019
$000
Operating profit
1,540
3,471
Adjusting items included in net operating expenses (see note 3)
1,187
1,786
Underlying operating profit
2,727
5,257
Underlying profit for the period from continuing activities
Profit for the period
595
4,233
Adjusting items included in net operating expenses (see note 3)
1,187
1,786
Adjusting items included in Financial income
(22)
(2,077)
Adjusting items included in Financial expense
536
-
Tax on adjusting items
48
Underlying profit for the period
2,296
3,990
Underlying EPS
A reconciliation of underlying EPS is included in note 7
15. Acquisition of control micro systems inc (cms)
On 21 June 2019, with an effective acquisition date of 1 June 2019, 600 Group PLC acquired the entire issued share capital of Control Micro Systems Inc ("CMS"), a provider of turnkey, custom-designed and fully-automated laser process machines and systems to a diverse base of US and international blue-chip customers across a range of industries, including industry-leading positions in the high-growth precision medical equipment, pharmaceutical and aerospace sectors, for a consideration of $10m, comprising of $9m in cash and $1m of 600 Group plc shares
Details of the purchase consideration, the net assets acquired, and goodwill are as follows:
$000
Purchase consideration
Cash paid
9,000
4,500,000 600 Group plc ordinary shares
1,000
Total purchase consideration
10,000
The assets and liabilities recognised as a result of the acquisition are as follows:
Provisional
Fair value
$000
Cash and cash equivalents
2,928
Cash investment
107
Plant and equipment
675
Customer relationships
2,743
Inventories
556
Trade and other receivables
1,527
Contract assets
138
Right of use assets
1,477
Lease liabilities
(1,477)
Trade and other payables
(524)
Contract liabilities
(457)
Provisions
(270)
Deferred Taxation
(197)
Taxes payable
(71)
Net identifiable assets acquired
7,155
Add: goodwill
2,845
Fair value of consideration paid
10,000
The goodwill is attributable to CMS's assembled workforce and its strong position and profitability in the pharmaceutical, healthcare and aerospace sectors. None of the goodwill is expected to be deductible for tax purposes.
Acquisition-related costs
Acquisition-related costs of $0.7m are included in adjusting items within net operating expenses in the income statement.
Revenue and profit contribution
The acquired business contributed revenues of $7.3m and net profit of $0.44m to the group for the period from 1 June 2019 to 28 March 2020. If the acquisition had occurred on 31 March 2019, it is estimated that consolidated revenue and consolidated profit after tax, on continuing activities, for the year ended 28 March 2020 would have been $68.9m and $0.5m respectively.
16. Post balance sheet events
The freehold property in Brisbane, Australia was sold on 24 October 2020 for $1.6m.
Subsequent to the year end the Group has taken advantage of Government schemes and has received $2.2m of loans across the three USA businesses under the Paycheck Protection Program. These loans may be forgiven dependent on expenditure on certain items and employment numbers with any amount not forgiven repayable as a 2 year loan at 1% interest rate.
The UK machine tools business received a $1.5m loan under the Coronavirus Large Business Interruption Loan Scheme with a 3 year bullet repayment in September 2023 and 1.92% interest.
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