REG - Dialight PLC - Final Results
28/03/2022 07:00
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RNS Number : 1510G Dialight PLC 28 March 2022
Dialight plc ("Dialight" or "the Group")
Full year results 2021
Dialight plc (LSE: DIA.L), the global leader in sustainable LED lighting for
industrial applications, announces its full year results for the year ended 31
December 2021.
Financial summary 2021 2020
£m £m
Revenue 131.6 119.0
Underlying profit (loss) from operating activities 4.5 (6.4)
Profit (loss) from operating activities 2.1 (8.8)
Profit (loss) for the year 0.3 (7.8)
Statutory EPS - basic 0.9p (24.0)p
Net debt (15.7) (11.4)
Key points
· Strong order growth of 24% at constant currency, closing order
book higher
· Revenue up 11% (17% at constant currency) driven by robust MRO
activity, project activity remains subdued although seeing more quoting
activity
· Underlying operating profit of £4.5m, up £10.9m on 2020
· Ongoing robust operational performance, despite headwinds of
cost, material availability and logistical constraints that are expected to
continue
· Net debt at £15.7m reflecting improving EBITDA and inventory
build to maintain uninterrupted supply
· 2022 has started well with a substantial order book and good
pipeline
Fariyal Khanbabi, Group Chief Executive, said:
"We have made a good start to the year, with order intake ahead of the same
period last year and a strong order pipeline. Our expectation for 2022,
despite current headwinds including supply chain constraints and inflation, is
for further strong progress driven by revenue growth and improved margins.
Our products meet the needs of our customers to enhance safety, reduce energy
and maintenance costs and critically will help them achieve net zero carbon.
The market opportunity is substantial and Dialight is well positioned to
deliver its growth strategy."
Full year results presentation
The 2021 full year results presentation can be found at:
http://ir.dialight.com/reports-presentations-and-results/results-presentation/
Contacts:
Dialight plc
Tel: +44 (0)203 058 3542
Fariyal Khanbabi - Group Chief Executive
Clive Jennings - Chief Financial Officer
About Dialight:
Dialight (LSE: DIA.L) is a global leader in sustainable LED lighting
for industrial applications. Dialight's LED products are providing the next
generation of lighting solutions that deliver reduced energy consumption and
create a safer working environment. Our products are specifically designed to
provide superior operational performance, reliability, and durability,
reducing energy consumption and ongoing maintenance, and achieving a rapid
return on investment.
The company is headquartered in the UK, with operations in the USA, UK,
Mexico, Malaysia, Singapore, Australia, Germany and Dubai. To find out more
about Dialight, visit www.dialight.com (http://www.dialight.com/) .
Notes:
1. Net debt excludes lease liabilities under IFRS 16
2. Underlying profit from operating activities and underlying EBIT are
the same measures
3. Constant currency impact is calculated by re-translating the prior
year numbers at the exchange rate prevailing in the current year.
4. Cautionary Statement: This announcement contains certain
statements, statistics and projections that are or may be forward-looking. The
accuracy and completeness of all such statements, including, without
limitation, statements regarding the future financial position, strategy,
projected costs, plans and objectives for the management of future operations
of Dialight plc and its subsidiaries is not warranted or guaranteed. These
statements typically contain words such as 'intends', 'expects',
'anticipated', 'estimates' and words of similar import. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. Although
Dialight plc believes that the expectations will prove to be correct. There
are a number of factors, many of which are beyond the control of Dialight plc,
which could cause actual results and developments to differ materially from
those expressed or implied by such forward-looking statements. This
announcement contains inside information on Dialight plc.
Overview
Dialight made important financial and operational progress in 2021, reflecting
the benefits of our growth model, strong culture and leading position within
the industrial markets. The Group returned to profitability and has taken
steps operationally which should ensure the business can deliver long-term
profitable growth. The strength of our product portfolio and the agility of
our business model enabled us to respond to changing conditions in our end
markets, disruption in the supply chains and labour markets.
Overall orders grew by 24% which reflects some recovery in our end markets and
reclaiming of market share. Orders have run ahead of revenue. We continue to
see a robust MRO market and are starting to see larger projects come online,
despite a backdrop of escalating construction costs which have a dampening
impact. COVID 19 has also brought severe supply chain disruption, driving
significant cost inflation. We navigated these challenges well, adjusting
inventory levels, production and prices proactively. Cost pressures are
expected to continue in the near‐term and we are working hard to offset
these pressures. Due to operating leverage and our operational excellence
initiatives, we expect further operating margin improvement going forward.
Our primary goal remains to accelerate revenue growth across our global
industrial markets. We continue to focus on developing new routes to market as
well as leading the market in innovation. Our next generation of technology is
heavily focused on the sustainability needs of our customers. Our customers
are increasingly seeking more environmentally friendly products to help meet
their net zero commitments. As market leader we are at the forefront of
providing the solutions.
Results
Overall group revenues in 2021 were 17% higher than the prior year at constant
currency (11% higher at reported currency). Revenue growth reflects some
recovery in our end markets but has been impacted by supply chain disruption.
We are pleased to report an Underlying EBIT of £4.5m for 2021 compared to a
loss of £6.4m in 2020. This was driven by increased revenue and gross margins
improving to 36% compared with 2020 where gross margins were 29%. The
improvement in revenue and gross margin resulted in a profit after tax of
£0.3m, compared with a £(7.8)m loss in the prior year, a £8.1m
turnaround.
Lighting gross margins rose to 37% in 2021, showing strong year on year
progress despite the cost pressures in the global supply chain.
Lighting order growth was 23% at constant currency. The majority of Lighting
order growth was generated in our core US market which had an increase of 27%
compared to the prior period. This region has a very solid foundation, with a
well-established channel strategy and a strong sales team. We believe the
US-market remains a significant growth opportunity for Dialight.
Orders in our EMEA business were 2% ahead on a constant currency basis
compared to the prior period. This region continued to be impacted by the
lockdowns and travel restrictions imposed by COVID-19. Our APAC region was 17%
ahead on a constant currency basis, driven by a strong performance in
Australia from the buoyant mining sector.
Included within the Lighting segment is Obstruction which provides marker
lights for communication towers, mainly in North America. This business grew
revenue by 44% in 2021, moved back into profit and saw customer orders up 53%
in a very concentrated end-user market.
Signals & Components is a high-volume business operating within highly
competitive markets. The resurgence of this division that we saw in 2020
continued in 2021 with order growth of 27% at constant currency. Within this
division, opto-electronic component sales were fueled by increased demand in
the electronics market related to home-working. In addition, demand for
Traffic Lighting continued to be strong. Raw material shortages impacted
conversion of orders to revenue, but the division enters 2022 with a strong
order book.
We entered 2022 with an order book higher than usual due to the supply
constraints, but we have been able to achieve Group on-time delivery at 71%,
above current industry standard. The supply constraints are not expected to
significantly improve this year, but we are expecting an improvement in
on-time delivery based on targeted production improvements.
To mitigate the impact of on-going challenges of the availability of raw
materials coupled with extended lead times, we increased our inventory of
critical components by £9.6m at constant currency during 2021. We have
actions underway to reduce underlying stock levels, however, we will continue
to maintain above average raw material and finished good safety stocks until
shipping and lead times for raw materials return to more normal levels.
We remain focused on further improving our operation performance. We
accelerated our manufacturing transformation initiative, improved efficiency
and added capacity for the future. We have continued to invest in our supply
chain development, implementing dual sourcing strategies, localising some key
components and implementing more efficient working practices.
The Group operates with a high level of focus on safety at all sites. The
extensive range of measures to support and ensure our teams' safety continue
to be applied despite many regions lifting COVID-19 restrictions.
Our commitment to product development remains unchanged. We launched two new
major products in 2021. We added the 200 LPW High Bay to our best-selling High
Bay portfolio. This fixture is the ultimate solution for sustainable lighting
for industrial environments, offering a faster return on investment up to a
full year sooner than previous Dialight High Bay models. This best-in-class
fixture will help companies achieve carbon-neutral operation goals faster
while saving money on lighting related energy costs. This product is available
with an adjustable-range microwave occupancy sensor option to activate the
lights only when necessary. Microwave sensors are uniquely suited for
industrial applications, since they can detect movement over and around
obstructions such as boxes, shelving and other barriers that commonly hamper
other sensors. Design improvements helped reduce fixture weight of the
wireless model by up to 57%.
We also launched our new ProSite Flood light for mounting heights of up to 100
feet. This product provides superior visibility to worksites with crisp, near
daylight illumination. The ProSite Flood features Dialight's hallmark
dependability and efficiency in an innovative, compact new design that
provides a brighter, safer and more secure work environment.
We made significant progress in strengthening our sales platform and expanding
multi-channel access to markets. As part of this initiative, we recognised our
current product portfolio covers approximately 80% of a typical customer
lighting schedule. The remaining 20% of the schedule is for products that are
not highly specified but are required to fulfil the customer's applications.
To address this 20%, we are taking a 'Source & Sell' approach. We are
exploring options to purchase these products or partner with companies that
can provide them. This initiative protects our market leading position within
key strategic accounts and increases our relevancy to the large accounts we
are targeting.
Strategy
Dialight's core strengths centre around our products and a long history of
innovation within the industrial lighting markets. Our fixtures meet the needs
of our customers to enhance safety, reduce energy and maintenance costs and
critically, help them achieve the objective of net zero carbon. Our products
also provide the best cost of ownership to industrial customers, with paybacks
based on energy savings and maintenance cost avoidance. Our in-house custom
designed power supply is the key to our market leading 10- year warranty and
field reliability. Our optimised optics ensure improved light illumination,
providing uniformity and quality whilst enabling our customers to use fewer
lights to illuminate the target area. Their integrated design significantly
reduces the burden of installation and maintenance. Our products have the
ability to withstand extreme environmental conditions such as very high or low
temperatures, humidity, high vibration and corrosive environments. The
addition of sensors and controls brings an additional element to the value
proposition for our customers.
Our overall strategy is focused on organic growth supported by product
innovation. We have three key objectives:
• Convert our core heavy and harsh industrial markets - which
has low levels of LED conversion. We believe that sustainability will be a
major driver in the conversion to LED and this has accelerated post COVID-19.
Dialight has a leading position within this space to continue to grow through
market share gains in MRO together with capex project recovery.
• Expand our market reach - by leveraging corporate
sustainability goals and our differentiated products. We have made progress in
identifying and engaging key accounts in addition to developing new routes to
market. This consists of targeting the EPC/engineering firms and electrical
contractors. We are continuing to work on strengthening our branding and
focusing on vertical market applications.
• Product innovation - we continue to lead the market in
innovation. Our next generation of technology is heavily focused on building
on the sustainability needs of our customers, with the goal to have the first
fully recyclable industrial LED lighting fixture. Our source and sell
initiative will further protect our market leading position.
Purpose and sustainability
We are actively working to accelerate the industrial evolution to greener
solutions through our cutting-edge technology. As a company we are committed
to being net zero by 2040. Creating a safer, cleaner, healthier future for
everyone is the cornerstone of our approach to sustainability. We are focused
on ensuring we can continue to serve our markets in a sustainable way over the
long-term. Our products are well positioned to play a positive role in
society, addressing issues which are fundamental to human wellbeing, are
long-term in nature, and of global reach: ensuring safety in industrial
environments while addressing key environmental challenges. We believe that
lighting has a critical role to play in helping businesses' journey to become
net zero.
Our sustainability strategy has dovetailed into our operational ethos and
therefore has not caused a fundamental change of direction. This, coupled with
a business purpose that has always been centred on climate change, means that
it is a natural extension of our existing strategy. Over the past year we
engaged with SBTi, CDP and ISS ESG.
In November 2021, we launched our first ESG Report which outlines some of the
key areas underscoring our approach to Environmental, Social and Governance
issues. This will be prepared annually going forward.
We are rethinking every aspect of our products from material science and
supply chain to product assembly to end of life. Part of this analysis
includes conducting Environmental Product Declaration (EPD) evaluations for
each of our major product lines to identify the carbon footprint of materials
used in our products. This information has already informed our material
choices for our next generation of products. To date we have had nine EPD's
issued covering seven product lines.
We are also concentrating on the end of life of our products and how we
recycle them. This is in two parts: firstly, partnering with companies that
can recycle the product, and secondly using recyclable materials. The level of
recycling that can be achieved varies across recycling processes, but our UK
partner can recycle up to 96% of the components of the fixture. There are no
similar schemes in the Americas or Australia currently, but nonetheless, we
have recycling partners that can process the aluminium in these locations.
Given the long life of our products we expect that this ability will be
enhanced over the coming years and programs like Waste from Electrical and
Electronic Equipment (WEEE) will be introduced globally by the time many of
our long-life fixtures reach end of life.
We performed a full Green House Gas (GHG) inventory for 2021 in addition to
our baseline in 2020. Dialight processes are not very resource hungry
therefore Scope 1 and 2 usage is low compared with Scope 3 customer usage,
upstream materials and logistics. We have a target to reduce Scope 1 & 2
by 3% per annum (per £m of revenue) in the short-term but this will be
superseded by the Net Zero targets that will be agreed with SBTi.
People are at the heart of our business. We recognise that the skill and
commitment of our employees plays a large part in the success of our company,
and we recognise that each person has their own individual contribution to
make. It is through our people that we will progress our strategy and ensure
that we realise the potential for growth. Developing a high performing and
inclusive culture is a key enabler in our ability to deliver strategic growth.
Engaged, motivated, empowered and appropriately skilled employees are integral
to our success. We support all our people by creating a safe, inclusive
environment, where every individual can work and contribute to the development
of the business.
We are very proud of our Dialight Foundation, which was started in June 2020,
a non-profit arm of our company dedicated to helping the communities we
operate within, with a focus on supporting children and women's causes. It is
governed by the Dialight Foundation Board, comprised of employees from around
the globe. This group was carefully selected to bring diverse perspectives
based on a variety of job functions, cultural backgrounds, and charitable
expertise. The overwhelming support from our employees around the world has
made a meaningful difference in the lives of so many and we look forward to
continuing to build on this initiative.
In celebration of Dialight's 50th year of LED-only innovation, the Dialight
Foundation provided a $25,000 donation to the Women's Earth Alliance as the
sole sponsor of their COVID-19 and Climate Relief Program in Tijuana, Mexico.
This area has been hit hard by COVID-19 as well as an influx of vulnerable
asylum seekers looking to cross the border. We were able to provide food and
information to thousands of vulnerable asylum seekers. Additionally, our
donation provided comprehensive support for 67 people so far consisting of
food, shelter, and legal services.
Full year guidance for 2022 and longer term
We have made a good start to the year, with order intake ahead of the same
period last year and a strong order pipeline. Our expectation for 2022,
despite current headwinds including supply chain constraints and inflation, is
for further strong progress driven by revenue growth and improved margins.
Our products meet the needs of our customers to enhance safety, reduce energy
and maintenance costs and critically will help them achieve net zero carbon.
The market opportunity is substantial and Dialight is well positioned to
deliver its growth strategy.
FINANCIAL REVIEW
2021 saw the Group return to profitability with revenue growth of 11% to
£131.6m (17% at constant currency), driven by strong customer demand across
both business segments. The gross profit margin grew by 710bps to 36% and with
strong cost control, the Group delivered a profit from operating activities of
£2.1m, an improvement of £10.9m on the 2020 loss of £(8.8)m. On an
underlying basis the Group delivered £4.5m in EBIT (see note 6 for items
regarded as non-underlying).
The underlying EBIT bridge for the year-on-year movement (in constant
currency) is:
Underlying EBIT bridge £m
Underlying EBIT loss 2020 (6.4)
Revenue increase impact 5.5
Gross margin improvement 9.3
Change in SG&A costs (3.9)
Underlying EBIT 2021 4.5
Increased revenue delivered a £5.5m increase in Underlying EBIT. Gross margin
improvements delivered a £9.3m uplift in EBIT driven by cost reduction
programmes in key Lighting products, continuing benefits from 2020 cost
reductions and operational leverage due to increased production volumes. These
were partly offset by increased freight costs and increases in Mexican
employment costs linked to minimum wage rate rises. Selling, General and
Administrative costs increased as temporary salary reductions in 2020 were
reversed, revenue generating activity increased and bonuses were accrued.
This strong growth and return to profitability were delivered against a
challenging operating environment, with industry-wide component shortages
impacting production and lead times to customers. Customer demand continued to
improve through the year, and our order book at 31 December was double the
2020 year-end level.
Lighting revenue grew by 11% (16% at constant currency), with our core US
market seeing increased levels of project and MRO business. Australia saw
continued strong sales and demand, but EMEA and Asia were particularly
impacted by COVID-19 travel restrictions and customers delaying projects.
Signals & Components performed positively with revenue up 10%, (18% at
constant currency) despite disruptions in the supply chain, driven by strong
demand for opto-electronic product.
Supply chains were challenging in 2021, despite this the Group performed well
operationally. In addition to the continuing disruption from COVID-19 and
government restrictions, global industry-wide shortages of key components
severely impacted our supply chain along with significant increases in
shipping times and availability. In order to safeguard production, the Group
decided to temporarily increase stocks of raw material which contributed the
majority of the £9.6m increase in inventory. As availability improves and
lead times reduce, inventory levels will be reduced to more normal levels.
Net debt increased by £4.3m to £15.7m following the increase in raw material
inventory, with the Group having access to a further £14.1m in undrawn
facilities and £1.2m in cash at 31 December.
Currency impact
Our major trading currency is the US Dollar (77% of revenue) due to the size
of our US business and the use of USD as a contract currency elsewhere in the
world. The Group reports its results in Sterling, and this gives rise to
translational exposures on the consolidation of overseas results.
Transactional exposure is where the currency of sales or purchases differs
from the local functional currency. We use natural hedging on revenue and
purchases to mitigate the majority of the currency risk and forward contracts
on a currency specific basis. The average US Dollar rate against Sterling fell
to 1.38 from 1.28, an adverse impact of 7% whereas the year-end spot rate with
the US Dollar weakened by only 1%.
In constant currency, Group revenue grew by 17% with gross profit up 46%
(versus 11% and 38% at actual rates) but there was no currency impact on
underlying EBIT which grew by £10.9m.
Lighting
Lighting 2021 2020 Variance % 2020 Constant currency variance %
£m £m at constant
currency
£m
Revenue 90.5 81.7 +11% 77.7 +16%
Gross profit 33.7 23.7 +42% 22.7 +48%
Gross profit % 37.2% 29.0% +820bps 29.2% +800bps
Overheads (28.4) (26.8) (6%) (25.4) (12%)
Underlying EBIT 5.3 (3.1) +271% (2.7) +296%
The Lighting segment saw good growth in 2021 with revenue up 11%, despite the
impacts from COVID-19 continuing to be felt across most of our geographies. It
represents 69% of Group revenue, consistent with 2020.
The Lighting business consists of two main revenue streams, large retrofit
projects, and on-going maintenance (MRO) spend. Overall revenue in the US was
up by 23% over the prior year as we continued to gain market share in the MRO
market by demonstrating that our operational issues are behind us. In the US,
H2 saw an increasing number of project orders and customer enquiries but we
are also seeing escalating costs of construction leading to projects being
re-bid, temporarily slowing order intake for us.
The EMEA business remained significantly impacted by lockdowns in Europe but
managed to grow revenue by 2% over the previous year and delivered an
improvement in performance through tight cost control.
Australia has a good combination of MRO and project business and had a
positive year with revenue up 11% over 2020. Whilst it has suffered from
fairly stringent lockdowns for most of 2021, strong relationships with
customers and demand for bulkhead products in the key mining vertical
delivered the revenue growth. Asia, our smallest market, saw revenue decline
by 46% with COVID-19 restrictions making travel very challenging, limiting
access to customers.
There was an 820bps improvement in gross margin year on year to 37%. The
material cost reduction programmes on key product lines, improved factory
efficiency and a full year benefit from 2020 actions were the main drivers,
partially offset by higher freight costs.
Overheads were £1.6m higher than the prior year due to a combination of
revenue related costs, increased travel costs for our large field-based sales
force, bonuses and the reversal of salary reductions and furloughs made in
2020 during the peak of COVID-19.
Signals & Components
Signals & Components 2021 2020 Variance % 2020 Constant currency variance %
£m £m at constant currency
£m
Revenue 41.1 37.3 +10% 34.8 +18%
Gross profit 13.3 10.3 +29% 9.5 +40%
Gross profit % 32.4% 27.6% +480bps 27.3% +510bps
Overheads (7.8) (7.7) (1%) (7.3) (7%)
Underlying EBIT 5.5 2.6 +112% 2.2 +150%
Signals & Components is a high-volume business operating within highly
competitive markets. There are three main elements to this business: traffic
lights, opto-electronic (OE) components and vehicle lights.
This division performed well during 2021 with revenue up 10%. High customer
demand drove OE revenue up 26%, helped by increased sales of new products and
expansion of our distributor footprint. Traffic improved by 13% despite
significant material shortages, especially LEDs and power supplies. Vehicle
grew by only 5%, with a weak bus market suffering from low ridership levels.
With revenue more heavily weighted to the higher margin OE products we saw
gross margin improve by 480bps. With only a marginal increase in overheads,
underlying EBIT profit of £5.5m for the year was over double 2020 and we
enter 2022 with a strong order book.
Central overheads
Central overheads comprise costs that are not directly attributable to a
segment and are shown separately. In the year, they were £6.3m, an increase
of £0.4m as COVID-19 related salary reductions by the Board and senior
managers were reversed and a bonus accrual made following the Group's return
to profitability.
Non-underlying costs
Non-underlying costs 2021 2020
£m £m
Redundancy costs - 0.9
Costs relating to manufacturing partner 2.9 0.3
Loss on disposal of subsidiary - 0.8
Release of warranty provision post sale (0.3) -
Release of litigation provision (0.2) 0.4
Total 2.4 2.4
Cash impact 2.4 1.3
In order to give a full understanding of the Group's performance and aid
comparability between periods, the Group reports certain items as
non-underlying. These are summarised above, and further details are in note 3.
The Group has continued to progress its legal claim against its former
manufacturing partner, Sanmina Corporation, following the termination in
September 2018 of the manufacturing services agreement. During the year, costs
of £2.9m have been expensed, comprising £2.4m of legal costs in preparing
for litigation and a £0.5m provision against slow-moving inventory. This
inventory was acquired at transition and was expected to be used within two
years. This has not proven to be the case and with the cost having been added
to the legal counterclaim against Sanmina during 2021, the Directors have
determined that provision is now appropriate. Further details on the
litigation and contingent liability are provided in note 15.
Release of warranty provision of £0.3m relates to unclaimed warranty related
to the disposal of the Group's Wind business in 2019. The Group has already
received and paid all claims related to this disposal and the remaining
balance of the provision was therefore released.
Other litigation credit related to employment litigation cases, a provision of
£0.4m (see note 7) was released as it was not probable that Group would have
to pay for the claims which was netted off with £0.2m legal cost incurred in
the year relating to the cases.
Prior year redundancy costs of £0.9m related to severance payments for the
various initiatives during the year to right-size the cost base. Costs of
£0.7m relate to legal fees for defending against employment litigation
(£0.4m) and legal costs relating to the legal claim with the former
manufacturing partner (£0.3m). The loss on disposal of subsidiary related to
the sale of the Group's Brazil business in November 2020.
Inventory
Inventory levels grew £9.9m over 2020 (£9.6m at constant currency), driven
by an increased holding of raw materials.
2021 2020
£m £m
Raw materials and sub-assemblies 30.9 19.6
Finished goods 11.2 12.6
Spare parts 0.3 0.3
42.4 32.5
Dialight, in common with many companies, has been impacted by the global
industry-wide commodity shortages as well as increased shipping times for
inbound raw materials and outbound finished goods. Supplier lead times have
increased, and market availability reduced for a number of key components,
including semiconductors, LEDs, and metals. Availability and lead time
uncertainty, compounded by supplier de-commits, led to the decision to
increase the level of raw material holdings in order to safeguard future
production and fulfil the high levels of customer orders being placed.
As commodity availability improves and shipping times normalise, the level of
raw material holdings will be reduced. This is not anticipated to occur for
some time, with further reductions delivered in later years through increased
product and sub-assembly standardisation.
Capital expenditure
During 2021, the Group invested £5.6m in capital expenditure (2020: £4.5m)
with the majority committed to new product development.
New product development expenditure included the new 200LPW Vigilant High Bay,
a new Mid and High Output Floodlight, a new power supply and other
enhancements to our existing product range. Maintenance and improvement
expenditure focused on increasing the production capacity in our factories,
replacing end of life machines, new and upgraded IT hardware and software as
well as carrying out essential health and safety works.
In 2022 the Group is planning to increase the level of maintenance and
expansionary capital expenditure to c. £10m as we complete a number of
improvement projects that are currently underway, continue to increase our
production capacity, replace end of life equipment, and digitise the business.
We expect the increased spend will help to facilitate our multi-year growth.
Cash and borrowings
The Group ended the year with net debt of £15.7m, an increase £4.3m from
December 2020. Net debt excludes lease liabilities related to the adoption of
IFRS 16 Leases, which is consistent with the basis of covenant testing.
The roll forward of net debt was as follows:
Net Debt
£m £m
Opening balance 01 January 2021 (11.4)
Inflows
Underlying EBITDA 11.1
Net working capital excluding inventory 5.4 16.5
Outflows
Increase in inventory (9.6)
Investment in new products (3.5)
Maintenance capex/other (2.3)
Non underlying costs (2.4)
Provisions & other movements (1.2)
Interest Paid (1.4)
FX (0.4) (20.8)
Closing balance at 31 December 2021 (15.7)
The main factors behind the increase in net debt were:
• Increased inventory to mitigate the impact of
global industry-wide commodity shortages and increased shipping times
• Increased capital investment into new product
development, improving factory capacity and maintenance (see earlier capital
expenditure section)
• Payment of warranty claims, previously provided
on the sale of our Wind business
• An increase in trade receivables resulting from
the growth in revenue that is traditionally weighted towards the end of
quarter four
The interest expense of £1.4m is analysed in note 4 and is expected to be at
a similar level in 2022.
Banking
The Group has its banking relationships with HSBC Bank plc and Wells Fargo.
The Group's multicurrency revolving credit facility with HSBC of £25m was due
to expire in February 2023 but has been re-negotiated until March 2025. The
new £25m multi-currency three-year loan has been fully approved and contains
normal covenants, covering maximum net leverage and minimum interest cover
levels. Documentation is ongoing and formal signing is expected in April. In
accordance with the Group's strong ESG commitment, the new facility is a
sustainability linked loan.
The Group increased its banking facility with HSBC on 15 June 2020 by adding a
further £10m facility on a 3-year basis, utilising a combination of £8m
under the COVID-19 Large Business Interruption Scheme (CLBILS) and a £2m
commercial loan. The £10m additional facilities are repayable over 30 months,
in equal instalments, from January 2021. £4m was repaid in the year, with a
further £4m payable in 2022 and the facilities fully repaid by June 2023 at
the latest. At 31 December the Group had £31m of available funds across
both facilities and £1.2m of cash on hand.
Covenants
As part of the additional £10m funding arrangement, the Group's banking
covenants based on leverage and interest cover were replaced by a 12-month
rolling minimum EBITDA test for the periods June 2020 to June 2021 inclusive.
The covenants have now reverted to a maximum leverage and minimum interest
cover level for all facilities, with the £10m facility having an additional
test based on the ratio of adjusted cashflow to debt service. The Group was
fully compliant with all its banking covenants at 31 December 2021 and
throughout 2021.
Tax
Based on a profit before tax of £0.7m in the year, the Group had an effective
tax rate of 57.1% resulting in a tax charge of £0.4m. This was higher than
our normalised rate of 28.6% due to UK trading losses for which we are not
recognising a deferred tax asset and other non-deductible costs, partially
offset by a continued benefit from the Cares Act in the US which allows us to
reclaim £0.4m. The 2022 effective tax rate is expected to be c. 25%.
In the year we paid £0.6m in corporation tax on operations in Australia and
Malaysia.
Pension costs
The Group has two defined benefit schemes that are closed to new entrants. The
aggregate surplus on both schemes is £3.9m, an increase of £2.7m from 31
December 2020. The increase is the result of actuarial gains from changes in
demographic and financial assumptions, as well as investment returns being
higher than expected and cash contributions. The cash cost of the scheme in
2021 was £0.4m (2020: £0.4m) as agreed with the Trustees following the 2019
valuation. The next valuation is due in April 2022 and, once this is
completed, cash contribution levels will be re-negotiated.
Capital management and dividend
The Board's policy is to have a strong capital base in order to maintain
customer, investor, and creditor confidence and to sustain future development
of the business. The Board considers consolidated total equity as capital. At
31 December 2021 this equated to £60.2m (2020: £57.3m).
The emphasis in 2021 was on profitably growing revenue and maintaining
availability of component supplies during a period of global industry-wide
commodity shortages, which has led to the higher-than-normal level of
inventory. Distributions are not permitted under the terms of the CLBILS
facility whilst there is debt outstanding, with the last repayment due in June
2023. Therefore, the Board is not proposing a final dividend payment for 2021
(2020: nil). The Group has a clear capital allocation discipline and is
committed to returning excess funds to shareholders via future dividend or
share repurchase.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2021
2021 2020
Note £'m £'m
Revenue 2 131.6 119.0
Cost of sales 3 (84.6) (85.0)
Gross profit 47.0 34.0
Distribution costs (21.3) (20.8)
Administrative expenses 3 (23.6) (22.0)
Profit/(loss) from operating activities 2.1 (8.8)
Underlying profit/(loss) from operating activities 3 4.5 (6.4)
Non-underlying items 3 (2.4) (2.4)
Profit/(loss) from operating activities 2.1 (8.8)
Financial expense 4 (1.4) (1.3)
Profit/(loss) before tax 0.7 (10.1)
Taxation 5 (0.4) 2.3
Profit/(loss) for the year 0.3 (7.8)
Profit/(loss) for the year attributable to:
Equity owners of the Company 0.1 (7.9)
Non-controlling Interests 0.2 0.1
Profit/(loss) for the year 0.3 (7.8)
Profit/(loss) per share
Basic 6 0.9p (24.0)p
Diluted 6 0.9p (24.0)p
The accompanying notes are extracted from the financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2021
2021 2020
Note £'m £'m
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations 0.7 (1.8)
Income tax on exchange difference on translation of foreign operations - (0.3)
0.7 (2.1)
Items that will not be reclassified subsequently to profit and loss
Remeasurement of defined benefit pension liability 2.5 (1.3)
Income tax on remeasurement of defined benefit pension liability 5 (0.5) 0.3
2.0 (1.0)
Other comprehensive income/(expense) for the year, net of tax 2.7 (3.1)
Profit/loss for the year 0.3 (7.8)
Total comprehensive income/(expense) for the year 3.0 (10.9)
Attributable to:
- Owners of the parent 2.8 (11.0)
- Non-controlling interest 0.2 0.1
Total comprehensive income/(expense) for the year 3.0 (10.9)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2021
Share Merger Translation Capital Own Shares Retained Total Non- Total
capital reserve reserve redemption earnings controlling Equity
reserve interests
£'m £'m £'m £'m £'m £'m £'m £'m £'m
Balance at 1 January 2021 0.6 0.5 9.3 2.2 - 44.3 56.9 0.4 57.3
Profit for the year - - - - - 0.1 0.1 0.2 0.3
Other comprehensive income:
Foreign exchange translation differences, net of taxes - - 0.7 - - - 0.7 - 0.7
Remeasurement of defined benefit pension liability, net of taxes - - - - - 2.0 2.0 -
2.0
Total other comprehensive income - - 0.7 - - 2.0 2.7 - 2.7
Total comprehensive income for the year - - 0.7 - - 2.1 2.8 0.2 3.0
Transactions with owners, recorded directly in equity:
Share-based payments - - - - - 0.6 0.6 - 0.6
Re-purchase of own shares - - - - (0.7) - (0.7) - (0.7)
Total transactions with owners - - - - (0.7) 0.6 (0.1) - (0.1)
Balance at 31 December 2021 0.6 0.5 10.0 2.2 (0.7) 47.0 59.6 0.6 60.2
Share Merger Translation Capital Own Shares Retained Total Non- Total
capital reserve reserve redemption earnings controlling Equity
reserve interests
£'m £'m £'m £'m £'m £'m £'m £'m £'m
Balance at 1 January 2020 0.6 0.5 11.6 2.2 - 52.6 67.5 0.3 67.8
Loss for the year - - - - - (7.9) (7.9) 0.1 (7.8)
Other comprehensive (expense)/income:
Foreign exchange translation differences, net of taxes - - (2.1) - - - (2.1) - (2.1)
Remeasurement of defined benefit pension liability, net of taxes - - (0.2) - - 0.2 - - -
Total other comprehensive (expense)/income - - - - - (1.0) (1.0) -
(1.0)
Total comprehensive (expense)/income for the year - - (2.3) - - (0.8) (3.1) - (3.1)
Transfer of merger reserve on disposal of business - - (2.3) - - (8.7) (11.0) 0.1 (10.9)
Transactions with owners, recorded directly in equity:
Share-based payments - - - - - 0.4 0.4 - 0.4
Total transactions with owners - - - - - 0.4 0.4 - 0.4
Balance at 31 December 2020 0.6 0.5 9.3 2.2 - 44.3 56.9 0.4 57.3
CONSOLIDATED STATEMENT OF TOTAL FINANCIAL POSITION
at 31 December 2021
2021 2020
Notes £'m £'m
Assets
Property, plant and equipment 12.0 12.8
Right of use assets 11.3 9.8
Intangible assets 21.4 21.2
Deferred tax assets 1.3 1.4
Employee benefits 3.9 1.1
Other receivables 4.7 5.0
Total non-current assets 54.6 51.3
Inventories 8 42.4 32.5
Trade and other receivables 26.2 19.9
Income tax recoverable 1.2 1.0
Cash and cash equivalents 10 1.2 5.3
Total current assets 71.0 58.7
Total assets 125.6 110.0
Liabilities
Trade and other payables (32.9) (21.5)
Provisions 7 (0.6) (1.5)
Tax liabilities (1.7) (1.5)
Lease liabilities (1.2) (1.4)
Borrowings 11 (4.0) (4.0)
Total current liabilities (40.4) (29.9)
Provisions 7 (1.3) (1.2)
Borrowings 11 (12.9) (12.7)
Lease liabilities (10.8) (8.9)
Total non-current liabilities (25.0) (22.8)
Total liabilities (65.4) (52.7)
Net assets 60.2 57.3
Equity
Issued share capital 0.6 0.6
Merger reserve 0.5 0.5
Other reserves 11.5 11.5
Retained earnings 47.0 44.3
59.6 56.9
Non-controlling interests 0.6 0.4
Total equity 60.2 57.3
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2021
2021 2020
Notes £'m £'m
Operating activities
Profit/(loss) for the year 0.3 (7.8)
Adjustments for:
Financial expense 4 1.4 1.3
Income tax expense/(credit) 5 0.4 (2.3)
Share-based payments 0.6 0.4
Depreciation of property, plant and equipment 3.1 3.1
Depreciation of right of use assets 2.2 2.0
Amortisation of intangible assets 3.5 3.0
Impairment losses on intangible assets - 0.3
Loss on disposal of business 3 - 1.1
Operating cash flow before movements in working capital 11.5 1.1
(Increase)/decrease in inventories (9.6) 12.6
(Increase)/decrease in trade and other receivables (5.8) 2.7
Increase/(decrease) in trade and other payables 11.1 (6.3)
(Decrease)/increase in provisions 7 (0.8) 0.5
Pension contributions in excess of the income statement charge (0.4) (0.1)
Cash generated by operations 6.0 10.5
Income taxes (paid)/received (0.6) 2.9
Interest paid(2) 4 (1.4) (1.3)
Net cash generated by operations 4.0 12.1
Investing activities
Capital expenditure (2.1) (0.8)
Capitalised expenditure on development costs (3.2) (3.4)
Purchase of software and licenses (0.3) (0.3)
Net cash used in investing activities (5.6) (4.5)
Financing activities
Drawdown of bank facility 11 4.2 10.0
Repayment of bank facility 11 (4.2) (10.3)
Re-purchase of own shares (0.7) -
Repayment of lease liabilities(1) (1.7) (1.7)
Net cash outflow from financing activities (2.2) (2.0)
Net (decrease)/increase in cash and cash equivalents (3.8) 5.6
Cash and cash equivalents at beginning of year 10 5.3 0.5
Effect of exchange rates (0.3) (0.8)
Cash and cash equivalents at end of year 10 1.2 5.3
The Group has classified:
1. cash payments for the
principal portion of lease payments as financing activities.
2. cash payments for the
interest portion of lease payments as operating activities consistent with the
presentation of interest payments chosen by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2021 (Audited)
1. Basis of preparation and principal accounting policies
(a) Statement of compliance
"The consolidated financial statements have been prepared in accordance with
UK-adopted International Accounting Standards in conformity with the
requirements of the Companies Act 2006. The Company has elected to present its
parent company financial statements in accordance with FRS 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland".
The financial information for the year ended 31 December 2020 and 2021 is
derived from the statutory accounts for 2020 (which has been delivered to the
Registrar of Companies) and 2021 (which will be delivered to the Registrar of
Companies following the AGM in May 2022). The auditors have reported on the
2020 and 2021 accounts; their report was unqualified and did not contain a
statement under Sections 498(2) or 498(3) of the Companies Act 2006. For both
statutory accounts of 2020 and 2021, the auditor's report does not include any
audit emphasis of matter.
Whilst the financial information included in this statement has been compiled
in accordance with the recognition and measurement principles of applicable
IFRS, this statement does not itself contain sufficient information to comply
with IFRS. Full Financial Statements that comply with IFRS are included in the
2021 Annual Report; these will be available to shareholders via the Group
website in March 2022.
(b) Consolidated basis of preparation
The uncertainty as to the future impact on the financial performance and cash
flows of the Group from the ongoing COVID-19 pandemic and worldwide supply
chain issues have been considered as part of the Group's adoption of the going
concern basis in the preparation of the consolidated financial statements. The
consolidated financial statements are prepared on a going concern basis which
the Directors believe to be appropriate for the reasons stated below.
The Group's multicurrency revolving credit facility with HSBC of £25m was due
to expire in February 2023 but has been re-negotiated until March 2025. The
new £25m multi-currency three-year loan has been fully approved and contains
normal covenants, covering maximum net leverage and minimum interest cover
levels. Documentation is ongoing and formal signing is expected in April. In
accordance with the Group's strong ESG commitment, the new facility is a
sustainability linked loan.
The Group increased its banking facility with HSBC on 15 June 2020 by adding a
further £10m facility on a three-year basis, utilising a combination of £8m
under the COVID-19 Large Business Interruption Scheme (CLBILS) and a £2m
commercial loan. The £10m additional facilities are repayable over 30 months,
in equal instalments, from January 2021. £4m was repaid in the year, with a
further £4m payable in 2022 and the facilities fully repaid by June 2023 at
the latest. At 31 December the Group had £31m of available funds across both
facilities and £1.2m of cash on hand.
Further details, including the relevant covenant tests, are included in note
11.
In assessing the going concern assumptions, the Directors have prepared
various scenarios that reflect the continuing impact of COVID-19, world-wide
commodity shortages, extended logistics delays, government enforced
restrictions in the countries we operate in, the extent to which performance
is recovering as these restrictions lift and the associated forecast outturns
alongside identified downside risks and mitigating actions. The Group has
modelled two main scenarios in its assessment of going concern, being the base
case and a downside scenario. We have modelled future financial performance
taking into account these restrictions, mitigations, expected inventory
unwind not materialising and a negative outcome from ongoing litigation as
per note 15.
Base case
The base case is derived from the Board approved 2022 budget and strategic
plan, which assume, consistent with current trading patterns, that our
factories continue to have "essential business" status and operate as normal.
In this scenario, the Directors consider that the Group will continue to
operate within its available committed facilities with sufficient headroom and
meet its financial covenant obligations.
The key assumptions in the base case include:
• Lighting growth consistent with 2021 driven by a strong level of
project-based activity
• gross margin reflects levels consistent with the final quarter of
2021; and
• operating costs flexed in line with the incremental revenue
Downside case
In a severe but plausible downside scenario, the Directors have assumed
continuing adverse impacts from a prolonged global pandemic with severe impact
to our customers, suppliers and operations. The associated forecast has
considered the following identified downside risks:
• Significantly lower revenue growth in 2022 as compared to 2021, with
lower growth in 2023 and 2024 reverting to normal levels but from a lower base
• Gross margin reductions ranging from 1.9% to 2.9% over the three
years
• Only 75% of the targeted inventory unwind is achieved in 2022
• Litigation by the former manufacturing partner is settled at the
maximum liability of their claim and the Dialight claim for damages in excess
of £190m is unsuccessful
In all these scenarios, the Group assumes a series of mitigating actions can
be put in place swiftly, including various temporary and permanent cost and
cash reductions.
In this severe but plausible downside scenario, the Group continues to retain
sufficient committed headroom on liquidity and is able to meet its financial
covenant obligations within the going concern assessment period. It has also
been assumed that no additional debt is raised during the assessment period.
Consequently, the Directors are confident that the Group and Company will have
sufficient funds to continue to meet their liabilities as they fall due for at
least 12 months from the date of approval of the financial statements and
therefore have prepared the financial statements on a going concern basis.
(c) Use of estimates, judgements and assumptions
The preparation of the consolidated financial statements requires management
to make judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses.
These estimates, judgements and assumptions are based on historical experience
and other factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates. The areas which require the
most use of management estimation and judgement are set out below.
Significant judgements
Development and patent costs
The Group capitalises development costs and patent costs provided they meet
all criteria in the respective accounting policy. Costs are only capitalised
when management applies judgement that they are satisfied as to the ultimate
commercial viability of the projects based on review of the relevant business
case. The capitalised costs are amortised over the expected useful economic
life, which is determined based on the reasonable commercial prospects of the
product and a comparison to similar products being sold by the Group.
The Group has £12.0m (2020: £11.9m) of development and patent costs that
relate to the current product portfolio and new products expected to launch
over the next one to two years. Within this cost, there is £1.1m relating to
development projects which have been paused during COVID-19 where the
Engineering team were redeployed to focus on inventory projects to consume raw
materials on hand to help the business mitigate the global supply chain
challenges. This project will recommence in the current financial year with
the objective of concluding it in 2023 with product launch. All of the
development projects are within the Lighting CGU and are tested for impairment
at the CGU level as part of the goodwill testing. However, management also
performs a review of each individual project to see if there are any
indications of specific impairment by comparing the carrying amount of the
asset with the net present value derived from the Board approved three-year
strategic plan.
Significant estimates
Inventory reserve - Raw Materials and Sub-Assemblies
Consistent with last year, the Group adopts a usage-based approach in
calculating its inventory provision. COVID-19 and global commodity shortages
have significantly impacted our operations, logistics and supply chains over
the past year and therefore the approach to identify inventory at risk has
been flexed to consider the impact from these factors. Management's focus
has been on inventory that is over 365 days old.
Raw materials and sub-assemblies are reserved if the quantity on hand, that is
greater than 365 days old, exceeds three year's historical usage and,
following review by engineering and supply chain personnel, there is no
reasonable prospect of the components being used or their shelf life not being
exceeded. Three years is felt to be appropriate at this time as: recent usage
has been depressed following the economic impacts from COVID-19; the majority
of components have a long shelf life; product demand mix between project and
MRO business has been skewed; and new products or upgrades have been delayed.
Raw material and sub-assembly inventory consists of a large number of Stock
Keeping Units ("SKUs") of varying value. Assessment of every at-risk SKU would
be impractical, and the reserve has therefore been determined by assessing the
nature, usability and condition for a range of at-risk SKUs that represent a
significant population of the inventory at risk. The result from this
assessment was then used to determine a reserve percentage that was applied to
the remaining population, with the combination of these calculations
determining the total reserve required.
The provision element that relates to raw material and sub-assembly items
greater than 365 days old is £2.2m and represents 43% of that specific aged
category of Inventory.
Inventory reserve - Finished goods
The review of finished goods inventory was based on all inventory over 365
days old. Inventory on hand was compared to historical sales, current orders,
sales pipeline and whether the product had been recently launched. Management
judgement was then applied to determine whether there was a reasonable
probability that the inventory would be sold, with a provision being required
for any inventory that failed this assessment.
The value of provision for all categories of inventory over which judgement
has been exercised was £3.0m (2020: £2.4m) and this represents 7% (2020: 7%)
of the gross inventory value.
Details of the inventory reserve are set out in note 8.
Inventory-absorbed overhead costs
The valuation of inventory, detailed in note 8, requires the use of estimates
in the amount of costs to be absorbed into inventory valuation. There are two
elements of cost over which estimates are applied.
Firstly, in relation to the amount of production overheads that are included
in the inventory valuation. The pools of cost related to production comprise
labour and direct overheads attributable to the production process. They are
assessed to ensure that costs not related to production are excluded.
Consistent with last year, the Group uses the weighted average inventory turns
calculated by comparing the level of inventory on hand with the amount of
production by month. This gives the number of days of overhead that should be
absorbed in inventory. The value of directly attributable costs over which
judgement was exercised was £5.0m (2020: £4.3m) and this represents 12%
(2020: 13%) of the inventory value. For every day that the estimate of the
days used for the overheads absorbed changes, it changes the calculation by
£14k.
Secondly, in relation to the amount of freight costs that are included in the
inventory valuation. The costs represent transportation costs for raw
materials and the labour cost of the buyers placing the orders. The cost is
absorbed into inventory by comparing the level of inventory on hand with the
amount of material costs in the cost of sales. This gives the number of days
of freight costs that are capitalised. Costs of transporting finished goods
to distribution centres on a global basis are included in the inventory
valuation until the associated finished goods have been sold outside the
Group.
The value of freight costs over which judgement was exercised was £3.1m
(2020: £2.2m) and this represents 7% (2020: 7%) of the inventory value. For
every day that the estimate of the days used for the overhead absorbed
changes, it changes the calculation by £62k.
Goodwill and other intangible assets
The Group tests at least annually whether goodwill has suffered any impairment
in accordance with the accounting policy. The recoverable amounts of the
Group's cash-generating units (CGU) have been determined based on value in use
calculations, which involve a high level of estimation due to the uncertainty
caused by COVID-19 and potential material shortages due to delays in the
supply chain. These calculations require the use of estimates and assumptions
consistent with the Board approved 2022 budget and the strategic plan for the
following two years.
In undertaking the assessment, the potential net impact of climate change on
the forecasts has been considered. Considering the Group's business model,
strategy and exposure, the opportunities overcome the risk and the majority of
the risk relates to ability to cope with accelerated product demand and has
been reflected in our forecast.
(d) Adoption of new and revised standard/ interpretations and amendments
The following accounting standards, interpretations, improvements and
amendments have become applicable for the current period and although the
Group have adopted them, they have had no material impact on the Group. These
comprise:
Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS
7, IFRS 4 and IFRS 16).
The following amendments to standards and interpretations have also been
issued, but are not yet effective and have not been early adopted for the
financial year ended 31 December 2021:
· IFRS 17 Insurance Contracts. (Effective day 1 January 2023);
· Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendment to IAS 12). (Effective from 1 January 2023);
· Onerous Contracts - Cost of Fulfilling a Contract (Amendment to
IAS 37). The current effective day is 1 January 2021. This is not expected to
be applicable to the Group. (Effective from 1 January 2023);
· Annual Improvements to IFRS Standards 2018-2020. (Effective from
1 January 2023);
· Property, Plant and Equipment: Proceeds Before Intended Use
(Amendments to IAS 16). (Effective from 1 January 2023);
· Reference to the Conceptual Framework (Amendments to IFRS 3).
(Effective from 1 January 2023);
· Classification of Liabilities as Current and Non-current
(Amendment to IAS 1). (Deferred until not earlier than 1 January 2024);
· Accounting Policies, Changes in Accounting Estimates and Errors:
definition (Amendments to AIS 8). (Effective from 1 January 2023);
· Amendments to IAS1 Presentation of Financial Statements and IFRS
Practice Statement 2 Making Materiality Judgments. (Effective from 1 January
2023);
· Sale or Contribution of Assets between an Investor and its
Associate or Joint venture (Amendments to IFRS 10 and IAS 28).
The adoption of these amendments is not expected to have a material impact on
the Group.
2. Operating segments
The Group has two reportable operating segments. These segments have been
identified based on the internal information that is supplied regularly to the
Group's chief operating decision maker for the purposes of assessing
performance and allocating resources. The chief operating decision maker is
considered to be the Group Chief Executive Officer.
The two reportable operating segments are:
- Lighting, which develops, manufactures and supplies highly efficient
LED lighting solutions for hazardous and industrial applications in which
lighting performance is critical and includes anti-collision obstruction
lighting; and
- Signals & Components, which develops, manufactures and supplies
status indication components for electronics OEMs, together with niche
industrial and automotive electronic components and highly efficient LED
signaling solutions for the traffic and signals markets.
There is no inter-segment revenue and there are no individual customers that
represent more than 10% of revenue.
All revenue relates to the sale of goods. Segment gross profit is revenue less
the costs of materials, labour, production and freight that are directly
attributable to a segment. Overheads comprise operations management, selling
costs plus corporate costs, which includes share‑based payments.
Segmental assets and liabilities are not reported internally and are therefore
not presented below.
Reportable segments
2021 Lighting Signals and Components Unallocated Total
£'m £'m £'m £'m
Revenue 90.5 41.1 _ 131.6
Gross profit 33.7 13.3 - 47
Overhead costs (28.4) (7.8) (6.3) (42.5)
Underlying profit/(loss) from operating activities 5.3 5.5 (6.3) 4.5
Non-underlying items (2.4) - - (2.4)
Profit/(loss) from operating activities 2.9 5.5 (6.3) 2.1
Financial expense (1.4)
Profit before tax 0.7
Taxation (0.4)
Profit after tax 0.3
2020 Lighting Signals and Components Unallocated Total
£'m £'m £'m £'m
Revenue 81.7 37.3 _ 119.0
Gross profit 23.7 10.3 - 34.0
Overhead costs (26.8) (7.7) (5.9) (40.4)
Underlying (loss)/profit from operating activities (3.1) 2.6 (5.9) (6.4)
Non-underlying items (2.4) - - (2.4)
(Loss)/profit from operating activities (5.5) 2.6 (5.9) (8.8)
Financial expense (1.3)
Loss before tax (10.1)
Taxation 2.3
Loss after tax (7.8)
Other segmental data
2021 2020
Lighting Signal & components Total Lighting Signals & components Total
£'m £'m £'m £'m £'m £'m
Depreciation of property, plant and equipment 2.1 1.0 3.1 2.1 1.0 3.1
Depreciation of right of use assets 1.5 0.7 2.2 1.4 0.6 2.0
Amortisation 2.4 1.1 3.5 2.1 0.9 3.0
Impairment of intangible assets - - - 0.3 - 0.3
Geographical segments
The Lighting and Signals & Components segments are managed on a worldwide
basis, but operate in three principal geographic areas, North America, EMEA
and Rest of World. The following table provides an analysis of the Group's
sales by geographical market, irrespective of the origin of the goods. All
revenue relates to the sale of goods.
Sales revenue by geographical market
2021 2020
£'m £'m
North America 101.0 89.8
EMEA 10.2 9.9
Rest of World 20.4 19.3
Total sales revenue 131.6 119.0
3. Non-underlying items
Statutory operating profit includes the following non-underlying costs which
are separately disclosed to allow the reader to obtain a full understanding of
the financial information and the best indication of the underlying
performance of the Group. The table below presents the components of
non-underlying profit or loss recorded within cost of sales and administrative
expenses.
2021 2020
£'m £'m
Non-underlying items:
Redundancy costs - 0.9
Loss on disposal of subsidiary - 0.8
Costs related to manufacturing partner 2.9 0.3
Release of warranty provision (0.3) -
Release of litigation provision (0.2) 0.4
Non-underlying items recorded in administrative expenses 2.4 2.4
The Group has continued to progress its legal claim against its former
manufacturing partner, Sanmina Corporation, following the termination in
September 2018 of the manufacturing services agreement. During the year, costs
of £2.9m have been expensed, comprising £2.4m of legal costs in preparing
for litigation and a £0.5m provision against slow-moving inventory. This
inventory was acquired at transition and was expected to be used within two
years. This has not proved to be the case and with the cost having been added
to the legal counterclaim against Sanmina during 2021, the Directors have
determined that provision is now appropriate. Further details on the
litigation and contingent liability are provided in note 15.
Release of warranty provision of £0.3m relates to unclaimed warranty related
to the disposal of the Group's Wind business in 2019. The Group has already
received and paid all claims related to this disposal and the remaining
balance of the provision was therefore released.
Other litigation credit related to employment litigation cases, a provision of
£0.4m (see note 7) were released as it was not probable that Group would have
to pay for the claims which was netted off with £0.2m legal cost incurred in
the year relating to the cases.
Prior year redundancy costs of £0.9m related to severance payments for the
various initiatives during the year to right-size the cost base. Costs of
£0.7m relate to legal fees for defending against employment litigation
(£0.4m) and legal costs relating to the legal claim with the former
manufacturing partner (£0.3m).
The loss on disposal of subsidiary related to the sale of the Group's Brazil
business in November 2020.
In 2020, the net assets and the net loss on disposal of Dialight Do Brasil
Technologia Led Ltda were as follows:
2020
£'m
Current assets 1.4
Current liabilities (0.6)
Net assets of the business disposed of 0.8
Loss on disposal of the business (1.1)
Total consideration paid (0.3)
Satisfied by:
Foreign translation (0.2)
Other disposal costs (0.1)
Total (0.3)
4. Financial expense
2021 2020
£'m £'m
Net interest on defined benefit liability 0.1 0.1
Interest expense on financial liabilities, except lease liabilities 0.8 0.6
Interest expense on lease liabilities 0.5 0.6
Net financing expense recognised in the consolidated income statement 1.4 1.3
5. Taxation
2021 2020
£'m £'m
Current tax expense
Current year 1.3 0.3
Adjustment for prior years (0.6) (2.9)
Total current tax 0.7 (2.6)
Deferred tax expense
Origination and reversal of temporary differences 0.1 (0.9)
Adjustment for prior years (0.4) 1.2
Total deferred tax (0.3) 0.3
Total tax expense/(credit) 0.4 (2.3)
Reconciliation of effective tax rate
2021 2021 2020 2020
% £'m % £'m
Profit/(loss) for the year 0.3 (7.8)
Total tax charge/(credit) 0.4 (2.3)
Profit/(loss) before tax 0.7 (10.1)
Income tax using the UK corporation tax rate (19.0) 0.1 (19.0) (1.9)
Non-deductible loss on disposal of a business - - 1.0 0.1
Effect of higher taxes on overseas earnings 43.0 0.3 - -
Reduction in tax rate - - (1.0) (0.1)
Non-deductible expenses 28.6 0.2 1.9 0.2
Current year losses for which no deferred tax is recognised 57.1 0.4 9.9 1.0
US carry back claim (43.0) (0.3) (12.5) (1.3)
Adjustment for prior years (88.3) (0.6) (4.0) (0.4)
Research and development credits (28.6) (0.2) (1.0) (0.1)
Foreign taxes incurred 69.3 0.5 1.9 0.2
57.1 0.4 (22.8) (2.3)
The effective tax rate for the year is 57.1% compared with 22.8% in the prior
year and the standard rate of 19% (2020: 19.0%) in the UK.
The normalised tax rate for the Group in the year is 28.6% (tax rate before
adjustments) and based on a pre-tax profit of £0.7m this would generate a tax
charge of £0.2m. However, in the year there is a tax charge of £0.4m
(57.1%). The difference of 28.5% is due to the following major factors:
· The current losses in the European Lighting business not
recognised as a deferred tax asset, resulting in £0.4m of tax credit not
being recognised in the year. We do not anticipate this business making
sufficient taxable profits in the short-term to utilise the losses;
· The Group has benefited from the stimulus package under the CARES
Act in the US which allows us to get tax relief by carrying back losses made
in 2020 for 5 years. This allows the Group to benefit from tax recovery at 35%
rather than the current rate of 21% that was used to calculate the recoverable
amount in 2020 and this gives rise to a one-off tax credit of £0.3m
· A prior year adjustment of £0.6m relating to additional research
and development credit in the US
· A non-deductible expense of £0.2m on non-underlying expenses
relating to the Sanmina litigation which is not allowed as a taxable expense
· The foreign tax incurred of £0.5m relates to taxes payable in
Mexico on profits by a Mexican subsidiary of Dialight Corporation
Tax charge/(credit) recognised directly in equity
2021 2020
£'m £'m
Employee benefits 0.5 (0.3)
Other (0.1) 0.3
Current tax
Current tax is calculated with reference to the profit or loss of the Company
and its subsidiaries in their respective countries of operation. Set out
below are details in respect of the significant jurisdictions where the Group
operates and the factors that influenced the current and deferred taxation in
those jurisdictions.
UK
The UK companies are subject to a corporate tax rate of 19% (2020: 19.0%).
There are no UK timing differences recognised at 31 December 2021. In the
March 2021 Budget, the UK Government announced that legislation will be
introduced in the Finance Bill 2021 to increase the main rate of UK
corporation tax from 19% to 25%, effective 1 April 2023.
US
The majority of the Group's profits arise in the US where the corporation tax
rate is 24%, including 21% federal tax and 3 % state tax (2020: 24%. including
21% federal tax and 3% state tax).
Group
The majority of the Group's profits are driven by the US entity where the tax
rate is 24% underpinning the Group's tax rate, which has increased as a result
of the higher mix of profits coming from high tax jurisdictions.
6. Earnings/(loss) per share
Basic earnings/(loss) per share
The calculation of basic earnings/(loss) per share ("EPS") at 31 December 2021
was based on a profit for the year of £0.3m (2020: £7.8m loss) and the
weighted average number of ordinary shares outstanding during the year of
32,393,109 (2020: 32,555,137).
Weighted average number of ordinary shares
2021 2020
'000 '000
Weighted average number of ordinary shares 32,393 32,555
2021 2020
Basic earnings/(loss) per share 0.9p (24.0)p
Diluted earnings/(loss) per share
The calculation of diluted EPS at 31 December 2021 was based on a profit for
the year of £0.3m and the weighted average number of dilluted ordinary shares
during the year of 32,803,606 (2020: 32,555,137), excluding the purchase of
205,026 own shares by the Group during the year.
Weighted average number of ordinary shares
2021 2020
'000 '000
Weighted average number of ordinary shares 32,804 32,555
2021 2020
Diluted earnings/(loss) per share 0.9p (24.0)p
7. Provisions
Warranty Lease-restoration Total
and claims £'m £'m
£'m
Balance at 1 January 2.5 0.2 2.7
2021
Provisions made during the 1.1 - 1.1
year
Provisions used during the year (1.2) _ (1.2)
Provisions released during the year (0.7) - (0.7)
Effects of foreign exchange movement - - -
Balance at 31 December 1.7 0.2 1.9
2021
The warranty provision relates to sales made over the past eight years. In the
previous year, the provision also included other claims across the Group,
which were either utilised or released (see note 3). The warranty provision
has been estimated based on historical warranty data with similar products.
The Group expects to settle the majority of the liability over the next two to
three years.
The table below provides a breakdown of the provisions into their short-term
and long-term portions:
2021 2020
£'m £'m
Due within one year 0.6 1.5
Due within one and five years 1.1 1.1
Due after five years 0.2 0.1
1.9 2.7
8. Inventories
2021 2020
£'m £'m
Raw materials and consumables 22.2 13.5
Work in progress 8.7 6.1
Finished goods 11.2 12.6
42.1 32.2
Spare parts 0.3 0.3
42.4 32.5
Inventories to the value of £55.8m (2020: £56.3m) were recognised as
expenses in the year. The inventory reserve at the balance sheet date was
£3.0m, which represents 7.0% of inventory (2020: £2.4m representing 7.0% of
inventory). The reserve was increased by £1.5m in the year with utilisation
of £0.9m, resulting in the net increase of the reserve of £0.6m.
As at 31 December 2021, management's best estimate of the amount of inventory
that will not be used within the next 12 months is circa £3.8m (2020:
£4.0m).
Last year, the Group changed from an age-based reserve calculation to a
usage-based calculation. A similar approach has been followed this year, that
considers the significant impact that global commodity shortages have had on
our operations and the logistics and supply chain. The approach revised the
basis of calculation for the inventory reserve to focus on usage (historical)
for raw materials and sub-assemblies plus any finished goods over 365 days.
The level of inventory was increased by £9.9m in 2021 driven by management
decisions to increase raw material holdings. The Group has been impacted by
the well-publicised global commodity shortages as well as increased shipping
times for inbound raw materials and outbound finished goods to its
subsidiaries in EMEA and Australia.
Supplier lead times have increased, and market availability reduced for a
number of key components, including semiconductors, LEDs, and metals.
Availability and lead time uncertainty, compounded by supplier de-commits, led
to the decision to increase the level of raw material holdings in order to
safeguard future production and fulfil the high levels of customer orders
being placed.
9. Dividends
There were no dividends declared or paid in the 12 months ended 31 December
2021 or 31 December 2020.
10. Cash and cash equivalents
2021 2020
£'m £'m
Cash and cash equivalents 1.2 5.3
11. Borrowings
The Group's multicurrency revolving credit facility with HSBC of £25m was due
to expire in February 2023 but has been re-negotiated until March 2025. The
new £25m multi-currency three-year loan has been fully approved and contains
normal covenants, covering maximum net leverage and minimum interest cover
levels. Documentation is ongoing and formal signing is expected in April. In
accordance with the Group's strong ESG commitment, the new facility is a
sustainability linked loan.
The Group increased its banking facility with HSBC on 15 June 2020 by adding a
further £10m facility on a three-year basis, utilising a combination of £8m
under the COVID-19 Large Business Interruption Scheme (CLBILS) and a £2m
commercial loan. The £10m additional facilities are repayable over 30 months,
in equal instalments, from January 2021. £4m was repaid in the year, with a
further £4m payable in 2022 and the facilities fully repaid by June 2023 at
the latest. At 31 December the Group had £31m of available funds across both
facilities and £1.2m of cash on hand.
Loans
£'m
At 1 January 2020 17.0
Facility drawdown (CLBILS) 10.0
Facility repayment (RCF) (10.3)
At 31 December 2020 16.7
Facility drawdown (RCF) 4.2
Facility repayment (CLBILS) (4.0)
At 31 December 2021 16.9
Details of the facilities Tenure Interest rate per annum* Maturity date Amount Amount drawn 31 December 2019
drawn 31
December 2020
Years % £'m £'m
£25m revolving credit facility 3 2.37 March 2025 10.9 6.7
£8m CLBILS 3 2.13 June 2023(+) 4.8 8.0
£2m commercial loan 3 2.30 June 2023(+) 1.2 2.0
(+) This loan will be repaid in equal installments over 3 years, repayment
started on the 15th January 2021
* This is an indicative rate as at December 2021.
As part of the facility, the original banking covenants of net debt to EBITDA
ratio and interest cover were replaced by a new test based on exceeding a
12-month rolling EBITDA level that was derived from a COVID impacted business
plan as agreed with HSBC, for the testing periods of June 2020 to June 2021.
Covenant test For Q1-21 For Q2-21 For Q3-21 onwards
Ratio Calculation Threshold Threshold Threshold
Leverage ratio Net debt/Adjusted EBITDA n/a n/a <3.0x
EBITDA level Rolling 12-month EBITDA (1.1) (3.8) n/a
Interest cover Adjusted EBIDTA/Interest expense n/a n/a >4.0x
Debt service ratio* Net operating income/Total debt service n/a n/a >1.2
* The debt service ratio does not apply to the revolving credit
facility and the Group was fully compliant with its banking covenants at 31
December and throughout 2021.
12. Principal exchange rates
2021 2021 2020 2020
Average rate At balance sheet date Average rate At balance sheet date
US Dollar 1.38 1.35 1.28 1.36
Euro 1.16 1.19 1.12 1.11
Canadian Dollar 1.72 1.72 1.72 1.74
Mexican Peso 27.88 27.64 27.51 27.14
13. Related party transactions
The ultimate controlling party of the Group is Dialight plc. Transactions
between the Company and its subsidiaries have been eliminated on
consolidation.
14. Reconciliation to non-GAAP performance measures
2021 2020
£'m £'m
Profit/(loss) from operating activities 2.1 (8.8)
Non-underlying items (see note 3) 2.4 2.4
Underlying profit/(loss) from operating activities 4.5 (6.4)
2.1 (8.8)
Profit/(loss) from operating activities
Non-underlying items (see note 3) 2.4 2.4
Depreciation of property, plant and equipment 3.1 3.1
Amortisation of intangible assets 3.5 3.0
Underlying EBITDA 11.1 (0.3)
Profit/(loss) from operating activities 2.1 (8.8)
Non-underlying items (see note 3) 2.4 2.4
Depreciation of property, plant and equipment 3.1 3.1
Amortisation of intangible assets 3.5 3.0
Share based payments 0.6 0.4
Net movement on working capital (Inventories, trade and other receivables, (4.3) 9.0
trade and other payables) as per Consolidated statement of cash flows
Underlying operating cash flow 7.4 9.1
Underlying profit from operating activities and underlying EBIT are the same
measures. Underlying operating cash flow and adjusted operating cash flow are
the same measures.
Constant Currency
The Group's revenues are mainly earned in the US, and it presents certain key
metrics on a constant currency basis to remove any impact of currency
fluctuations. The Group uses GBP based constant currency models to measure
performance. These are calculated by restating the results of the Group for
the comparable year at the same average exchange rates as those used in
reported results for the current year.
This gives a GBP denominated income statement, which excludes any variances
attributable to foreign exchange rate movements. The most important foreign
currencies for the Group are: Pounds Sterling, Euro, Canadian Dollar and
Mexican Peso. The exchange rates used are in note 12.
Net debt
Net debt is defined as total Group borrowings less cash. Net debt of £15.7m
at the year-end (2020: £11.4m) consisted of borrowings of £16.9m (2020:
£16.7m) less cash of £1.2m (2020: £5.3m).
15. Contingencies
Sanmina litigation
As previously reported, we have sought to reach a negotiated conclusion of
various outstanding matters following the termination of the manufacturing
services agreement with our former manufacturing partner, Sanmina Corporation.
On 20th December 2019, both parties issued legal proceedings against the
other. The parties are therefore in formal litigation, with no conclusion
expected before the end of 2022 at the earliest. The basis of the claim filed
by Sanmina Corporation relates to outstanding invoices and to residual
inventory, which they allege that they purchased for Dialight. The claim filed
by Dialight is more complex in nature and relates to significant costs and
losses suffered as a direct consequence of Sanmina Corporation not performing
in accordance with the terms of the manufacturing services agreement. The
Group has sought external legal advice and is paying for the legal costs as
incurred. As at 31 December 2021, the Group has not made any provision for
future legal costs.
The claim filed by Dialight alleges that Dialight suffered significant costs
and losses with total damages exceeding £190m suffered as a result of: (a)
Sanmina's fraudulent inducement of Dialight to enter into a manufacturing
services agreement (MSA); (b) Sanmina breaching the terms of the MSA in a
willful and/or grossly negligent manner (for example in respect of their
failure to appropriately manage supply chain and inventory levels and to
deliver product on time and free of workmanship defects); and, (c) Sanmina's
gross negligence and/or willful misconduct. In the event that Sanmina's claim
is successful, the range of outcomes could be £0 - £8.9m, excluding legal
costs.
Defined benefit pension schemes
During 2011, the Roxboro UK Pension Fund (the "Scheme") was closed to future
accrual. This Scheme is included within pension assets. As part of the
negotiations regarding closure, the Company agreed to grant a parent company
guarantee in respect of all present and future obligations and liabilities
(whether actual or contingent and whether owed jointly or severally and in any
capacity whatsoever) of Dialight Europe Limited, the principal employer, to
make payments in the Scheme up to a maximum amount equal to the entire
aggregate liability, on the date on which any liability under the guarantee
arises, of every employer (within the meaning set out in Section 318 of the
Pensions Act 2004 and regulations made thereunder) in relation to the Scheme,
were a debt under Section 75(2) of the Pensions Act 1995 to have become due on
that date. No provision has been made in relation to this contingency.
Uncertainties under income tax treatment
The Group operates in certain jurisdictions that are unstable or have changing
political conditions, giving rise to occasional uncertainty over the tax
treatment of items of income and expense. In addition, from time to time
certain tax positions taken by the Group are challenged by the relevant tax
authorities, which carry a financial risk as to the final outcome. The
Directors have considered the potential impact arising from these
uncertainties and risks on the Group's tax assets and liabilities, both
recognised and unrecognised, and believe that they are not material to the
Financial Statements.
Employee claims
The Group has received two claims from former employees in France and, whilst
recognising the inherent risks of employee-related litigation in France, the
Directors believe that these two claims are without merit and will be robustly
defended and are not considered likely to result in any material outflow of
funds from the Group.
16. Principal and emerging risks and uncertainties
The Board is responsible for identifying the nature and extent of the risks
the Group has to manage in order to successfully pursue its growth strategy
and generate shareholder value over the long term.
The Board uses a risk framework, which is designed to support the process for
identifying, evaluating and managing both financial and non-financial risk.
The Group has identified the following key risks. This is not an exhaustive
list but rather a list of the most material risks facing the Group. The impact
of these risks, individually or collectively, could potentially affect the
ability of the Group to operate profitably and generate positive cash flows in
the medium to long term. As a result, these risks are actively monitored and
managed, as detailed below.
· Organic growth - The risk of stagnation of growth where the
product portfolio is not renewed, where there is any failure to identify
customer requirements (including pricing sensitivity and economic models), and
the risk of concentration of certain verticals and/or geographical markets.
· Environmental and geological - The Group's main manufacturing
centre is in Mexico and its main market is North America. Any impediment to
raw materials getting into Mexico or restrictions on finished goods entering
North America related to natural disasters could have a large impact on
profitability. Disruption to global markets and transport systems arising from
geological, biological, or environmental events may impact the
Group's ability to operate and the demand for its products.
· Funding - The Group has a net debt position and there is a risk
related to liquidity. The Group has not paid a dividend since 2015. The Group
reports in Sterling; however, the majority of its revenues and
its cost base are in US Dollars. Fluctuations in exchange rates between
Sterling and US Dollar could cause profit and balance sheet volatility.
· Production capacity and supply chain - The Group operates a
complex international supply chain (both inbound and outbound) which can be
impacted by a range of risk factors including political disruption, border
frictions, logistics challenges and other compliance issues. Supply chain
challenges can in turn impact production capacity and efficiency - as well as
other factors including investment in capacity, labour-supply issues and costs
of production.
· Cyber and data systems - Disruption to business systems would
have an adverse impact on the Group. The Group also needs to ensure the
protection and integrity of its data. With the Group's dispersed international
footprint and increased homeworking following COVID-19 there is greater risk
of impact on IT infrastructure/communications between employees.
· Product development strategy --Inability to translate market
requirements into profitable products.
Failure to deliver technologically advanced products and to react to
disruptive technologies.
· Product risk - The Group gives a 10-year warranty on Lighting
products which are installed in a variety of high-risk environments. Risks
could arise in relation to product failure and harm to individuals and damage
to property.
· Talent and diversity - The Group performance is dependent on
attracting and retaining high-quality staff across all functions.
· Intellectual property - Theft or violation of intellectual
property ("IPR") by third parties or third parties taking legal action
for IPR infringement.
· Geo-political / macro-economic impacts - The Group faces a range
of external geo-political, socio-political and macro-economic risks which,
after a period of relative calm in global markets, have recently emerged as
significant potential disruptors.
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