REG - Dialight PLC - Final Results
27/03/2023 07:00
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RNS Number : 2326U Dialight PLC 27 March 2023
Dialight plc
("Dialight" the "Company" or the "Group")
Unaudited preliminary results for the year ended 31 December 2022
Dialight plc (LSE: DIA.L), the global leader in sustainable LED lighting for
industrial applications,
announces its unaudited preliminary results for the year ended 31 December
2022.
Financial summary 2022 2021
£m £m
Revenue 169.7 131.6
Underlying profit from operating activities 5.0 4.5
Profit from operating activities 2.3 2.1
Profit after tax 0.4 0.3
Statutory EPS - diluted 1.2p 0.9p
Adjusted EPS* - diluted 7.3p 6.4p
Pre-IFRS16 Net debt (20.9) (15.7)
Key points
· Overall Group revenues in 2022 were 29% higher than the prior year
(17% at constant currency):
· Lighting revenues up 34%, with orders up 23%
· Underlying operating profit increased to £5.0m (2021: £4.5m),
which was lower than initially expected due to weaker orders in the very
important December trading period
· Gross margin fell to 32.2%, reflecting significant cost inflation
and supply chain disruption (2021: 35.7%)
· Net debt of £20.9m (1.7x LTM EBITDA), driven by higher inventory
levels
Fariyal Khanbabi, Group Chief Executive, said:
"We made important strategic progress which was reflected in significant sales
growth driven by strong demand for our sustainable lighting products. However,
the markets we operate within became increasingly difficult during the year
due to significant price inflation and continued global supply chain
disruptions, which impacted our gross margins. Whilst these headwinds remain,
we believe that they are in most cases transitory, and we expect to see some
alleviation in H2 2023.
The strong growth in Lighting orders demonstrates the increasing relevance of
our products as energy efficiency became more urgent. We deliver innovative
and sustainable lighting solutions to our customers and continue to make
progress towards driving our impact on the environment and society."
*Adjusted earnings excludes non-underlying items (see note 3) and allocates
tax at the appropriate rate (see note 5)
Full year results presentation
The 2022 full year results presentation can be found at:
https://www.dialight.com/ir/reports-news/
(https://www.dialight.com/ir/reports-news/)
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
We made important strategic and operational progress during the year,
achieving revenue growth of 29% against exceptionally challenging market
conditions, increasing our penetration of Tier 1 customer accounts and making
over £3.0m of operating cost savings. Total revenue growth at constant
currency was 17%, achieved through a combination of volume (11%) and price
(6%) increases. The volume growth reflecting both an increase in market share,
as well as expanding our market reach. The Maintenance, Repair and Operations
(MRO) market remains generally robust, but we experienced a slowing of larger
capex projects, particularly in the fourth quarter, owing to labour and
material shortages. Combined with the distribution channel reducing their
inventory levels, this had a significant impact on the final month of trading.
Positively, the structural demand for our products continued to increase as
energy efficiency became a higher priority agenda item for businesses,
accelerated by the energy crisis which commenced during 2022. This
strengthened our competitive position as we executed on our strategic
priorities. We developed innovative and sustainable new lighting solutions for
our customers and continued to make progress towards driving a more positive
impact on the environment and society.
Results
Overall Group revenues in 2022 were 29% higher than the prior year (17%
constant currency). Underlying operating profit was £5.0m, compared to £4.5m
in 2021, which was lower than initially expected, due to weaker orders and
deliveries in the very important December trading period.
Gross margin reduced to 32.2% (from 35.7%) reflecting a number of headwinds
during the year. Our supply chain was severely impacted by significant
inflation, component shortages and continued challenges in shipping times and
cost. Microchip availability was particularly problematic as suppliers
struggled to deliver either on time or in the required volumes. We focused
considerable resources to sourcing and testing alternative components and
suppliers, which enabled us to successfully overcome shortages, albeit this
impacted gross margin. The impact of increased material costs and expedited
freight costs accounted for 4.3% of the reduction in gross margins.
Our gross margins were further impacted by increases in the minimum wage in
Mexico of 23%. There were also inefficiencies in our labour utilisation due to
the component shortages. This impacted gross margin by 0.9%.
Our operational performance during 2022 made key improvements despite supply
chain headwinds. We were able to partially offset the increased material
and labour costs by generating 1.8% of production efficiencies. These were
generated by reduction in consumables, standardisation in our packaging and
investments in automation. Our on-time delivery was 77%, above the current
industry standard, and we achieved customer lead times of three weeks,
supporting our revenue growth.
Lighting order growth in 2022 was 23% (constant currency 11%) with all regions
reporting growth over the prior year. The majority of Lighting order growth
was generated in our core US market which increased by 30% (constant currency
17%), with EMEA increasing by 53% (constant currency 38%). APAC increased by
7% (constant currency -3%). Obstruction orders fell by 28% (constant currency
-35%) as higher steel prices led to lower levels of tower construction.
Signals & Components is a high-volume business operating within highly
competitive markets. This business segment had exceptional growth during
COVID-19 but has since normalised. Within this division, opto-electronic
component orders fell by 13% as the market reduced the level of inventory in
the channel. After two years of growth, a market correction was expected, but
the level of cancellations in Q4 were higher than forecast.
As a result of the supply chain shortages, we increased our inventory to
mitigate the challenges we faced. We have taken a number of actions in the
second half of the year to reduce the levels of raw materials held, which has
resulted in raw material inventory levels being broadly flat year on year and
9% down on a constant currency basis.
Market conditions
We operate within the industrial LED lighting market and our future will be
determined by the trends within this space. The advances we have seen over the
last ten years in terms of efficiencies and controls are all building a path
to a more sustainable fixture. Older technologies have become more expensive
to maintain while LED fixtures use 75% less energy and last 25 times longer,
compared with HPS/fluorescent lighting. In the US alone there are more than
144 million industrial lighting fixtures in 455,000 facilities. With existing
industrial carbon emissions in the US estimated at c. 2 billion metric tonnes
per annum, high-efficiency LED lighting provides an immediate and sustainable
reduction in emissions. That is a compelling proposition when companies and
global economies are mapping their pathway to achieve their net zero targets.
The macro-economic backdrop presents considerable uncertainty, and we continue
to take an active approach to targeting market niches with more resilient
demand dynamics and where growth is driven by structural, safety, regulatory
and sustainability factors.
The Group's natural resource markets in oil & gas and mining are expected
to show solid demand in the short to medium term. Global energy market
shortages have seen an expansion in oil extraction activity, with US onshore
drilling up 60% year over year, and with three times the number of rigs in
service from two years ago. Mining customers are benefitting from the demand
for Lithium and Nickel in battery production, which should benefit our
customers in Australia.
The Group is also seeing increasing success, led by the strategic sales team,
in expanding its customer base into a wider range of process industries
including aerospace, electric vehicle and food & beverage. Facilities in
these markets can be very significant and often have demanding operational
requirements which lend themselves to Dialight's highly engineered lighting
product range.
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 their corporate objectives of being carbon net
zero. 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 underpinned by product
innovation. We have three key objectives:
• Convert our core heavy and harsh industrial markets -- by
expanding our routes to market, emphasising our product innovations and
sustainability credentials. We believe that sustainability will be a major
driver in the conversion to LED and this has accelerated post COVID-19 with a
return to corporate discretionary spend. Dialight will continue to grow its
leading position through market share gains in MRO together with capex
projects as the market recovers.
We continue to identify and successfully engage with new key accounts through
our strategic sales team. In particular, increased targeting of
EPC/engineering firms and electrical contractors. We are continuing to work on
strengthening our branding and focusing on vertical market applications, with
good progress made during the year.
· Improve margins - through continued cost improvements and
manufacturing efficiency programmes supported by supply chain development. By
reducing the cost, weight, and size of our products we can improve our
competitiveness and improve our overall margins. Over the past two years, we
have successfully reduced the cost of our High Bay, 60K High Bay and Area
Lights. Besides design-based cost reductions, we believe there are further
cost reductions through strategic supply chain sourcing and value-added
engineering to improve our manufacturing processes.
·
We are also focused on simplification of our products in order to reduce costs
and improve lead times. At the start of 2022, Dialight had 8,800 active
finished good SKUs, and approximately 64,000 active components. Our
initiatives over the past year have been to remove legacy finished SKUs from
the database to simplify operational planning. We have standardised
components within our product lines to reduce the complexity of sub-assembly
management. At the end of 2022 we had reduced the active finished goods SKUs
by 24%. Following on from standardising our mainstream Vigilant High Bay in
2021 we continued with the hazardous version resulting in 99% of our highest
running product family being upgraded to the third-generation power supply.
During the year we have also upgraded 92% of our Area Light family to our
third-generation power supply.
We are dual sourcing components to mitigate the risk of component shortfalls
which significantly impact on operational efficiency. Out of our total active
components, 588 are deemed to be critical in nature. To date we have dual
sourced 248 parts with 340 remaining. We will continue to develop alternate
sources and vendors for critical components and regionalise supply of
components where possible, using VMI and consignment stocks. In conjunction
with our dual sourcing plan, we will develop and implement a regionalisation
strategy to reduce the business risk directly related to sourcing from the Far
East. While these challenges are expected to continue for some time, we will
continue to mitigate their impact.
These actions will support the achievement of our targeted £5m reduction in
inventory in 2023, with further inventory reductions expected in later years.
Our focus will continue to be on further improvements in efficiency and
mitigation of increasing labour costs. We plan to automate our sub-assembly
operations which will improve our efficiency and cost base over time.
• 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 address the 20% of the customer lighting schedule that is not
highly specified. This initiative protects our market leading position with
key strategic accounts and increases our relevancy to the large accounts we
are targeting.
Strategy execution in 2022
Organic growth remains a key focus, both in terms of penetrating the MRO
market, but more importantly delivering significant capex projects as end
customers increase their expenditure on lighting over the longer term. This
encompasses three strands:
Strategic sales focus
The new strategic sales team are focused on building relationships with key
large corporates, primarily in the US. This is a longer-term activity
particularly focused on new customers, so prospects will take time to develop
into initial orders and then gain preferred supplier status. The team has
already won several multi-million-dollar orders for major US corporates. There
is a sizeable pipeline of opportunities, however predicting when these orders
will come is challenging in the current economic climate. To date we have
secured 11 strategic accounts with whom we are the preferred supplier.
Expanding routes to market
Expanding our market reach is key to wider penetration and growth of our
market share. We continue to make strong inroads, developing new distribution
partners along with a focus on the contractor market. We signed over 37 new
distribution partners along with engaging with an additional 80 distributor
locations in the US alone. We have developed over 30 new contractor
relationships, expanding our routes to market. Another key milestone has been
re-joining Affiliate Distributors which is a members owned group that brings
growth orientated distributors and best in class suppliers together, with a
view to outperforming the market and staying ahead of the competition.
Enhanced product range through innovation
Our new product platforms launched in the past two years are expected to
further strengthen our position within our heavy industrial verticals. These
product platforms are the Ultra-Efficiency High Bay, the GRP Linear, the new
Bulkhead, and new Flood lights. In addition, we have launched two source and
sell product lines (Wall-Packs and emergency lighting). We have received
£22.4m in orders from products launched in the past two years. These products
have been critical in advancing our technological lead and provide the best
cost of ownership within the markets we operate within.
Sanmina litigation
As previously disclosed, Dialight is involved in ongoing litigation with
Sanmina Corporation, following the termination in September 2018 of the
manufacturing services agreement (MSA). The Board is pleased to note the
Federal court ruling on 14th March 2023 that the strength of evidence on our
claim of fraudulent inducement, together with various claims and
counter-claims relating to accounts receivable and accounts payable, is
sufficient that the dispute should be resolved by jury trial, pending any
appeal process. This ruling confirms that Dialight can challenge the
contractual liability cap in the MSA on the basis of Sanmina's fraudulent
inducement and Dialight intends to rigorously pursue this claim, and the
various other contract-based claims, to trial.
Purpose and sustainability
Sustainability is at the heart of everything we do, from product design to
material sourcing and the way we operate the business.
Our products provide an easily achievable opportunity to reduce carbon
emissions in the near-term by utilising our ultraefficient LED technology that
generates up to 75% less emissions than legacy lighting. The time value of
carbon reductions 1 (#_ftn1) is magnified by the pace at which the industrial
world embraces a significant adoption of LED lighting. The lights sold in 2022
will generate avoided emissions of 2.1m tonnes over their lifetime and help
our customers achieve their emission reduction goals. Our sustainable
solutions have been recognised by the Lighting Council of Australia in their
inaugural awards in 2022.
Over the past two years we have invested significant time in understanding our
existing carbon impact and how to use R&D to reduce that impact in the
design of our products and the choice of materials. We continue to recycle
packaging from upstream and as much by-product of production as possible. We
also target downstream end-of life recycling through the use of partnerships
on a geographic basis.
In 2020, we carried out our first full Green House Gas (GHG) inventory and
this will form the base year for our SBTi Net Zero targets which will be
submitted during H1-2023. Dialight's internal processes are low intensity with
most of the more intense processing happening upstream. Nonetheless, in the
interim, we established Scope 1 & 2 reduction targets and water
consumption targets, both on an intensity basis. The targeted reduction for
Scope 1 & 2 was 3% and we achieved 9%; the target for water consumption
reduction of 5% was also surpassed at 21%.
Dialight engages with the Carbon Disclosure Project where we achieved a B
rating for climate change and B- for water security, plus an EcoVadis rating
of silver. We are members of the Clean Lighting coalition which seeks to ban
the use of mercury in lighting and because our products are mercury free, we
have been assessed by FTSE Russell as having 100% green revenue.
The Dialight Foundation continues to enhance the communities where we operate
by supporting local initiatives with funding and donated time. The specific
focus areas are women's rights and educational support for children. To this
end, we have continued our support of the Women's Earth Alliance and a local
orphanage in Ensenada, Mexico. In addition, the Foundation also has a hardship
fund which can be accessed by staff facing unforeseen expenses.
As a business at the leading edge of industrial LED technology, people are at
the heart of our business. We support all our people by creating a safe,
inclusive environment, where every individual is able to work and contribute
to the development of the business. Having engaged, motivated, empowered and
appropriately skilled employees is integral to our success. Developing a high
performing and inclusive culture is a key enabler in our ability to deliver
strategic growth. Our position as a long-term presence in our operating
locations is reflected in the range of long service awards around the globe,
ranging from 10 years in Malaysia to 50 years in the USA.
Our target of zero accidents at all our sites is a morally responsible
business objective. As a producer of lighting that is used in heavy industrial
and hazardous locations, our safety focus extends beyond our own staff to
those of our customers. In our own operation in 2021 there were no recordable
incidents but regrettably in 2022 there were five. Dialight production is
mainly light engineering and assembly, so these incidents are typically
strains and sprains, sustained where operating procedures were not correctly
followed, or PPE not used. We take these incidents very seriously and have
provided re-training where necessary to prevent recurrences. Despite the
increase in recordable incidents, two of our plants have not recorded any
incidents in the past two years.
Dialight is committed to always conducting its business in an ethical and
responsible manner, and in full compliance with all applicable laws and
regulations. All employees and all third parties who act on the Group's behalf
are required to comply with our standards of behaviour and business conduct,
as set out within the Code, and applicable laws and regulations in all of the
countries in which we operate. In 2022 we undertook a survey of our top
30 suppliers (c. 70% of supply chain value) to establish whether they had
sustainability ratings and to understand their sustainability processes and
due diligence processes in more detail.
As a sustainability solution provider to our customers, our business is
primarily focussed on the opportunity that arises from the transition of the
industrial market away from traditional lighting and towards LED as an
alternative. Hence, the requirements of TCFD dovetail with the existing
business framework. The largest opportunity lies in the scale and speed of
increases in market adoption of LED. There are some smaller efficiency and
logistic opportunities that could also be realised in the process.
The business strategy of growth will result in increasing the avoided
emissions for our customers which outweigh the emissions from using our
fixtures by a factor of 1.6x. Since we started the Lighting segment, we have
helped our customers avoid c. 20m tonnes of carbon emissions, significantly
reduce their operating costs and increase the safety of their facilities. Our
values are designed to ensure that our sustainability solution is underpinned
by a sustainable business model.
Outlook
The macroeconomic outlook remains challenging, and we expect global supply
chain disruptions to continue in the short term. We expect to see some
alleviation in H2 2023.
We expect to continue to grow our Lighting business demonstrating the
increasing relevance of our products as energy efficiency becomes more urgent.
This is underpinned by a clear organic growth strategy, solid order book, and
a strong pipeline of projects. Longer term, we see significant opportunity as
the established leader in the heavier industrial lighting market.
FINANCIAL REVIEW
2022 saw strong revenue growth of 29% (17% in constant currency) driven by
strong customer demand across both business segments and a robust order book
at the start of the year. This growth was delivered against the backdrop of a
challenging supply chain with component shortages and significant cost
increases, particularly in H2, that were only partially mitigated by price
increases. Availability and supplier reliability impacted production and lead
times to customers, but the situation is improving. The result was a decline
in the gross profit margin by 350bps to 32.2%, despite strong cost control on
all non-revenue linked activity.
The Group delivered a reported profit from operating activities of £2.3m, an
improvement of 10% (£0.2m) over the 2021 profit of £2.1m. After increased
debt financing costs, the profit for the year was £0.4m, an increase of 33%
(£0.1m) over 2021. On an underlying basis the Group delivered EBIT of £5.0m
(see note 3 for items regarded as non-underlying), up 11% on 2021.
The underlying EBIT bridge for the year-on-year movement is:
Underlying EBIT bridge CCY 2022 Actual 2022
£m £m
Underlying EBIT 2021 4.7 4.5
Revenue increase impact 9.0 13.6
Change in gross margin (6.0) (6.0)
Change in SG&A costs (2.7) (7.1)
Underlying EBIT 2022 5.0 5.0
Strong revenue growth in both segments delivered a £9.0m increase in gross
profit. However, 2022 saw significant increases in key raw material costs
(particularly in H2), increased freight costs and increased Mexican employment
costs linked to minimum wage rate rises. These were only partially offset in
the period by price increases, cost reduction programmes in key Lighting
products and operational leverage due to increased production volumes and
resulted in a lower gross profit margin of 32.2% compared to 35.7% in 2021.
Selling, General and Administrative costs increased to support the near and
longer-term growth in revenue and include exchange losses on US dollar
borrowings. As a percentage of revenue, costs at 29.2% were lower than last
year.
Lighting revenue grew by 34% (23% at constant currency), with our core US
market seeing increased levels of project and MRO business, although December
did not see the traditional end of year uplift in sales and orders. Our
closing order book was lower than anticipated but we are starting to see this
build again. EMEA and Asia grew revenue with customer demand increasing as
COVID-19 restrictions eased and delayed projects re-commenced, but Australia
revenue was lower following a strong performance in 2021, with restrictions
impacting customer site access for a large part of the year and larger
projects being delayed. These restrictions have been lifted and performance is
expected to improve in 2023.
Signals & Components performed well with revenue up 18%, (7% at constant
currency) driven by strong demand for opto-electronic (OE) product. The
cyclical OE market has been strong for two years and is now going into an
expected downturn.
Operations had another challenging year. While disruption from COVID-19 and
government restrictions reduced, world-wide shortages of key components
continued to severely impact our supply chain along with significant increases
in shipping times and availability. To mitigate the impact, the Group
increased stocks of raw material in H1 but in H2 actions were taken to reduce
holdings, leading to raw material inventory levels being broadly flat
year-on-year at December (down 9% ccy). The provision for excess or obsolete
raw material inventory increased in 2022 by £2.0m, partly due to the decision
to move to an aged-based method of calculation.
Net debt increased by £5.2m to £20.9m with a higher level of finished goods
inventory and adverse movements in the USD exchange rate. At December, the
Group had access to £7.5m in undrawn facilities and £1.7m in cash.
Currency impact
Our major trading currency is the US Dollar (87% 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
strengthened to 1.24 from 1.38, a favourable impact of 10% with the year-end
spot rate with the US Dollar rising by 11% to GBP: USD 1.21.
In constant currency, Group revenue grew by 17% with gross profit up 6%
(versus 29% and 16% at actual rates). Underlying EBIT grew by £0.5m at
actual currency rates and £0.3m at constant rates.
Lighting
Lighting 2022 2021 Variance % 2021 Constant currency variance %
£m £m at constant
currency
£m
Revenue 121.0 90.5 +34% 98.8 +23%
Gross profit 40.6 33.7 +20% 36.9 +10%
Gross profit % 33.6% 37.2% -360bps 37.3% -370bps
Overheads (33.7) (28.4) (19%) (31.2) (8%)
Underlying EBIT 6.9 5.3 +30% 5.7 +21%
The Lighting segment saw continued strong growth in 2022, with revenue up 34%.
Lighting represents 71% of the Group's revenue (2021: 69%), and consists of
two main revenue streams, large retrofit projects and on-going MRO spend.
US revenues saw strong growth of 37% with the region benefitting from a high
opening backlog of orders supported by price increases implemented in H1. We
continued to gain market share in the MRO market, saw an increase in the
number of sales to retrofit projects and started to see orders generated from
the strategic sales team. However, revenue was significantly below our
expectations in December, reflecting seasonal demand being below historic
levels as well as several strategic customers deferring anticipated orders.
Margins reduced in the year due to the challenges of increased material and
freight costs, negated in part by operational efficiencies resulting from the
capital investment.
EMEA revenue grew by 36% as COVID-19 restrictions lifted, with orders up 53%
driven by new product launches. 2023 will see the benefit from price increases
implemented in Q4 that will help offset the impacts from economic headwinds.
Following two years of strong growth, Australia suffered from lockdowns and
close contact rules that reduced the ability of contractors and our
sales teams to get on site, which reduced both sales (4%) and order intake
(5%). With the relaxation of restrictions, we are seeing improved enquiry and
MRO rates. Revenue growth rates are expected to increase in 2023, with
improved product availability following transfer of more production to Penang
and the benefit from recent price rises.
Asia, our smallest region, saw revenue grow by 133% to £3.4m as restrictions
lifted with strong order growth at 60%. Activity levels remain excellent,
with several larger projects under discussion and a strong backlog going into
2023.
Gross margins came under pressure from significant component price increases
and a lack of availability, especially for aluminium, microchips, electrical
components, and high freight costs. This particularly impacted H2 and was
partially offset by the benefits from better fixed overhead absorption
(higher production volumes) and cost saving programmes on key products. Sale
prices for new orders were raised on two occasions but there is a lag before
their benefits are realised in revenue and the overall impact saw margin
falling to 33.6%, a reduction of 360bps on 2021.
Operating costs were £5.3m higher than 2021 with higher sales and marketing
(including commissions) to support the strong revenue growth as well as
engineering costs to support sourcing and testing of alternative critical
components. As a percentage of sales, overheads fell from 31% of revenue to
28% in 2022.
This resulted in an underlying operating profit of £6.9m, compared to a
profit of £5.3m in 2021.
Signals & Components
Signals & Components 2022 2021 Variance % 2021 Constant currency variance %
£m £m at constant currency
£m
Revenue 48.7 41.1 +18% 45.7 +7%
Gross profit 14.0 13.3 +5% 14.8 (5)%
Gross profit % 28.7% 32.4% -370bps 32.4% -370bps
Overheads (8.3) (7.8) (6%) (8.4) +1%
Underlying EBIT 5.7 5.5 +4% 6.4 (11)%
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.
The segment performed strongly during 2022 with revenue up 18% (7% at constant
currency), helped by the strong order book carried from 2021. Continued high
customer demand drove OE revenue up 21%, with increased sales of new products
and expansion of our distributor footprint. OE is a cyclical business and the
past two years have seen strong volume growth driven by customer concerns over
supply chain instability. H2 saw the expected downturn in orders and revenue,
which is expected to continue into 2023 as customers work through their raised
inventory levels.
Traffic improved by 9% with higher orders placed ahead of price increases and
changes to our shipping costs policy. Vehicle grew by 22%, despite the
impact from curtailed bus production due to supply chain shortages.
Gross margin fell by 370bps driven by increased input prices for raw material
and components, particularly in H2. Pricing has been raised for new orders,
but the high level of committed customer orders and contracts resulted in
only limited benefit in H2. Overheads increased by £0.5m to £8.3m due to
foreign exchange movements but fell as a percentage of revenue.
The benefit from improved revenue was largely offset by the lower gross
margin and resulted in an underlying operating profit of £5.7m compared to
£5.5 in 2021.
Central overheads
Central overheads comprise costs that are not directly attributable to a
segment and are shown separately. In the year, these totaled £7.6m, an
increase of £1.3m (£0.2m at constant currency) due to a combination of
foreign exchange movements, underlying inflation, annual pay awards and
increased travel following the lifting of COVID-19 restrictions.
Non-underlying costs
Non-underlying costs 2022 2021
£m £m
Sanmina costs 1.0 2.9
Development cost impairment 1.3 -
Release of warranty provision post sale - (0.3)
Other litigation costs 0.4 (0.2)
Total 2.7 2.4
Cash impact 1.4 2.4
To give a full understanding of the Group's performance and aid comparability
between periods, the Group reports certain items as non-underlying to normal
trading. These are summarised above, and further details are in note 3.
Costs of £1.0m were incurred in the year in relation to the ongoing
litigation with Sanmina Corporation, following the termination in September
2018 of the manufacturing services agreement (MSA). Following unsuccessful
mediation at the beginning of the year, Sanmina lodged a motion for summary
judgement to dismiss the majority of Dialight's claim. The detailed evidence
from both parties was examined by Federal judge and the Court's ruling on
Sanmina's dismissal motion was released to the parties under seal on Tuesday
14 March 2023. The court denied Sanmina's motion to dismiss Dialight's
fraudulent inducement claim and denied its motion for summary judgment on
Sanmina's accounts receivable claim. The court granted Sanmina's motion as to
the dismissal of Dialight's willful misconduct claim. The judge ruled that the
strength of the evidence on the fraudulent inducement claim, together with
various claims and counterclaims relating to accounts receivable and accounts
payable, is sufficient that the dispute should be resolved by jury trial,
pending any appeal process.
This ruling confirms that Dialight can challenge the contractual liability cap
in the MSA on the basis of Sanmina's fraudulent inducement and Dialight
intends to rigorously pursue this claim, and the various other contract-based
claims, to trial. During the year, the Group has also incurred £0.4m in legal
costs relating to a disagreement initiated by Dialight over royalty payments
covering a number of years. Further costs will be incurred during 2023.
At the beginning of 2021, the Group paused development of a new range of
Obstruction products within the Lighting segment. This was a temporary measure
while technical and engineering resources supported the supply chain team in
identifying and sourcing alternative components, following world-wide
shortages linked to COVID-19. Over the past year management has explored
options to complete the development, with the most likely outcome now unlikely
to involve use of the Dialight developed technology. Accordingly, the
development costs of £1.3m have been impaired.
In the prior year, we incurred £2.4m in legal costs and £0.5m in provisions
for slow moving inventory in relation to Sanmina; £0.3m was released
following the expiry of the warranty period on a disposed subsidiary and a
provision of £ 0.2m for employment claims was released.
Inventory
Inventory levels grew £11.2m over 2021 (£6.7m at constant currency), driven
by increased holdings of sub-assemblies and finished goods.
2022 2021
£m £m
Raw materials 22.7 22.2
Sub-assemblies 11.9 8.7
Finished goods 18.8 11.2
Spare parts 0.2 0.3
53.6 42.4
Dialight, in common with many companies, has continued to be impacted by the
well-publicised global commodity shortages as well as increased shipping times
for inbound raw materials and outbound finished goods. Supplier lead times and
the level of de-commits have been higher than normal in 2022 and, especially
for semi-conductors, lack of availability forced us to temporarily purchase
via expensive brokers. This continuing uncertainty led to the decision to
maintain the level of raw material holdings in order to safeguard production
and fulfil customer orders.
Inflation and foreign exchange have also increased the value of inventory
held, with significant raw material price rises across many key components and
movements in exchange rates since December 2021 increasing inventory by c.
£4.5m.
Finished goods and sub-assembly levels increased following lower-than-expected
customer demand in December. Inventory of high-running lines is normally built
up in anticipation of a strong order take for immediate delivery, but this
seasonal demand did not occur to the expected level and the inventory is now
expected to be sold during early 2023.
We continue to keep inventory levels and future commitments under close review
but will continue to maintain above average raw material and WIP stocks until
lead times on both availability and shipping times for raw materials return to
more normal levels, which is expected over the course of 2023. This is
targeted to deliver a reduction of at least £5m, with further reductions
delivered in later years through increased product and sub-assembly
standardisation.
Capital expenditure
During 2022, the Group invested £7.3m in capital expenditure (2021: £5.6m).
New product development expenditure of £3.6m included the new Prosite High
Mast/High Output Floodlight, next generation Highbay, new battery back-up
systems and next generation GaN power supply.
Capital expenditure of £3.4m was focused on increasing automation of
sub-assemblies in our Mexico factories, tooling for new or existing products,
investment in capacity through production transfer to Malaysia, essential
health and safety works in Mexico and completing the replacement of the
Roxboro factory roof.
In 2023 the Group is planning to increase the level of investment to circa
£10m, with 40% on new product development and 60% on capital expenditure.
Product development will focus on new technologies, cost reduction for
existing products and next generation Highbay/linear. Capital expenditure will
focus on automation to reduce labour, increasing factory capacity to support
revenue growth, replacing end of life equipment and digitise the business.
This increased spend will help facilitate our multi-year growth.
Purchase of minority interest
In May, the Group acquired a further 12.5% of Dialight ILS Australia Pty Ltd
for £1m (satisfied by issuing 266,958 new ordinary shares of 1.89 pence) and
a cash payment of £100,000. This increased our shareholding to 87.5%, with
the balance owned by a current senior employee.
Cash and borrowings
The Group ended the year with net debt of £20.9m, an increase £5.2m from
December 2021 and £0.7m since June 2022. 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 2022 (15.7)
Inflows
Underlying EBITDA 12.3
Net working capital excluding inventory 0.2 12.5
Outflows
Increase in inventory (6.7)
Investment in new products (3.6)
Maintenance capex/other (3.7)
Non underlying costs (1.4)
Provisions and other movements (0.1)
Interest and tax paid (2.6) (18.1)
Foreign exchange 0.4
Closing balance at 31 December 2022 (20.9)
The main factors behind the increase in net debt were:
• Increase in raw material inventory during H1 to mitigate the impact
of world-wide commodity shortages and increased shipping times plus increased
finished goods inventory following lower-than-expected December sales
• Improved credit terms with key suppliers
• Continued capital investment into new product development,
increasing factory capacity and maintenance (see earlier capital expenditure
section)
• Non-underlying costs (see earlier section)
• Higher interest and tax payments
There is a focus on reducing borrowings in the coming year, partly driven by
the reduction in inventory discussed above.
The interest expense is analysed in note 4 and taxes paid in note 5. Interest
expense will be higher in 2023 following the renegotiation of bank facilities
and higher level of borrowing.
Banking
The Group has its banking relationships with HSBC Bank plc. The Group's
multicurrency revolving credit facility with HSBC of £25m was re-negotiated
and signed in July 2022 and will now run until at least July 2025. The
three-year facility has two one-year extension options exercisable between 60
days before and 30 days from the first and second anniversary of the effective
date, giving a maximum duration of five years. In November 2022, the facility
was re-denominated to USD 34m as the majority of the Group's income and
expenditures are denominated in USD. 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 £2m payable in 2023 and the facilities will be fully repaid by June
2023 at the latest. At 31 December the Group had £30m (2021: £31m) in
facilities of which £22.6m was drawn and £1.7m of cash on hand.
Covenants
The Group's quarterly banking covenants have reverted to a maximum leverage
and minimum interest cover level for all facilities, with the CLBILS facility
having an additional test based on the ratio of adjusted cashflow to debt
service. The Group was fully compliant with all leverage and interest
covenants on its RCF facilities at 31 December 2022 and throughout 2022. The
additional covenant test on the CLBILS facility was complied with through June
2022 and has been waived for all periods thereafter, until the end of the
facility in June 2023. The trailing 12-month leverage multiple is 1.7x EBITDA
and is expected to reduce towards 1x by the end of 2023, with interest cover
at over 9x.
Tax
Based on a profit before tax of £0.5m in the year, the Group had an
effective tax rate of 20% (2021 57.1%) resulting in a tax charge of £0.1m.
This was broadly in line with our normalised rate, with prior year and R&D
credits offsetting UK trading losses for which we are not recognising a
deferred tax asset.
In the year we made a net cash tax payment of £0.8m, with £2.5m in
corporation tax on operations in the USA, Australia and Malaysia offset by a
£1.7m carry back refund in the US.
Pension costs
The Group has two defined benefit schemes that are closed to new entrants. The
aggregate surplus on both schemes is £4.5m, an increase of £0.6m from 31
December 2021. 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
2022 was £0.4m (2021: £0.4m) as agreed with the trustees following the 2019
valuation. The latest valuations were completed as at April 2022, and future
cash contributions have been agreed at the current levels.
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 2022 this equated to £68.7m (2021: £60.2m).
Management's focus in 2022 has been on profitably growing revenue and
maintaining availability of component supplies during a period of continuing
world-wide commodity shortages and increased pricing, 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. The Board is not proposing a final dividend
payment for 2022 (2021: nil). The Group has a clear capital allocation
discipline and is committed to returning excess funds to shareholders via
future dividend or share repurchases.
CONDENSED CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2022
2022 2021
(unaudited) (audited)
Note £'m £'m
Revenue 2 169.7 131.6
Cost of sales (115.1) (84.6)
Gross profit 54.6 47.0
Distribution costs (25.5) (21.3)
Administrative expenses (26.8) (23.6)
Profit from operating activities 2.3 2.1
Underlying profit from operating activities 2 5.0 4.5
Non-underlying items 3 (2.7) (2.4)
Profit from operating activities 2.3 2.1
Financial expense 4 (1.8) (1.4)
Profit before tax 0.5 0.7
Taxation 5 (0.1) (0.4)
Profit for the year 0.4 0.3
Profit for the year attributable to:
Equity owners of the Company 0.4 0.1
Non-controlling Interests - 0.2
Profit for the year 0.4 0.3
Profit per share
Basic 6 1.2p 0.9p
Diluted 6 1.2p 0.9p
The accompanying notes are extracted from the financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2022
2022 2021
(unaudited) (audited)
Note £'m £'m
Other comprehensive income
Items that may be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations 8.1 0.7
Income tax on exchange difference on translation of foreign operations (0.6) -
7.5 0.7
Items that will not be reclassified subsequently to profit and loss
Remeasurement of defined benefit pension liability 0.3 2.5
Income tax on remeasurement of defined benefit pension liability 5 (0.1) (0.5)
0.2 2.0
Other comprehensive income for the year, net of tax 7.7 2.7
Profit for the year 0.4 0.3
Total comprehensive income for the year 8.1 3.0
Attributable to:
- Owners of the parent 8.1 2.8
- Non-controlling interests - 0.2
Total comprehensive income for the year 8.1 3.0
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2022 (unaudited) and the year ended 31 December
2021 (audited)
Share Merger Translation Capital Share premium Own Shares Retained Total Non- Total
capital reserve reserve redemption earnings controlling Equity
reserve interests
£'m £'m £'m £'m £'m £'m £'m £'m £'m £'m
Balance at 1 January 2022 0.6 0.5 10.0 2.2 - (0.7) 47.0 59.6 0.6 60.2
Profit for the year - - - - - - 0.4 0.4 - 0.4
Other comprehensive income:
Foreign exchange translation differences, net of taxes - - 7.5 - - - - 7.5 - 7.5
Remeasurement of defined benefit pension liability, net of taxes - - - - - - 0.2 0.2 -
0.2
Total other comprehensive income - - 7.5 - - - 0.2 7.7 - 7.7
Total comprehensive income for the year - - 7.5 - - - 0.6 8.1 - 8.1
Transactions with owners, recorded directly in equity:
Share-based payments - - - - - - 0.5 0.5 - 0.5
Re-purchase of own shares - - - - - (0.1) - (0.1) - (0.1)
Minority interest purchase - - - - 1.0 - (0.6) 0.4 (0.4) -
Total transactions with owners - - - - 1.0 (0.1) (0.1) 0.8 (0.4) 0.4
Balance at 31 December 2022 0.6 0.5 17.5 2.2 1.0 (0.8) 47.5 68.5 0.2 68.7
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
CONSOLIDATED STATEMENT OF TOTAL FINANCIAL POSITION
at 31 December 2022
2022 2021
(unaudited) (audited)
Notes £'m £'m
Assets
Property, plant and equipment 13.9 12.0
Right of use assets 10.5 11.3
Intangible assets 21.4 21.4
Deferred tax assets 2.4 1.3
Employee benefits 4.5 3.9
Other receivables 5.6 4.7
Total non-current assets 58.3 54.6
Inventories 8 53.6 42.4
Trade and other receivables 30.2 26.2
Income tax recoverable 0.6 1.2
Cash and cash equivalents 10 1.7 1.2
Total current assets 86.1 71.0
Total assets 144.4 125.6
Liabilities
Trade and other payables (37.3) (32.9)
Provisions 7 (0.6) (0.6)
Tax liabilities (2.3) (1.7)
Lease liabilities (1.2) (1.2)
Borrowings 11 (2.0) (4.0)
Total current liabilities (43.4) (40.4)
Provisions 7 (1.6) (1.3)
Borrowings 11 (20.6) (12.9)
Lease liabilities (10.1) (10.8)
Total non-current liabilities (32.3) (25.0)
Total liabilities (75.7) (65.4)
Net assets 68.7 60.2
Equity
Issued share capital 0.6 0.6
Merger reserve 0.5 0.5
Share premium 1.0 -
Other reserves 18.9 11.5
Retained earnings 47.5 47.0
68.5 59.6
Non-controlling interests 0.2 0.6
Total equity 68.7 60.2
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2022
2022 2021
(unaudited) (audited)
Notes £'m £'m
Operating activities
Profit for the year 0.4 0.3
Adjustments for:
Financial expense 4 1.8 1.4
Income tax expense 5 0.1 0.4
Share-based payments 0.5 0.6
Depreciation of property, plant and equipment 2.9 3.1
Depreciation of right of use assets 1.8 2.2
Amortisation of intangible assets 4.4 3.5
Impairment losses on intangible assets 1.3 -
Operating cash flow before movements in working capital 13.2 11.5
(Increase) in inventories (6.7) (9.6)
(Increase) in trade and other receivables (1.1) (5.8)
Increase in trade and other payables 1.3 11.1
Increase /(decrease) in provisions 7 0.3 (0.8)
Pension contributions in excess of the income statement charge (0.4) (0.4)
Cash generated by operations 6.6 6.0
Income taxes paid (0.8) (0.6)
Interest paid(2) 4 (1.8) (1.4)
Net cash generated by operations 4.0 4.0
Investing activities
Capital expenditure (3.4) (2.1)
Capitalised expenditure on development costs and other intangible assets
(3.6) (3.2)
Purchase of software and licenses (0.2) (0.3)
Purchase of 12.5% of Dialight Australia (0.1) -
Net cash used in investing activities (7.3) (5.6)
Financing activities
Drawdown of bank facility 11 8.5 4.2
Repayment of bank facility 11 (4.0) (4.0)
Arrangement fee for revised facility (0.5) -
Re-purchase of own shares (0.1) (0.7)
Repayment of lease liabilities(1) (1.7) (1.7)
Net cash inflow/(outflow) from financing activities 2.2 (2.2)
Net decrease in cash and cash equivalents (1.1) (3.8)
Cash and cash equivalents at beginning of year 10 1.2 5.3
Effect of exchange rates 1.6 (0.3)
Cash and cash equivalents at end of year 10 1.7 1.2
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 2022 (unaudited)
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 financial information for the year ended 31 December 2021 and 2022 is
derived from the statutory accounts for 2021 (which has been delivered to the
Registrar of Companies) and 2022 (which will be delivered to the Registrar of
Companies following the AGM in May 2023). The auditors have reported on the
2021 accounts; their report was (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006. The statutory accounts
for 2022 will be finalised on the basis of the financial information presented
by the directors in this preliminary announcement and will be delivered to the
Registrar of Companies in due course.
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 will be included in
the 2022 Annual Report; these will be available to shareholders via the Group
website.
(b) Consolidated basis of preparation
The uncertainty as to the future impact on the financial performance and cash
flows of the Group from the uncertainty in the economic environment and
current world-wide commodity challenges 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
re-negotiated in July 2022 to a sustainability-linked loan and runs until July
2025. In November 2022, the £25m facility was redenominated to a $34m
facility as most drawings are in USD and recent fluctuations in the GBP: USD
exchange rate had adversely impacted headroom. The new facility contains
normal covenants, covering maximum net leverage and minimum interest cover
levels and contains options for two one-year extensions.
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 a
£8m Coronavirus Large Business Interruption Loan Scheme (CLBILS) loan and a
£2m commercial loan. The £10m additional facilities are repayable over 30
months, in equal instalments, from January 2021. £8m has been repaid to date
(2022 £4.0m), with the remaining £2m to be fully repaid by June 2023 at the
latest. During the year the debt service cover ratio (DSCR) covenant , which
only applies to the CLBILS loan, was waived for Q2 and Q3 as the covenant
penalises investment in working capital and capex. In December 2022, HSBC
waived the remaining covenant tests for Q4 2022 and Q1 2023. At 31 December
the Group had £30m (2021: £31m) in facilities of which £22.6m was drawn
and £1.7m 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
downside scenarios that reflect the risk of lower-than-expected revenue growth
in our core Lighting markets, higher revenue decline in the opto-electronic
market, lower gross margins due to input cost inflation, the associated
forecast outturns alongside identified downside risks and mitigating actions.
The Group has modelled four main scenarios in its assessment of going concern,
being the base case, a lower revenue scenario, a lower margin scenario and a
combined downside taking elements of lower revenue and lower margin.
Base case
The base case is derived from the Board approved 2023 budget, which assumes
that demand for our new and existing products remains strong, component
availability and pricing normalises, and our factories operate as normal. In
this scenario, the Directors consider that the Group will continue to operate
within its available committed facilities of $34m (£30m) with sufficient
headroom and meet its ongoing financial covenant obligations.
The key assumptions in the base case include:
• continued revenue growth in Lighting due to our focus on markets with
growing demand and where growth is driven by structural, safety and
sustainability factors but at a lower level than seen in 2022;
• a short-term cyclical downturn in the opto-electronic segment;
• gross margins normalise to pre-COVID levels as component price
premiums reduce and supply becomes more readily available, freight costs
normalise, and the benefits from cost reduction and automation programmes are
delivered; and
• operating costs are flexed in line with the incremental revenue and
increasing operational leverage.
Downside cases
Lower revenue
In a severe revenue downside scenario, the Directors have assumed:
• no growth in Lighting revenue in 2023 followed by growth in 2024
at less than 50% of that achieved in 2022;
• no growth in Signals and Components revenue versus 2022; and
• no change in segmental gross margins.
Lower margin
In the margin downside scenario, the Directors have assumed:
• segmental revenues in line with the base case;
• gross margin reduction in 2023 of 1% caused by continued input
cost pressures that are not fully mitigated by in year price increases; and
• gross margin improvement in 2024 to achieve a similar margin to
2021.
Combined downside case
In the combined downside case, the Directors have assumed:
· flat volume compared with 2022 but with the price increases
negotiated in November 2022 applying throughout 2023 and into early 2024;
· gross margin reduction of 2% throughout 2023 and into early 2024;
In all these scenarios, the Group has a series of controllable mitigating
actions that can be taken swiftly (a number of which have already been
enacted), including various temporary and permanent cost and cash saving
measures.
The base case and downside cases have been further modelled to show headroom
for any material one-off costs.
In the post mitigation downside scenarios, 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. Consequently,
the Directors are confident that the Group 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
Termination of outsourced manufacturing agreement
Significant judgement is applied in determining whether to recognise a
provision or a contingent liability in respect of the claims from the Group's
former manufacturing partner Sanmina. In the view of management, it is not
probable that the Group will have to make a payment, therefore no provision is
required and the matter is disclosed as a contingent liability in note 15,
which contains further details on the matter.
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 is 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 £11.5m (2021: £12.0m) 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 the prior year cost, there was £1.3m
relating to development projects which were paused during COVID-19 while the
engineering team was redeployed to focus on projects to source alternative
components and consume raw materials on hand, to help the business mitigate
the global supply chain challenges. This project was expected to recommence in
2022, but the Group is currently exploring other options that may not use
these capitalised costs. Due to uncertainty of next steps, capitalised costs
of £1.3m have been written off and the impairment recorded in the income
statement as a non-recurring expense (note 3). 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 strategic plan.
Estimates
Inventory reserve - Raw Materials and Sub-Assemblies
In the previous year, the basis for reserving raw materials and sub-assemblies
was to reserve the quantity on hand that was greater than 365 days old,
exceeded three year's historical usage and where, following a review by
engineering and supply chain personnel, there was no reasonable prospect of
the components being used or their shelf life not being exceeded. This
estimate was felt appropriate given the significant impact that the prolonged
pandemic/geopolitical situation had on our operations and the consequential
logistics and supply chain challenges, that resulted in inventory being held
for longer than normal. The Group has now revised its basis of estimate for
calculating the inventory reserve to provide for raw and sub-assembly
inventory that is over 24-months old at the balance sheet date. This basis for
estimate reduces estimation subjectivity, whilst allowing for the adverse
impact from component shortages that have led to high inventory levels and
some components being held for longer than expected. Two years is felt to be
appropriate as the components have a long shelf life, continue to be used in
production and the product demand mix between project and MRO business has
been skewed during COVID-19.
Management believes that any reasonably possible change in the assumption
would not cause any significant change in the provision estimate for raw
materials and sub-assemblies in the next financial year.
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.
Management believes that any reasonably possible change in the assumption
would not cause any significant change in the provision estimate for finished
goods.
The value of the provision for all categories of inventory over which
judgement has been exercised was £4.1m (2021: £3.0m) and this represents
7.7% (2021: 7.0%) 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 (2022: 68 days, 2021: 64 days). The value of directly
attributable costs over which judgement was exercised was £7.0m (2021:
£5.0m) and this represents 13% (2021: 12%) of the inventory value. For every
day that the estimate of the days used for the overheads absorbed changes, it
changes the calculation by £17k.
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 (2022: 151 days, 2021: 162 days). 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 £4.1m
(2021: £3.1m) and this represents 8% (2021: 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 £91k.
Management believes that any reasonably possible change in the assumptions
would not cause any significant change in the amount of costs absorbed into
inventory.
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 CGU's have been determined based on value in use calculations, which
involve a high level of estimation due to the uncertainty caused by the
geopolitical situation and potential material shortages due to delays in the
supply chain.
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 the ability to cope with accelerated product demand and
has been reflected in our forecast.
Management believes that any reasonably possible change in the assumptions
would not cause the carrying amount to exceed the recoverable amount in the
next financial year.
Pensions/Retirement benefits
Benefits in the form of retirement pensions are provided to current and former
employees under defined benefit plans. Obligations under defined benefit plans
are calculated annually by independent actuaries using the Defined Accrued
Benefit method.
Defined benefit plan surpluses are recognised as an asset to the extent they
are considered recoverable. The amount recognised in the statement of
comprehensive income in respect of defined benefit plans mainly comprises
service cost and net interest. Remeasurement of the net defined benefit asset
resulting from actuarial gains and losses, and return on plan assets, are
recognised in other comprehensive income. The Group has £4.5m (2021: £3.9m)
of defined benefit asset.
The valuation of the defined benefit pension obligations requires the use of
estimates for three elements, discount rate, inflation and life expectancy.
The discount rate is a key assumption in calculating the value of defined
benefit obligations. The assumption is used to calculate the net present
value of the expected benefit payments. The rate is derived from high quality
corporate bonds. The rate used for this year's valuation is 4.85% (2021:
1.85%). For every 0.1% change in the discount rate used in the estimate it
changes the calculation by £160k.
The inflation rate is a key assumption in calculating the value of defined
benefit obligations. The assumption is used to calculate the expected amounts
of future benefit payments. The rate is derived from the central bank
inflation curve less an inflation premium. The rate used for this year's
valuation is 3.3% (2021: 3.6%). For every 0.1% change in the inflation rate
used in the estimate it changes the calculation by £100k.
The mortality rate is a key assumption in calculating the value of defined
benefit obligations. The mortality assumption estimates how long members are
expected to live and receive benefits for. The assumption is used to calculate
the expected amounts of future benefit payments, the assumption is derived
from current life expectancy and the Continuous Mortality Investigation (CMI)
projection tables. For every 6 months change in the mortality rate used in the
estimate it changes the calculation by £300k.
(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 has adopted them, they have had no material impact on the Group. These
comprise:
· Onerous Contracts - Cost of Fulfilling a Contract (Amendment to IAS
37);
· Annual Improvements to IFRS Standards 2018-2020;
· Property, Plant and Equipment: Proceeds Before Intended Use
(Amendments to IAS 16);
· Reference to the Conceptual Framework (Amendments to IFRS 3).
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 2022:
· 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);
· 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 IAS 8) (Effective from 1 January 2023);
· Amendments to IAS1 Presentation of Financial Statements and IFRS
Practice Statement 2 Making Materiality Judgements (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
2022 (unaudited) Lighting Signals and Components Unallocated Total
£'m £'m £'m £'m
Revenue 121.0 48.7 _ 169.7
Gross profit 40.6 14.0 - 54.6
Overhead costs (33.7) (8.3) (7.6) (49.6)
Underlying profit/(loss) from operating activities 6.9 5.7 (7.6) 5.0
Non-underlying items (note 3) (2.7) - - (2.7)
Profit/(loss) from operating activities 4.2 5.7 (7.6) 2.3
Financial expense (1.8)
Profit before tax 0.5
Taxation (0.1)
Profit after tax 0.4
2021 (audited) Lighting Signals and Components Unallocated Total
£'m £'m £'m £'m
Revenue 90.5 41.1 _ 131.6
Gross profit 33.7 13.3 - 47.0
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 (note 3) (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
Other segmental data
2022 (unaudited) 2021 (audited)
Lighting Signal & components Total Lighting Signals & components Total
£'m £'m £'m £'m £'m £'m
Depreciation of property, plant and equipment 2.1 0.8 2.9 2.1 1.0 3.1
Depreciation of right of use assets 1.3 0.5 1.8 1.5 0.7 2.2
Amortisation* 4.4 _ 4.4 3.5 _ 3.5
Impairment of intangible assets 1.3 - 1.3 - - -
*Re-presentation of 2021 amortisation, with no impact on segmental income
statement
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
2022 2021
£'m £'m
(unaudited) (audited)
North America 132.7 101.0
EMEA 14.5 10.2
Rest of World 22.5 20.4
Total sales revenue 169.7 131.6
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.
2022 2021
£'m £'m
(unaudited) (audited)
Non-underlying items:
Costs related to manufacturing partner 1.0 2.9
Impairment of capitalised development costs 1.3 -
Other litigation costs 0.4 -
Release of warranty provision - (0.3)
Release of litigation provision - (0.2)
Non-underlying items recorded in administrative expenses 2.7 2.4
As previously reported, Dialight sought to reach a negotiated conclusion of
various outstanding matters and performance issues following the termination,
in 2018, of the manufacturing services agreement (MSA) with its former
manufacturing partner, Sanmina Corporation ("Sanmina"). Following unsuccessful
mediation at the beginning of the year, Sanmina lodged a motion for summary
judgement to dismiss the majority of Dialight's claim. The detailed evidence
from both parties was examined by Federal judge and the Court's ruling on
Sanmina's dismissal motion was released to the parties under seal on Tuesday
14 March 2023. The court denied Sanmina's motion to dismiss Dialight's
fraudulent inducement claim and denied its motion for summary judgment on
Sanmina's accounts receivable claim. The court granted Sanmina's motion as to
the dismissal of Dialight's willful misconduct claim. The judge ruled that the
strength of the evidence on the fraudulent inducement claim, together with
various claims and counter-claims relating to accounts receivable and accounts
payable, is sufficient that the dispute should be resolved by jury trial,
pending any appeal process. This ruling confirms that Dialight can challenge
the contractual liability cap in the MSA on the basis of Sanmina's fraudulent
inducement and Dialight intends to rigorously pursue this claim, and the
various other contract-based claims, to trial. Dialight has sought external
legal advice and is paying for the legal costs as incurred. During the year,
legal costs of £1m have been expensed, compared to prior-year legal and
inventory write off costs of £2.9m.
At the beginning of 2021, the Group paused development of a new range of
Obstruction products within the Lighting segment. This was a temporary measure
while technical and engineering resources supported the supply chain team in
identifying and sourcing alternative components, following world-wide
shortages linked to COVID-19. Over the past year management has explored
several options to complete the development, including continuing internal
development or utilising third party technology. The most likely option is now
to utilise third party components in the new product suite, as this will be
quicker and allow Dialight to capitalise on market opportunities and gain
market share. Given this change in strategy would not involve use of the
Dialight developed technology, the paused development costs of £1.3m have
been impaired and the non-cash cost classified as non-underlying in accordance
with Group accounting policy.
Other litigation costs of £0.4m relate to a contractual litigation case,
initiated by Dialight during 2022, relating to the use of the intellectual
property. The costs incurred relate to the legal costs incurred in the year.
Prior year release of warranty provision of £0.3m related to unclaimed
warranty related to the disposal of the Group's Wind business in 2019. The
Group had received and paid all claims related to this disposal and the
remaining balance of the provision was therefore released. Prior year
litigation credit related to employment litigation cases; a provision of
£0.2m (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.
4. Financial expense
2022 2021
£'m £'m (audited)
(unaudited)
Net interest on defined benefit liability 0.1 0.1
Interest expense on financial liabilities, except lease liabilities 1.1 0.7
Arrangement fee amortisation 0.1 0.1
Interest expense on lease liabilities 0.5 0.5
Net financing expense recognised in the consolidated income statement 1.8 1.4
5. Taxation
2022 2021
£'m £'m
(unaudited) (audited)
Current tax expense
Current year 2.1 1.3
Adjustment for prior years (0.2) (0.6)
Total current tax 1.9 0.7
Deferred tax expense
Origination and reversal of temporary differences (1.9) 0.1
Adjustment for prior years 0.1 (0.4)
Total deferred tax (1.8) (0.3)
Total tax expense 0.1 0.4
Reconciliation of effective tax rate
2022 2022 2021 2021
% £'m % £'m
(unaudited) (audited)
Profit for the year 0.4 0.3
Total tax charge 0.1 0.4
Profit before tax 0.5 0.7
Income tax using the UK corporation tax rate 19.0 0.1 19.0 0.1
Effect of higher taxes on overseas earnings 20.0 0.1 43.0 0.3
Non-deductible expenses 20.0 0.1 28.6 0.2
Current year losses for which no deferred tax is recognised 40.0 0.2 57.1 0.4
US carry back claim - - (43.0) (0.3)
Adjustment for prior years (20.0) (0.1) (88.3) (0.6)
Research and development credits (19.0) (0.1) (28.6) (0.2)
Foreign taxes incurred (40.0) (0.2) 69.3 0.5
20.0 0.1 57.1 0.4
The effective tax rate for the year is 20% compared with 57.1% in the prior
year and the standard rate of 19% (2021: 19.0%) in the UK. During the year,
the Group made a profit of £0.5m, which was lower than the prior year, which
resulted in a tax charge in the year of £0.1m.
The normalised tax rate for the Group in the year is 25% (tax rate before
adjustments) and based on a pre-tax profit of £0.5m this would generate a
tax charge of £0.1m. The Group's overall tax rate was 20%, which was broadly
the same as the normalised rate due to untypical adjustments equating each
other out. The major adjustments were:
• The current losses in the European Lighting business are not
recognised as a deferred tax asset, resulting in £0.2m of tax credit not
being recognised in the year. We do not anticipate this business making
sufficient taxable profits in the foreseeable future to utilise the losses.
• A current year adjustment of £0.1m relating to additional
research and development credit in the US.
• A £0.1m prior year adjustment in Malaysia and US truing up prior
year provisions to actual submissions.
Tax charge/(credit) recognised directly in equity
2022 2021
£'m £'m
(unaudited) (audited)
Employee benefits 0.1 0.5
Other 0.6 (0.1)
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% (2021: 19.0%).
There are no UK timing differences recognised at 31 December 2022. 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 (2021: 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.
6. Earnings per share
Basic earnings per share
The calculation of basic earnings per share ("EPS") at 31 December 2022 was
based on a profit for the year of £0.4m (2021: £0.3m profit) and the
weighted average number of ordinary shares outstanding during the year of
32,574,668 (2021: 32,393,109).
Weighted average number of ordinary shares
2022 2021
'000 '000
(unaudited) (audited)
Weighted average number of ordinary shares 32,575 32,393
2022 2021
Basic earnings per share 1.2p 0.9p
Basic adjusted earnings per share* 7.4p 6.5p
Diluted earnings per share
The calculation of diluted EPS at 31 December 2022 was based on a profit for
the year of £0.4m and the weighted average number of diluted ordinary shares
during the year of 33,231,301 (2021: 32,803,606), excluding the purchase of
225,451 own shares by the Group.
Weighted average number of ordinary shares
2022 2021
'000 '000
(unaudited) (audited)
Weighted average number of ordinary shares 33,231 32,804
2022 2021
Diluted earnings per share 1.2p 0.9p
Adjusted diluted earnings per share* 7.3p 6.4p
*Adjusted earnings excludes non-underlying items (see note 3) and allocates
tax at the appropriate rate (see note 5)
7. Provisions
Warranty Lease-restoration Total
and claims £'m £'m
£'m
Balance at 1 January 2022 (audited) 1.7 0.2 1.9
Provisions made during the year 1.4 - 1.4
Provisions used during the year (1.3) - (1.3)
Effects of foreign exchange movement 0.2 - 0.2
Balance at 31 December 2022 (unaudited) 2.0 0.2 2.2
The warranty provision relates to sales made over the past nine 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:
2022 2021
£'m £'m
(unaudited) (audited)
Due within one year 0.6 0.6
Due within one and five years 1.2 1.1
Due after five years 0.4 0.2
2.2 1.9
8. Inventories
2022 2021
£'m £'m
(unaudited) (audited)
Raw materials and consumables 22.7 22.2
Sub-assemblies 11.9 8.7
Finished goods 18.8 11.2
53.4 42.1
Spare parts 0.2 0.3
53.6 42.4
Inventories to the value of £79.0m (2021: £55.8m) were recognised as
expenses in the year. The inventory reserve at the balance sheet date was
£4.1m, which represents 7.7% of inventory (2021: £3.0m representing 7.0% of
inventory). Additional reserves of £2.0m were booked in year with an increase
of £0.3m due to foreign exchange movements, being offset by utilisation of
£1.2m, resulting in a net movement in the reserve of £1.1m.
As at 31 December 2022, management's best estimate of the amount of inventory
that will not be used within the next 12 months is c.£4.8m (2021: £3.4m).
In the previous year, the basis for reserving raw materials and sub-assemblies
was to reserve the quantity on hand that was greater than 365 days old,
exceeded three year's historical usage and where, following a review by
engineering and supply chain personnel, there was no reasonable prospect of
the components being used or their shelf life not being exceeded. This
estimate was felt appropriate given the significant impact that the prolonged
pandemic/geopolitical situation had on our operations and the consequential
logistics and supply chain challenges, that resulted in inventory being held
for longer than normal. The Group has now revised its basis for estimate to
calculating the inventory reserve to provide for raw and sub-assembly
inventory that is over 24-months old at the balance sheet date. This new
basis for estimate reduces estimation subjectivity whilst allowing for the
adverse impact from component shortages that have led to high inventory levels
and some components being held for longer than expected. Two years is felt to
be appropriate as the components have a long shelf life, continue to be used
in production and the product demand mix between project and MRO business has
been skewed during COVID-19.
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 level of inventory was increased by £11.2m in 2022 driven by £4.5m in
foreign exchange and management decisions to increase finished goods stock
levels in December to fulfil seasonal demand, however this demand was lower
than expected along with several strategic customers deferring anticipated
orders.
9. Dividends
There were no dividends declared or paid in the 12 months ended 31 December
2022 or 31 December 2021.
10. Cash and cash equivalents
2022 2021
£'m £'m
(unaudited) (audited)
Cash and cash equivalents 1.7 1.2
11. Borrowings
The Group's multicurrency revolving credit facility with HSBC of £25m was
re-negotiated in July 2022 to a sustainability-linked loan and runs until July
2025. In November 2022, the £25m facility was redenominated to a $34m
facility as most drawings are in USD and fluctuations in the GBP: USD exchange
rate had adversely impacted headroom. The new facility contains normal
covenants, covering maximum net leverage and minimum interest cover levels and
contains options for two one-year extensions.
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 £2m payable in 2023 and the facilities will be fully repaid by June
2023 at the latest. During the year, the debt service cover ratio (DSCR),
linked to the CLBILS loan, was waived for Q2 and Q3 2022 as the test penalises
investment in working capital and capex. In December 2022, HSBC waived the
remaining DSCR covenant tests for Q4 2022 and Q1 2023.
At 31 December the Group had £30m (2021: £31m) in facilities and £1.7m of
cash on hand.
Loans
£'m
At 1 January 2021 (audited) 16.7
Facility drawdown (RCF) 4.2
Facility repayment (CLBILS) (4.0)
At 31 December 2021(audited) 16.9
Facility drawdown (RCF) 8.5
Facility repayment (CLBILS) (4.0)
Interest accrued 1.1
Interest paid (note 4) (1.1)
Foreign exchange 1.2
At 31 December 2022 (unaudited) 22.6
Details of the facilities Tenure Interest rate per annum* Maturity date Amount Amount drawn 31 December 2021
drawn 31 (audited)
December 2022
(unaudited)
Years % £'m £'m
$34m revolving credit facility 3 6.97 July 2025 20.6 10.9
£8m CLBILS 3 5.59 June 2023(+) 1.6 4.8
£2m commercial loan 3 5.79 June 2023(+) 0.4 1.2
(+) This loan will be repaid in equal installments over 3 years, repayment
started on the 15th of January 2021
* This is an indicative rate as at December 2022.
The banking covenants were based on a 12-month rolling EBITDA test until June
2021, when they reverted to:
Covenant test Every Quarter
Ratio Calculation Threshold
Leverage ratio Net debt/Adjusted EBITDA <3.0x
Interest cover Adjusted EBITDA/Interest expense >4.0x
Debt service ratio* Net operating income/Total debt service >1.2
* The debt service cover ratio does not apply to the
revolving credit facility and has been waived from June 2022 to the end of the
loan.
12. Principal exchange rates
2022 2022 2021 2021
Average rate At balance sheet date Average rate At balance sheet date
US Dollar 1.24 1.21 1.38 1.35
Euro 1.17 1.13 1.16 1.19
Canadian Dollar 1.61 1.64 1.72 1.72
Mexican Peso 24.87 23.53 27.88 27.64
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
2022 2021
£'m £'m
Profit from operating activities 2.3 2.1
Non-underlying items (see note 3) 2.7 2.4
Underlying profit from operating activities 5.0 4.5
2.3 2.1
Profit from operating activities
Non-underlying items (see note 3) 2.7 2.4
Depreciation of property, plant and equipment 2.9 3.1
Amortisation of intangible assets 4.4 3.5
Underlying EBITDA 12.3 11.1
Profit from operating activities 2.3 2.1
Non-underlying items (see note 3) 2.7 2.4
Depreciation of property, plant and equipment 2.9 3.1
Amortisation of intangible assets 4.4 3.5
Share based payments 0.5 0.6
Net movement on working capital (Inventories, trade and other receivables, (6.5) (4.3)
trade and other payables) as per Consolidated statement of cash flows
Underlying operating cash flow 6.3 7.4
Underlying profit from operating activities and underlying EBIT referred to in
the earlier sections of this announcement are the same measures. Underlying
operating cash flow and adjusted operating cash flow referred to in the
earlier sections of this announcement 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: US Dollar, Euro, Canadian Dollar and Mexican
Peso. The exchange rates used are set out in note 12.
Net debt
Net debt is defined as total Group borrowings less cash. Net debt of £20.9m
at the year-end (2021: £15.7m) consisted of borrowings of £22.6m (2021:
£16.9m) less cash of £1.7m (2021: £1.2m).
15. Contingencies
Sanmina litigation
As previously reported, Dialight sought to reach a negotiated conclusion of
various outstanding matters and performance issues following the termination,
in 2018, of the manufacturing services agreement (MSA) with its former
manufacturing partner, Sanmina Corporation ("Sanmina"). The failure to reach a
satisfactory resolution of these issues led to both parties issuing formal
legal proceedings against the other on 20th December 2019 in the US District
Court for the Southern District of New York. The basis of the claim filed by
Sanmina 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 counterclaims, and costs and
losses suffered by Dialight. Dialight has sought external legal advice and is
paying for the legal costs as incurred. As at 31 December 2022, Dialight has
not made any provision for future legal costs.
The claim filed by Dialight alleged that Dialight suffered significant costs
and losses (with total potential damages of approximately $220m) as a result
of: (a) Sanmina's fraudulent inducement of Dialight to enter into the MSA; (b)
Sanmina breaching the terms of the MSA in a wilful and/or grossly negligent
manner (for example in respect of their failure to appropriately manage supply
chain and inventory levels and to deliver product on time and free of
workmanship defects); and, (c) Sanmina's gross negligence and/or wilful
misconduct in the performance of its duties owed to Dialight. If Sanmina's
claim is successful, the range of outcomes could include the payment by
Dialight to Sanmina of between $0 and $8.3m (excluding legal costs and
judicial interest, but inclusive of Dialight 'escrow' monies held by Sanmina).
If Dialight's claims are successful, the range of outcomes could include the
payment by Sanmina to Dialight of between $0 and c. $220m (excluding legal
costs and judicial interest).
Sanmina subsequently lodged a motion for summary judgement to dismiss elements
of Dialight's claims/counter-claims (first filed on 2 May 2022). The detailed
evidence and legal arguments from both parties (submitted in May-July 2022)
was examined by Federal judge and the Court's ruling on Sanmina's dismissal
motion was released to the parties under seal on Tuesday 14 March 2023. The
court denied Sanmina's motion to dismiss Dialight's fraudulent inducement
claim and denied its motion for summary judgment on Sanmina's accounts
receivable claim. The court granted Sanmina's motion as to the dismissal of
Dialight's willful misconduct claim. The judge ruled that the strength of the
evidence on the fraudulent inducement claim, together with various claims and
counter-claims relating to accounts receivable and accounts payable, is
sufficient that the dispute should be resolved by jury trial, pending any
appeal process. This ruling confirms that Dialight can challenge the
contractual liability cap in the MSA on the basis of Sanmina's fraudulent
inducement and Dialight intends to rigorously pursue this claim, and the
various other contract-based claims, to trial.
Dialight currently expects that the case will go to trial in late 2023
(subject, potentially, to the timing impact of either party appealing any
adverse judgment). Open court documents, including the ruling and pleadings in
respect of the motion for summary judgment, can be accessed on the Public
Access to Court Electronic Records (PACER) public access system for the U.S.
District Court for the Southern District of New York
(https://ecf.nysd.uscourts.gov (https://ecf.nysd.uscourts.gov) ).
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.
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.
· Geopolitical / 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. In particular, the Group sources a
significant amount of key components from China.
1 (#_ftnref1) The Time Value of Carbon is the concept that greenhouse gas
emissions cut today are worth more than cuts promised in the future, due
to the escalating risks associated with the pace and extent of climate
action.
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