REG - Flowtech Fluidpower - 2020 Half-year Report
RNS Number : 2825YFlowtech Fluidpower PLC08 September 2020
NEWS RELEASE
Issued on behalf of Flowtech Fluidpower plc
Immediate Release
The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.
Tuesday, 8 September 2020
FLOWTECH FLUIDPOWER PLC
("Flowtech", the "Group" or "Company")
Specialist full-service supplier of technical fluid power products and services
HALF-YEAR REPORT
For the six months ended 30 June 2020
"We are pleased that the trend in market conditions since April 2020 has been positive and we look forward to an improvement in performance in H2 2020 and into 2021"
FINANCIAL HIGHLIGHTS
HY2020
30.6.20
unaudited
HY2019
30.6.19
unaudited
FY2019
31.12.19
Audited
· Revenue
£46.6m
£59.6m
£112.4m
· Gross profit %
35.1%
35.6%
35.7%
· Operating (loss) / profit
£ (0.5m)
£4.3m
£5.7m
· Underlying operating profit*
£0.9m
£6.1m
£9.8m
· (Loss) / profit before tax
£ (0.9) m
£3.8m
£4.7m
· Earnings per share (basic)
(1.37) p
5.00p
6.12p
· Net debt**
£14.5m**
£18.8m
£16.6m
· Resilient response to COVID-19
· Organic sales down 21.8% (Q1-11%, Q2-33%)
· Gross margin strong at 35.1% (H1 2019: 35.6%)
· Underlying operating profit of £0.9m (H1 2019: £6.1m)
· Strong cash generation and net debt down £2.1m, £4.3m lower than H12019
· Continued progress on reducing cost base
"I'm pleased with the way our team responded to the challenges presented by COVID-19. We were already engaged in a process of rationalising operating sites and reducing costs, but, given the ongoing uncertainty, it is now imperative we accelerate this activity. Our cash management has been good and whilst we remain well funded, it is important to recognise that one of the keys to our success is inventory availability and that this must not be compromised. Looking forward, an important element of our future strategy is our digital and data capability, this is an area of close focus and ongoing investment. Given the impact of COVID-19 it is difficult to predict underlying levels of demand so notwithstanding our plans to achieve further efficiency and organic growth coupled with our inherent resilience we will be affected by overall market conditions and will react appropriately."
Roger McDowell, Non-Executive Chair
*Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3) and the impact of fair value adjustment to inventory acquired through business combinations (IFRS 3)..The FY2019 comparative has been adjusted as explained in note 3.
**Net Debt excludes benefit obtained by deferring c.£1.6m (2019: £nil) of VAT linked to Government COVID-19 related support schemes.
ENQUIRIES:
FLOWTECH FLUIDPOWER PLC
Roger McDowell, Non-Executive Chair
Bryce Brooks, Chief Executive Officer
Russell Cash, Chief Financial Officer
Tel: +44 (0) 1695 52759
Email: info@flowtechfluidpower.com
Corporate Marketing Manager: Eve Rigby Tel: +44 (0) 1695 577780
Zeus Capital Limited (Nominated Adviser and Joint Broker)
Andrew Jones, Kieran Russell (Corporate Finance)
Dominic King, John Goold (Sales & Broking)
Tel: + 44 (0) 20 3829 5000
finnCap Limited (Joint Broker)
Ed Frisby, Kate Bannatyne (Corporate Finance)
Rhys Williams, Andrew Burdis (Sales & Broking)
Tel: + 44 (0) 20 7220 0500
TooleyStreet Communications (IR and media relations)
Fiona Tooley
Tel: +44 (0) 7785 703523 or email: fiona@tooleystreet.com
ABOUT FLOWTECH FLUIDPOWER PLC
Founded as Flowtech in 1983, the Flowtech Fluidpower Group is the UK's leading specialist supplier of technical fluid power products and services. The business joined AIM in 2014 (AIM: Symbol FLO). Today, the Group has two distinct divisions:
Division:
What we do:
Locations:
Components
Supply of hydraulic and pneumatic consumables, predominantly through distribution for urgent maintenance and repair operations across all industry sectors. Additionally, support a broad range of original equipment manufacturers (OEMs) supplying off-the-shelf and tailored components and assemblies.
Flowtechnology Benelux (Deventer)
Flowtechnology UK (Skelmersdale)
Indequip (Skelmersdale)
Beaumanor (Leicester)
Hydravalve (Willenhall)
Primary Fluid Power Components (Skelmersdale)
Nelson Hydraulics (Dublin, Lisburn, Dungannon)
HTL (Ludlow)
Hi-Power Hydraulics (Cork, Dublin, Belfast, Knowsley)
Hydroflex (Brussels, Rotterdam and OudBeijerland)
Hydraulic Equipment Supermarkets (Gloucester, Leeds)
Derek Lane & Co (Newton Abbot)
Tractec (Gloucester)
Services
Bespoke design, manufacturing, commissioning, installation, and servicing of systems to manufacturers of specialised industrial and mobile hydraulic original equipment manufacturers (OEMs) and additionally a wide range of industrial end users.
Primary Fluid Power Systems (Knowsley)
TSL (Knowsley)
Branch Hydraulic Systems (Gloucester)
Lubemec (Gloucester)
Fluidpower Group Services (Spennymoor, Leeds, Gloucester)
FlowConnect (Gloucester)
Orange County (Spennymoor)
Both Group's divisions have overlapping product sets, allowing procurement synergies to be maximised.
The above divisions are supported by a centralised back office team based in Wilmslow, Cheshire, UK and a procurement and quality control team in Shanghai, China. In total, the business employs c.600 people. For more information please visit, www.flowtechfluidpower.com
FLOWTECH FLUIDPOWER PLC
HALF-YEAR REPORT
FOR THE SIX MONTHS ENDED 30 JUNE 2020
COVID-19 IMPACT AND RESPONSE
Since the COVID-19 lockdown we have prioritised the health and wellbeing of our people. All our sites in the UK, Ireland and the Benelux have been adapted to become safer working environments, and whilst this has created some challenges in our larger facilities, we are extremely grateful to all our employees for the resilience and adaptability they have shown throughout recent months. This has ensured that high levels of customer service have been maintained.
All our key customers have returned and the recovery is encouraging; our revenue in August was 12% down on the comparative period, a much-improved position from April which was down 41%. Over the last two months we have welcomed back most of our UK furloughed employees. 15 remain furloughed at the start of September, compared with a peak of 189 in April. Although most of our supplier base is located overseas, the quality of the working relationships we have with them has been invaluable throughout this period. Overall, it is pleasing to report that our supply chain has continued to function effectively, with only minor disruptions post lockdown.
DELIVERING ON OPERATIONAL COST SAVINGS
Despite COVID-19 we have continued with our plans to remove cost from our businesses, with most savings coming from a reduction in people and property. Highlights in the first half of 2020 include the move from Knowsley into Skelmersdale of the Primary Fluid Power Components function, and the transition of the logistics operations of Hydravalve from Willenhall on 1 May and 1 June respectively. Both have incorporated significant IT implementations, the establishment of an Engineering & Modifications Centre in the main logistics hub, and new ways of working to service different customer requirements. As well as the associated cost savings we are already seeing benefits in the form of more efficient picking and delivery.
In Q2 we announced internally that our two Irish businesses - Nelson Hydraulics and Hi-Power - would merge their operations and relocate most warehousing functions to the UK. During the second half of the current year we will also be undergoing a similar change process at Group HES, our Gloucester operation. When fully implemented we expect further savings, with the removal of two properties and a further reduction in headcount
Whilst certain projects have been slightly delayed due to lockdown restrictions, in some cases so we can take additional cost out, we remain confident of delivering annualised savings of at least £1.6m. We expect these savings to be fully reflected in 2021. These are in addition to the cost cutting we took in response to COVID-19, including the 25 redundancies actioned post this reporting date.
CONTINUING TO DE-LEVERAGE
We are pleased to see more progress in this area despite profitability having been materially affected by COVID-19. Net Debt reduced by £2.1m in H1 2020 and £4.3m in the 12-month period ended 30 June 2020.
Management of working capital has remained high on our list of priorities, and whilst debtor collections have slowed slightly, we have where necessary worked proactively with our customers and suppliers to ensure net cash generation.
We continually review inventory levels to ensure sufficient stock to service the demands of our customer base. We anticipate that further reductions in inventory are achievable, although at more modest levels than seen over the past 24-months. From a peak in June 2018 of £29.0m, inventories are now down to £22.6m.
DIGITAL CAPABILITIES
In 2019, we said we would use our market penetration and premium position with the leading global suppliers to develop a fully-fledged e-business operation. This year a specialist team has been working on the next stage of this, and identified a clear strategy to redesign our IT architecture, create the most extensive Product Information System in the sector, and build a data driven approach to sales development using a single Customer Data Platform. When this is coupled with the integration of all the Group's legacy IT systems to create a single stock holding framework, we will be in a very strong position to exploit the changing digital landscape. This initiative will also have input and support from our new Non-Executive Director Paul Gedman, who joined us in August, having held senior positions including as Divisional CEO at The Hut Group. Paul has extensive experience in the global e-commerce industry and a wealth of practical knowledge in growing international businesses through leveraging data and digital capabilities.
FINANCIAL STATEMENT
HALF-YEAR FINANCIAL PERFORMANCE AND DIVISIONAL ANALYSIS
Revenue
Six months
ended
30 June 2020
£000
Six months
ended
30 June 2019
£000
%
Change
Year
ended
31 December 2019
£000
Components
39,124
50,001
-21.8%
96,348
Services
7,443
9,639
-22.8%
16,070
Total Group revenue
46,567
59,640
-21.9%
112,418
Gross profit %
35.1%
35.6%
35.7%
Underlying operating result*
Six months
ended
30 June 2020
£000
Six months
ended
30 June 2019
£000
Change
£000
Year
ended
31 December 2019
£000
Components
3,331
7,945
(4,614)
14,138
Services
(94)
241
(335)
(53)
Central costs
(2,305)
(2,091)
(214)
(4,331)
Underlying operating result*
932
6,095
(5,163)
9,754
* Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3) and the impact of fair value adjustment to inventory acquired through business combinations (IFRS 3)..The FY2019 comparative has been adjusted as explained in note 3.
REVENUE
Overall revenue was down 22% against prior year comparatives, 11% in Q1 and 33% in Q2. We had expected a modest decline in Q1 against a strong 2019 quarter, but COVID-19 further impacted on this and then affected the whole of Q2.
Gross profit margin
Although this can vary from period to period dependent on market conditions and mix of sales, in H1 it was virtually unchanged at 35.1%. This is higher than 2017 and 2018 and we are confident that our focus in this area will continue to see further improvements .
OPERATING Costs
Our operating costs in H1 2020 were £15.4m, marginally ahead of the comparative period in 2019. A significant factor contributing to this was the investment made in the business in mid-2019 when market conditions were far more favourable. The impact of this and a number of COVID-19 related initiatives will see operating costs in H2 2020 well below those in H2 2019. At the start of the year headcount across the Group was 651, and at the time of writing this was down to 614, with further reductions expected in the second half.
UNDERLYING OPERATING PROFIT
Our underlying operating result was impacted by COVID-19, reducing from £6.1m to £0.9m, the majority of which was in our Components businesses.
FINANCIAL POSITION INCLUDING CASH FLOW AND BANK DEBT
We are pleased with the £4.6m of cash generated from operating activities (after discounting the £1.6m VAT deferral support from HMRC), which is in line with the comparative period. Our focus on managing working capital has enabled us to achieve this result despite the significant reduction in underlying profitability. This has allowed us to fund our restructuring activity as well as achieving a £2.1m reduction in Net Debt in H1 2020 and a position which is £4.3m lower than at the end of H1 2019.
We have recently agreed the renewal of our Banking facilities, with the £25m aggregate facilities in place for a further three years. These facilities are currently being documented by lawyers, a process which we hope will be complete by the end of September 2020.
FUTURE REGULATORY REPORTING
Flowtech announces that following a review of its financial reporting practices it will no longer publish quarterly operational trading updates for Q1 and Q3 in addition to its regular financial reporting calendar. The Company will continue to provide, in conjunction with preliminary and interim reports, qualitative updates covering market and business developments. This change in reporting will take immediate effect. Shareholders will be able to view the financial calendar of events on our website https://www.flowtechfluidpower.com/shareholder-information/financial-calendar/.
OUTLOOK & DIVIDEND
The fluid power sector has previously shown resilience in economic downturns and this characteristic, when coupled with the Group's wide mix of customers and sectors, has been evident in recent months. The trend in demand since the April nadir has been encouraging. If this pattern continues and is combined with our internal cost reduction programme it leads us to expect an improvement in performance in H2 2020 and into 2021. However, as it still remains difficult to predict short term market conditions, we therefore consider it prudent to withhold both formal financial guidance and the payment of a dividend. We will keep this position under constant review and intend to reinstate both guidance and dividend as soon as is practicable.
Our priorities continue to be: - excellent customer service, careful management of cash, margin protection and the accelerated execution of our restructuring and cost reduction programme. We will also continue to invest in our digital capability and endeavour to maximise the opportunities offered by our strong market position through our high quality and committed team of people. We approach the future with measured optimism.
By order of the Board
8 September 2020
CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2020
Notes
Unaudited
Unaudited
Audited
Six months
ended
Six months
ended
Year
ended
30 June
30-June
31-December
2020
2019
2019
£000
£000
£000
Continuing operations
Revenue
46,567
59,640
112,418
Cost of sales
(30,226)
(38,395)
(72,235)
Gross profit
16,341
21,245
40,183
Distribution expenses
(2,081)
(2,139)
(4,547)
Administrative expenses before separately disclosed items
(13,328)
(13,099)
(26,179)
- separately disclosed items
3
(1,481)
(1,678)
(3,712)
Total administrative expenses
(14,809)
(14,777)
(29,891)
Operating (loss) / profit
(549)
4,329
5,745
Financial income
-
-
-
Financial expenses
(380)
(528)
(1,038)
Net financing costs
(380)
(528)
(1,038)
(Loss) / profit from continuing operations before tax
(929)
3,801
4,707
Taxation
4
88
(726)
(968)
(Loss) / profit from continuing operations
(841)
3,075
3,739
(loss) / profit for the period attributable to:
Non-controlling interest
-
22
-
Owners of the parent
(841)
3,053
3,739
Earnings per share
Basic earnings per share - continuing operations
6
(1.37p)
5.00p
6.12p
Diluted earnings per share - continuing operations
6
(1.37p)
4.99p
6.10p
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30 JUNE 2020
Unaudited
Unaudited
Audited
Six months ended
Six months
ended
Year
ended
30 June
30-June
31-December
2020
2019
2019
£000
£000
£000
(Loss) / profit for the period
(841)
3,076
3,739
Other comprehensive income
-Exchange differences on translating foreign operations
334
71
(394)
Total comprehensive income in the period attributable to:
(507)
3,147
3,345
Non-controlling interest
-
22
-
Owners of the parent
(507)
3,125
3,345
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2020
Unaudited
Unaudited
Audited
30-June
30-June
31-December
2020
2019
2019
£000
£000
£000
Assets
Non-current assets
Goodwill
63,216
62,959
63,014
Other intangible assets
6,047
7,089
6,573
Property, plant, and equipment
6,957
6,717
6,528
Right of use assets
7,385
8,752
8,228
Total non-current assets
83,605
85,517
84,343
Current assets
Inventories
22,639
28,130
24,000
Trade and other receivables
20,050
27,034
21,377
Prepayments
1,672
1,057
759
Cash and cash equivalents
7,082
3,881
3,446
Total current assets
51,443
60,102
49,582
Liabilities
Current liabilities
Interest-bearing borrowings
16,000
18,605
16,055
Lease liabilities - current
1,845
1,426
1,635
Trade and other payables
18,344
18,403
15,510
Deferred and contingent consideration
-
1,005
214
Tax Payable
-
1,659
298
Total current liabilities
36,189
41,098
33,712
Net current assets
15,254
19,004
15,870
Non-current liabilities
Interest-bearing borrowings
4,000
4,000
4,008
Lease liabilities - non-current
5,773
7,394
6,735
Provisions
363
411
417
Deferred tax liabilities
1,417
1,709
1,519
Total non-current liabilities
11,553
13,514
12,679
Net assets
87,306
91,007
87,534
Equity directly attributable to owners of the parent
Share capital
30,747
30,564
30,579
Share premium
60,959
60,959
60,959
Other reserves
187
187
187
Shares owned by the Employee Benefit Trust (EBT)
(372)
(400)
(372)
Merger reserve
293
293
293
Merger relief reserve
3,645
3,575
3,599
Currency translation reserve
711
727
244
Retained losses
(8,864)
(4,940)
(7,955)
Total equity attributable to the owners of the parent
87,306
90,965
87,534
Non-controlling interest
-
42
-
Total equity
87,306
91,007
87,534
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 JUNE 2020
Share capital
£000
Share
premium
£000
Other reserves
£000
Shares owned by EBT £000
Merger reserve
£000
Merger relief
reserve
£000
Currency
translation
reserve
£000
Retained
losses
£000
Non-controlling interest
£000
Total
equity
£000
Six months ended 30 June 2020 unaudited
Balance at 1 January 2020
30,579
60,959
187
(372)
293
3,599
244
(7,955)
-
87,534
Profit for the period
-
-
-
-
-
-
-
(841)
-
(841)
Other comprehensive income
-
-
-
-
-
-
467
(133)
-
334
Total comprehensive income for the period
-
-
-
-
-
-
467
(974)
-
(507)
Transaction with owners
Issue of share capital
168
-
-
-
-
46
-
-
-
214
Share-based payment charge
-
-
-
-
-
-
-
65
-
65
Total transactions with owners
168
-
-
-
46
-
65
-
279
Balance at 30 June 2020
30,747
60,959
187
(372)
293
3,645
711
(8,864)
-
87,306
Six months ended 30 June 2019 unaudited
Balance at 1 January 2019
Profit for the period
Other comprehensive income
30,460
-
-
60,793
-
-
187
-
-
(413)
-
-
293
-
-
3,575
-
-
664
-
63
(8,146)
3,053
8
20
22
-
87,433
3,075
71
Total comprehensive income for the period
-
-
-
-
-
-
63
3,061
22
3,146
Transaction with owners
Issue of share capital
Share-based payment charge
Share options settled
104
-
-
166
-
-
-
-
-
-
-
13
-
-
-
-
-
-
-
-
-
-
96
49
-
-
-
270
96
62
Total transactions with owners
104
166
-
13
-
-
-
145
-
428
Balance at 30 June 2019
30,564
60,959
187
(400)
293
3,575
727
(4,940)
42
91,007
Twelve months ended 31 December 2019 - audited
Balance at 1 January 2019
30,460
60,793
187
(413)
293
3,575
664
(8,146)
20
87,433
Profit for the year
-
-
-
-
-
-
-
3,739
-
3,739
Other comprehensive income
-
-
-
-
-
-
(420)
26
-
(394)
Total comprehensive income for the year
-
-
-
-
-
-
(420)
3,765
-
3,345
Transaction with owners
Issue of share capital
25
45
-
-
-
-
-
-
-
70
Purchase of minority shares
-
-
-
-
-
-
-
(270)
(20)
(290)
Shares issued in consideration
94
121
-
-
-
24
-
-
-
239
Other movements in share capital
-
-
-
-
-
-
-
133
-
133
Share-based payment charge
-
-
-
-
-
-
-
143
-
143
Share options settled
-
-
-
41
-
-
-
169
-
210
Equity dividends paid
-
-
-
-
-
-
-
(3,749)
-
(3,749)
Total transactions with owners
119
166
-
41
293
24
-
(3,574)
(20)
(3,244)
Balance at 31 December 2019
30,579
60,959
187
(372)
293
3,599
244
(7,955)
-
87,534
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED 30 JUNE 2020
Notes
Unaudited
Unaudited
Audited
Six months ended
Six months
ended
Year
ended
30-June
30-Jun
31-Dec
2020
2019
2019
£000
£000
£000
Net cash from operating activities
8
6,203
4,443
13,246
Cash flow from investing activities
Acquisition of property, plant, and equipment
(1,221)
(519)
(756)
Proceeds from sale of property, plant, and equipment
189
24
39
Acquisition of subsidiary
(202)
-
(38)
Payment of deferred and contingent consideration
(218)
(1,630)
(2,635)
Net cash used in investing activities
(1,452)
(2,125)
(3,390)
Cash flows from financing activities
5
Net proceeds from the issue of share capital
-
70
70
Repayment of lease liabilities
(792)
(778)
(1632)
Net cash settled share options
-
(47)
-
Interest on right of use leases
(131)
(141)
(282)
Other interest paid
(249)
(387)
(756)
Repayment of loan by EBT
-
15
47
Dividends paid
-
-
(3,749)
Share option payments to staff
-
-
(61)
Net cash generated from / (used in) financing activities
(1,172)
(1,268)
(6,363)
Net change in cash and cash equivalents
3,579
1,050
3,493
Cash and cash equivalents at start of period
3,446
253
253
Exchange differences on cash and cash equivalents
57
78
(300)
Cash and cash equivalents at end of period
7,082
1,381
3,446
Cash and cash equivalents
7,082
3,881
3,446
Bank overdraft
-
(2,500)
-
Cash and cash equivalents at end of period
7,082
1,381
3,446
Reconciliation of liabilities arising from financing activities
The changes in the Group's liabilities arising from financing activities can be classified as follows:
Long-term borrowings
Short term borrowings
Lease liabilities
Total
£000
£000
£000
£000
At 1 January 2020
4,000
16,000
8,433
28,433
Cash flows
Repayment
-
-
(792)
(792)
Proceeds
-
-
-
-
Other lease movements
-
-
(67)
(67)
Non-cash
New leases
-
-
44
44
At 30 June 2020
4,000
16,000
7,618
27,618
NOTES TO THE HALF-YEAR REPORT
FOR THE SIX MONTHS ENDED 30 JUNE 2020
1.General information
The principal activity of Flowtech Fluidpower plc (the "Company") and its subsidiaries (together, the "Group") is the distribution of engineering components and assemblies, concentrating on the fluid power industry. The Company is a public limited company incorporated and domiciled in the United Kingdom. The address of its registered office is Bollin House, Wilmslow, SK9 1DP.
The registered number is 09010519.
As permitted, this Half-year report has been prepared in accordance with the AIM rules and not in accordance with IAS 34 "Interim Financial Reporting".
The consolidated financial statements are prepared under the historical cost convention, as modified by the revaluation of certain financial instruments.
This consolidated Half-year report and the financial information for the six months ended 30 June 2020 does not constitute full statutory accounts within the meaning of section 434 of the Companies Act 2006 and are unaudited. This unaudited Half-Year Report was approved by the Board of Directors on
8 September 2020.
The Group's financial statements for the year ended 31 December 2019 have been filed with the Registrar of Companies. The Group's auditor's report on these financial statements was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
Electronic communications
The Company is not proposing to bulk print and distribute hard copies of this Half-year Report unless specifically requested by individual shareholders. The Board believes that by utilising electronic communication it delivers savings to the Company in terms of administration, printing and postage, and environmental benefits through reduced consumption of paper and inks, as well as speeding up the provision of information to shareholders. News updates, regulatory news, and financial statements can be viewed and downloaded from the Group's website https://www.flowtechfluidpower.com.
Copies can also be requested from; The Company Secretary, Flowtech Fluidpower plc, Bollin House, Bollin Walk, Wilmslow, SK9 1DP.
Email: info@flowtechfluidpower.com.
2. aCCOUNTING POLICIES
2.1 Basis of preparation
The financial information set out in this consolidated Half-year Report has been prepared under International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the accounting policies which will be adopted in presenting the Group's Annual Report and Financial Statements for the year ended 31 December 2020. These are consistent with the accounting policies used in the Financial Statements for the year ended 31 December 2019.
2.2 Going concern
The financial statements are prepared on a going concern basis. The Directors believe this to be the most appropriate basis for the following reasons:
· The Group generated underlying operating profit of £0.9m in a half year period which was materially affected by the unprecedented, unforeseen circumstances of COVID-19;
· July and August have seen improving trends in terms of Revenue and profitability;
· The Group has achieved significant debt reduction over the last 18months and has been consistently operating with significant headroom against the £25m banking facilities.
In addition we have recently agreed the renewal of our Banking facilities which will see our aggregate £25m facilities in place for a further 3 year period; the facilities are currently being documented by lawyers and we expect this to be complete by the end of September. As part of this we have refreshed our Banking covenants to reflect the unexpected reduction in our level of profitability as a result of COVID-19; as a result of this we expect to continue to satisfy all covenant and other requirements within the Banking agreement.
As referred to our 2019 Report & Accounts we continue to recognise that the potential prolonged impact of the COVID-19 pandemic presents a material uncertainty that could potentially cast doubt on the Group and Parent Company's ability to continue as a going concern. Nevertheless, taking all factors into consideration the Directors have a reasonable expectation that the Group and Parent Company has adequate resources to continue in operational existence for the foreseeable future. For these reasons the Directors continue to adopt the going concern basis in preparing the half year report and accounts. These financial statements do not reflect any adjustments which would result from the going concern basis of preparation proving to be inappropriate.
3. OPERATING SEGMENTS
The Group comprises the following two operating segments which are defined by trading activity:
· Components - Supply of hydraulic and pneumatic consumables, predominantly through distribution for maintenance and repair operations across all industry markets but supported by supply agreements direct to a broad range of OEMs.
· Services - Bespoke design, manufacturing, commissioning, installation, and servicing of systems to manufacturers of specialised industrial and mobile hydraulic OEMs and additionally a wide range of industrial end users.
The Board is the chief operating decision maker (CODM). The CODM manages the business using an underlying profit figure. Only finance income and costs secured on the assets of the operating segment are included in the segment results. Finance income and costs relating to loans held by the Company are not included in the segment result that is assessed by the CODM. Transfer prices between operating segments are on an arm's length basis.
The Directors believe that the underlying operating profit provides additional useful information on key performance trends to Shareholders. The term "underlying" is not a defined term under IFRS and may not be comparable with similarly titled profit measurements reported by other companies.
A reconciliation of the underlying operating result to operating profit / (loss) from continuing operations is shown below. The principal adjustments made are in respect of the separately disclosed items and are as detailed at the end of this note. Segment information for the reporting periods is as follows:
Components
£000
Services
£000
Inter-segmental transactions
£000
Central
costs
£000
Total continuing operations
£000
Six months ended 30 June 2020
Income statement - continuing operations:
Revenue from external customers
39,124
7,443
-
-
46,567
Inter segment revenue
2,490
504
(2,994)
-
-
Total revenue
41,614
7,947
(2,994)
-
46,567
Underlying operating result*
3,331
(94)
-
(2,305)
932
Net financing costs
(131)
(3)
-
(246)
(380)
Underlying segment result
3,200
(97)
-
(2,551)
552
Separately disclosed items
(683)
-
-
(798)
(1,481)
Profit / (loss) before tax
2,517
(97)
-
(3,349)
(929)
Specific disclosure items
Depreciation
1,169
132
-
46
1,347
Amortisation
463
63
-
-
526
Reconciliation of underlying operating result to operating profit:
Underlying operating result*
3,331
(94)
-
(2,305)
932
Separately disclosed items
(683)
-
-
(798)
(1,481)
Operating profit/(loss)
2,648
(94)
-
(3,103)
(549)
*Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3) and the impact of fair value adjustment to inventory acquired through business combinations (IFRS 3).
Components
£000
Services
£000
Inter-segmental transactions
£000
Central
costs
£000
Total continuing operations
£000
Six months ended 30 June 2019
Income statement - continuing operations:
Revenue from external customers
50,001
9,639
-
59,640
Inter segment revenue
1,224
10
(1,234)
-
-
Total revenue
51,225
9,649
(1,234)
59,640
Underlying operating result*
7,945
241
-
(2,091)
6,095
Net financing costs
(33)
-
-
(494)
(528)
Underlying segment result
7,912
241
-
(2,585)
5,567
Impact of fair value adjustment to inventory
(88)
-
-
-
(88)
Separately disclosed items
(767)
(20)
-
(892)
(1,678)
Profit/(loss) before tax
7,058
221
-
(3,477)
3,801
Specific disclosure items
Depreciation
1,212
90
-
21
1,323
Amortisation
473
62
-
-
535
Reconciliation of underlying operating result to operating profit:
Underlying operating result*
7,945
241
-
(2,091)
6,095
Impact of fair value adjustment to inventory
(88)
-
-
-
(88)
Separately disclosed items
(767)
(20)
-
(891)
(1,678)
Operating profit/(loss)
7,090
221
-
(2,982)
4,329
*Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3) and the impact of fair value adjustment to inventory acquired through business combinations (IFRS 3).
Components
£000
Services
£000
Inter-segmental transactions
£000
Central
costs
£000
Total continuing operations
£000
Year ended 31 December 2019
Income statement - continuing operations:
Revenue from external customers
96,348
16,070
-
-
112,418
Inter segment revenue
3,199
232
(3,431)
-
-
Total revenue
99,547
16,302
(3,431)
112,418
Underlying operating result*
13,995
(59)
-
(4,329)
9,607
Net financing costs
(46)
(2)
-
(708)
(756)
Underlying segment result
13,949
(61)
-
(5,037)
8,851
Impact of fair value adjustment to inventory
(297)
-
-
-
(297)
Impact of re-statement under IFRS 16 on profit before tax
(126)
1
-
(10)
(135)
Separately disclosed items
(1,114)
(689)
-
(1,909)
(3,712)
Profit/(loss) before tax
12,412
(749)
-
(6,956)
4,707
Specific disclosure items
Depreciation
2,266
245
-
106
2,617
Amortisation
927
124
-
-
1,051
Reconciliation of underlying operating result to operating profit:
Underlying operating result*
13,995
(59)
-
(4,329)
9,607
Impact of fair value adjustment to inventory
(297)
-
-
-
(297)
Impact of re-statement under IFRS 16 on operating profit
143
6
-
(2)
147
Separately disclosed items
(1,114)
(689)
-
(1,909)
(3,712)
Operating profit/(loss)
12,727
(742)
-
(6,240)
5,745
Reconciliation of underlying operating result in note 3 to financial highlights on page 1
Total continuing operations
£000
Underlying operating result* shown above
9,607
Add back impact of re-statements under IFRS 16 on Operating profit
147
Underlying operating profit* shown on page 1 of RNS
9,754
*Underlying operating result is continuing operations' operating profit before separately disclosed items (note 3), the impact of fair value adjustment to inventory acquired through business combinations (IFRS 3) and IFRS 16 adjustments to operating lease rental costs. The inclusion of the IFRS16 adjustment was necessary to compare 2019 to prior periods because, as permitted by the standard, prior periods were not restated for the introduction of IFRS16. In order to compare 2019 with future periods this adjustment is now unnecessary. Accordingly, the 2019 comparative in the table on page 1 and page 4 have been adjusted.
SEPARATELY DISCLOSED ITEMS
· Acquisition costs include stamp duty, due diligence, legal fees, finance fees and other professional costs incurred in the acquisition of businesses
· Share-based payment costs relate to the provision made in accordance with IFRS 2 "Share-based payment" following the issue of share options to employees
· Restructuring costs related to restructuring activities of an operational nature following acquisition of business units and other restructuring activities in established businesses. Costs include restructuring advice, asset write downs, employee redundancies and IT integration.
Six months
ended
30 June
2020
£000
Six months
ended
30 June
2019
£000
Year
ended
31 December
2019
£000
Share based payment costs
65
96
143
Amortisation of acquired intangibles
526
535
1,051
Changes in amounts accrued for contingent and deferred consideration
218
596
596
Restructuring costs
644
394
1,739
Acquisition costs
28
57
183
Total
1,481
1,678
3,712
4. TAXATION
Six months ended
Six months ended
Year
ended
30-June
2020
30-June
2019
31-December
2019
£000
£000
£000
Current tax on income for the period - continuing operations:
UK tax
(57)
907
888
Overseas tax
69
-
324
Deferred tax credit
(100)
(40)
(232)
Adjustments in respect of prior years
-
(141)
(12)
Total taxation
(88)
726
968
The taxation for the period has been calculated by applying the estimated tax rate for the financial year ending 31 December 2020.
5. DIVIDENDS
Six months
ended
30 June
2020
£000
Six months
ended
30 June
2019
£000
Year
ended
31 December
2019
£000
Final dividend (2019: 4.04p) per share
-
-
2,453
Interim dividend (2019: 2.13p) per share
-
-
1,296
Total dividends
-
-
3,749
In the light of economic uncertainty due to COVID-19, the Directors have suspended all dividend payments.
6. EARNINGS PER SHARE
Basic earnings / (loss) per share is calculated by dividing the earnings / (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. For diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The dilutive shares are those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period. For diluted loss per share the weighted average number of ordinary shares in issue is not adjusted.
Six months ended
Six months ended
Year ended
30 June 2020
30 June 2019
31 December 2019
Earnings
Weighted average number of shares
Earnings per share
Earnings
Weighted average number of shares
Earnings per share
Earnings
Weighted average number of shares
Earnings per share
£000
000's
Pence
£000
000's
Pence
£000
000's
Pence
Basic earnings per share
Continuing operations
(841)
61,354
(1.37p)
3,053
61,091
5.00p
3,739
61,067
6.12p
Diluted earnings per share
Continuing operations
(841)
61,354
(1.37p)
3,053
61,218
4.99p
3,739
61,286
6.10p
Six months
ended
30 June
2020
£000
Six months
ended
30 June
2019
£000
Year
ended
31 December 2019
£000
Weighted average number of ordinary shares for basic and diluted earnings per share
61,354
61,091
61,067
Impact of share options
-
127
219
Weighted average number of ordinary shares for diluted earnings per share
61,354
61,218
61,286
7. SUBSEQUENT EVENTS
Since the end of June 2020, we have announced further restructuring activity involving our Group HES business in Gloucester. We have also made progress in extending our Banking facilities, terms having been agreed with the Bank and documentation currently being progressed by lawyers; we expect this to be formally in place by the end of September 2020.
8. NET CASH FROM OPERATING ACTIVITIES
Six months ended
Six months
ended
Year
ended
30-June
2020
30-June
2019
31-December
2019
£000
£000
£000
Reconciliation of profit before taxation to net cash flows from operations:
(Loss) / profit from continuing operations before tax
(929)
3,802
4,707
Depreciation on property, plant, and equipment
533
507
916
Depreciation on right-of-use assets (IFRS 16)
814
816
1,701
Financial expense
249
387
756
Finance cost on right-of-use assets (IFRS 16)
131
141
282
Loss on sale of plant and equipment
70
7
6
Amortisation of intangible assets
526
535
,051
Brought forward gain on sale of shares by EBT, released to reserves
-
140
140
Other financial items
-
-
123
FV Adjustment of stock
-
-
12
Equity settled share-based payment charge
65
96
143
Change in amounts accrued for contingent and deferred consideration
218
596
596
Operating cashflow before changes in working capital and provisions
1,677
7,027
10,433
Change in trade and other receivables
642
(1,949)
4,006
Change in stocks
1,578
537
4,667
Change in trade and other payables
2 705
30
2,862)
Change in provisions
(51)
12
18
Cash generated from operations
6,551
5,657
16,262
Tax paid
(348)
(1,215)
(3,016)
Net cash generated from operating activities
6,203
4,442
13,246
9. PRINCIPAL RISKS AND UNCERTAINTIES
In common with all organisations, Flowtech faces risks which may affect its performance. The Group operates a system of internal control and risk management to provide assurance that we are managing risk whilst achieving our business objectives. No system can fully eliminate risk and therefore the understanding of operational risk is central to management processes. The long-term success of the Group depends on the continual review, assessment, and control of the key business risks it faces. The Directors set out in the 2019 Annual Report and Financial Statements the principal risks identified during this exercise, including quality control, systems and site disruption and employee retention. The Board does not consider that these risks have changed materially in the last six months.
10. FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Although the Group believes that the expectations reflected in these statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Given that these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statements whether because of new information, future events or otherwise.
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