REG - Flowtech Fluidpower - Unaudited Preliminary Results-year ended 31.12.22
12/04/2023 07:00
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RNS Number : 8904V Flowtech Fluidpower PLC 12 April 2023
NEWS RELEASE
Immediate Release
Wednesday,12 April 2023
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 as amended by the Market Abuse (Amendment) (EU Exit)
Regulations 2019. Upon the publication of this announcement via the Regulatory
Information Service, this inside information is now considered to be in the
public domain.
FLOWTECH FLUIDPOWER PLC
("Flowtech", the "Group" or "the Company")
Specialist full-service supplier of technical fluid power products and
services
Unaudited Preliminary Results
For the year ended 31 December 2022
FY2022 Financial & Operational Highlights
· Revenue of £114.8m (2021: £109.1m), £5.7m (5.2%) up on 2021
· £8.6m underlying operating profit * (2021: £5.7m), an
improvement of £2.9m as the business continued its recovery from the COVID-19
pandemic
· £11.6m underlying EBITDA (+) (2021: £8.4m), an improvement of
£3.2m
· Measures taken to manage the cost base, in particular a
significant reduction in headcount by the end of the year, has reduced
underlying operating overheads** by £0.4m (1.3%) in an environment of
significant inflationary pressures
· Significantly improved performance by the Services segment with
underlying operating profit of £1.8m (2021: -£0.1m)
· Managed inventory levels (£1.0m increase in 2022) to mitigate
the impact of supply chain uncertainties and satisfy customer demand for core
products. Now reducing (£3.2m decrease in H2 2022) with more predictable
supply chains
· Separately disclosed items of £13.0m includes £10.1m impairment
of goodwill (see note 8), £1.4m restructuring costs largely relating to the
exit from the Leicester Logistics Centre and £0.9m amortisation of
intangibles
· After taking account of the separately disclosed items the loss
before tax was £5.6m
· Looking forward to 2023 being a year of further improvements,
with particular focus on inventory management, debt reduction and cash
generation.
(*) Underlying operating profit is used as an alternative performance measure
to assess the trading performance of the business and is operating profit
before separately disclosed items which are amortisation and impairment of
acquired intangibles, impairment of goodwill, share based payments, and
restructuring costs.
(+) Underlying EBITDA is underlying operating profit prior to depreciation
charges and website amortisation.
(**) Underlying operating overheads is the total of distribution costs and
administrative expenses before separately disclosed items.
"We have entered 2023 with much of the strategic building blocks in place
after an array of challenges over the past three years, and we will remain
focused on completing the remaining actions of our strategic plan. With global
supply chains now more consistent, we can reduce inventories to match our
needs and return to generating strong cashflows to support our investment
activities, whilst exploiting our new digital capabilities".
Roger McDowell, Non-Executive Chair
"2022 saw the completion of many of the key changes that we defined in our
2020 strategy review and in 2023 we will continue to pursue all remaining
elements with vigour. With supply chains now more predictable, and at both
sector and geographical level demand remaining broadly stable, we are
confident that all the major strategy decisions we have made will create
additional shareholder value, and will quickly feed through into strong cash
generation available for further investment to drive shareholder value".
Bryce Brooks, CEO
The Company will be holding a 'live' presentation which will be hosted by CEO
Bryce Brooks, and CFO Russell Cash via the Investor Meet Company platform at
10.00am on Monday,17 April 2023:
https://www.investormeetcompany.com/flowtech-fluidpower-plc/register-investor
(https://www.investormeetcompany.com/flowtech-fluidpower-plc/register-investor)
ENQUIRIES:
Flowtech Fluidpower plc
Roger McDowell, Chair
Bryce Brooks, Chief Executive
Russell Cash, Chief Financial Officer
Tel: +44 (0) 1695 52759
Email: info@flowtechfluidpower.com (mailto:info@flowtechfluidpower.com)
Liberum (Nominated adviser and Sole Broker)
Richard Lindley / Ben Cryer / Will King
Tel: +44 (0) 20 3100 2000
TooleyStreet Communications (IR and media relations)
Fiona Tooley
Tel: +44 (0) 7785 703523
or email: fiona@tooleystreet.com (mailto:fiona@tooleystreet.com)
Statement from the Chair
Introduction
2022 presented certain challenges, with the uppermost being the significant
inflationary pressures impacting all aspects of our economy and exacerbated by
impacts of the conflict in Ukraine. We have therefore maintained our focus on
improving gross margins with the 42bps increase achieved in the year pleasing
to note, and driving productivity wherever we can. At the same time, we are
continuing to reinforce overall business resilience to ensure we can adapt
more quickly to the changing demands of our marketplace and manage the Group's
response to our risk environment with growing maturity.
Review of 2022
In each of our operating segments, we have responded to the inflationary
pressures on our cost base whilst benefiting through the effect on inventory
values. Group gross margin has been slightly enhanced and underlying costs
reduced through structural change in facilities and productivity. That said,
at segment level we have seen differing outcomes compared to our initial
expectations.
Implemented at the very start of 2022, the main objectives of the
consolidation work in the Flowtech division were achieved, both commercially
and operationally. Nevertheless, whilst accepting that there may be short term
risk to the customer experience whilst managing an extensive change process,
it was disappointing that financial performance took a step back. External
assessment has indicated that the general markets in which the division
operates have not been helpful, but our analysis accepts that improvements can
be made. With the ability to now ensure all aspects of the change become the
"new normal", our focus is on ensuring this clearly significant group asset
returns to growth, particularly with the enhancements from our digital
investment.
In a different vein, for the Fluidpower Group - covering our Solutions and
Services segments - we have been able to take advantage of some of the
tailwinds in the hydraulics sector and give early proof of the benefits from
our structural work undertaken in 2020 and 2021. For example, in Ireland the
Nelson Hi-Power operation formed in 2021 from the combination of two acquired
businesses, Nelson and Hi-Power, have used their complementary strengths to
create a single market approach with financial performance ahead of our
initial expectations. Also, after its creation in 2019, our Services operation
has turned its opening losses into the profitable position more in line with
the Board's expectations. Whilst it remains a "work in progress", it gives
confidence that our belief in its value to the Group as a coordinated entity
can translate into financial gain.
We have continued to make good progress with the main framework of both our
ESG and risk management agenda, with particular focus on employee related
issues. I am particularly proud our new Learning & Development plan has
been established, with technical training via enhanced apprenticeship
initiatives and our next generation of leaders accessing "The Accelerate
Programme" for the first time. Investing in our people will bring benefits in
the medium and long-term, and ensure we retain and reward our most progressive
employees. Across the Group we are engendering an approach to Health &
Safety management, including mental wellbeing, that encompasses all the
positive aspects of modern ideals to this important task, with building
culture at its heart. This is both the right thing to do but is increasingly
an essential part of our relationship with major customers and suppliers and
is also therefore creating an edge over our traditional competitors.
It is disappointing to report a non-cash £10.1m impairment against the
carrying value of goodwill which has been significantly influenced by the
sizeable increase in discount rates. Within the Flowtech UK business this was
also due to the reduced performance, albeit correlated to trends as reported
by the British Fluid Power Distributors Association. If last year's discount
rates had been applied this year the impairment would have reduced to £2.0m
and relate solely to one business unit, Orange County.
Strategic progress
Since my last report, it has been another year of solid progress with many of
the key elements of our strategic plan, with detail provided in the reports of
the Executive team. Whilst it has been disappointing that the introduction of
our new web capabilities was delayed, the lessons we have learned through the
process will be invaluable and will help guide our next steps as we seek to
enhance functionality to drive up conversion rates, and take advantage as SEO
rankings gradually improve. We are confident we will have a class leading
offering, with a growing influence on our profitability, also backed up by a
more progressive "data-driven" approach than we have historically been able to
use in business development.
With regard to the simplification of our commercial structure, Flowtech is now
complete and Solutions and Services are implementing the next steps to create
a single "Fluidpower Group" trading style that will further unlock synergies
to add to the strong financial performance already seen in both segments.
After the lengthy change process undertaken, we see it as essential that the
customer centric agenda is now reinforced.
We have been able to gradually reduce headcount by approaching 10% over recent
months, with the continued consolidation of warehouse activities into our
Skelmersdale campus a highlight, now added to by our new Engineering
Modification Centre, with both providing a sound base for managing future
growth.
Dividend
It has been pleasing to note that cash generation has improved, particularly
in the second half of the year in a more stable supply chain environment, and
my expectation is that this will continue in the first half of 2023, the Board
will be recommending a dividend of 2.1p per ordinary share in respect of 2022
at the AGM in June 2023. Subject to shareholder approval the dividend will be
paid on 21 July 2023 to Members on the register as at 23 June 2023 with an
ex-dividend date of 22 June 2023.
Board changes
In January 2023, we announced that Nigel Richens would be retiring as a
Non-Executive Director of the Company having served on the Board since May
2014; this will be effective following the release of the Group's fully
audited Annual report. I would like to thank him for his sterling service
over the nine-year period and wish him a long and happy retirement. Having
joined us at the start of the year, Stuart Watson will then become chair of
the Audit Committee, and I am delighted we have been able to attract a
candidate of Stuart's calibre.
Furthermore, today, with the announcement of these results, I am delighted to
welcome Mike England, previously Group COO of RS Group plc, as the new Group
CEO. On behalf of all his colleagues the Board would like to acknowledge and
thank Bryce Brooks for his significant commitment, skill and dedication to the
business during his 13-year tenure with the Group.
http://www.rns-pdf.londonstockexchange.com/rns/8904V_1-2023-4-11.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/8904V_1-2023-4-11.pdf)
Outlook
A year ago we believed that by the end of 2022 most of the key components of
our strategic plan would be in place and providing solid foundations to move
forward and unlock our undoubted growth potential. Whilst we again face
macro-economic challenges that may suppress growth in the short term, we
continue to focus on reducing costs where sensible to do so, and now seek to
consolidate the commercial and operational changes we have made to improve
customer service, and grow market share. We have entered 2023 with much of the
strategic building blocks in place after an array of challenges over the past
three years, and we will remain focused on completing the remaining actions of
our strategic plan. With global supply chains now more consistent, we can
reduce inventories to match our needs and return to generating strong
cashflows to support our investment activities, whilst exploiting our new
digital capabilities.
I would like to thank all my colleagues for all their efforts during 2022,
which was another year of significant change within the Group. It is again of
great credit to them that profitability has been maintained and, in several
areas, significantly improved whilst at the same time managing an extensive
change programme.
The Board is of the view that the broad medium term outlook for the business
is positive and is well underpinned our recent change programme.
Roger McDowell
Non-Executive Chair
12 April 2023
CEO's Year in Review
Business Review
A multitude of macro-economic factors have impacted our core markets in recent
years, and 2022 again did not see a return to the stable outlook that we have
all enjoyed for the majority of recent times. Whilst dealing with such change
is part of the skills we have, the pace with which events have unfolded in the
past few years has certainly been more pronounced. Whilst necessary to do so,
we have added to these external factors by transforming the commercial and
operational structure of our Group at the same time.
We therefore entered the year with certain external challenges:-product and
cost inflation, lengthy and inconsistent supply chains, delivery issues both
domestically and across the Irish Sea. Stock levels had been built to defend
against some of these risks, with the commensurate impact on net debt that was
still recovering from the impacts of lockdown. All these issues had differing
effects on the sectors that we serve, most notably affecting pneumatics into
MRO markets and hydraulics into Mobile OEM markets.
I believe it is of great credit therefore that my colleagues right across the
Group have been up to meeting all the challenges faced, with significant
progress being made, both in financial returns, profitability and margins, and
in our wider focus on strengthening our resilience against the risks we face
as a business.
In 2022 revenue grew by 5.2% to £114.8m and gross margin improved from 35.3%
to 35.7%. Underlying operating profit* increased to £8.6m (2021: £5.7m), an
improvement of £2.9m as the business continued its recovery from the COVID-19
pandemic. However, after a goodwill impairment charge of £10.1m, operating
loss was at £4.4m (2021: £3.7m profit). Further details relating to this
goodwill impairment are provided in the Financial Review section of this
announcement and Note 8.
My review below will focus on the underlying operating results of our three
segments, which excludes central costs, financing charges, separately
disclosed items and tax.
2022 (£000) (Unaudited) Flowtech Solutions Services Total
Total revenue 55,565 38,076 21,125 114,766
Underlying Segment Operating Profit (*) 6,887 4,405 1,804 13,096
Contribution % 12.4% 11.6% 8.5% 11.4%
2021 (£000) (Audited)
Total revenue 57,552 34,158 17,397 109,107
Underlying Segment Operating Profit (*) 7,543 2,689 (122) 10,110
Contribution % 13.1% 7.9% -0.7% 9.3%
(*) Underlying Segment Operating Profit is continuing operations' operating
profit before central costs and separately disclosed items detailed in note 3.
($) FY 2021 Segment results are re-stated to show results for Primary
Components (PFC) within the Flowtech Segment. Some overheads costs relating
to divisional management have been re-categorised as segment operating
overheads to present a more comparable segment result. Refer to note 3 for
reconciliation to prior year reporting.
In two out of our three segments we have been able to enhance contribution
rates significantly and have achieved our short term objective of exceeding
10% as a Group. This is before our central costs, which are primarily required
to implement change management and governance, as well as operate the plc.
In Flowtech a contribution rate of 12.4% was achieved (2021: 13.1%), which was
lower than our targets at the start of the year. As detailed in our commentary
on strategy development below, the segment undertook the most wide ranging
change programme in its history, and shortly afterwards replaced its multiple
web offerings with a single website. Whilst we are now happy with the changes
implemented, the difficulties of the change had a negative commercial effect
which impacted results.
As we ended 2021, being the immediate post COVID-19 year, a sense that sales
volumes had returned to pre-pandemic levels was misplaced. The markets that
Flowtech predominantly deal in declined, with the British Fluidpower
Distributors Association ("BFPDA") estimating that year on year pneumatic
distributor sales reduced by 5.1% (hydraulics increased by 5.3%).
We now believe that 2022 is more representative of the base market and we
expect to see gradual but steady growth from this base. Furthermore, having
continued to review analysis of negative growth areas, we have used the
information gathered to ensure our focus over recent months has been on
ensuring that the detailed execution areas for all our change programme -
commercial, operational and digital - are bedded down and give us the right
platform for growth. With the majority of this change period behind us, we
remain of the view that this segment should target a contribution rate of at
least 15% in the medium-term.
In Solutions, with the majority of product supply being furnished from
European sources, whilst there have been inflationary pressures, supply chains
have been consistent for most of the year, and on top of the uplift in buffer
stock that we instigated to support our customers, this has allowed us to take
advantage of the positive market conditions seen, particularly in mobile
hydraulics where many of our largest customers are heavily involved in export
markets. This segment is currently implementing an amalgamation of its sales
resources in England, under the banner of Fluidpower Group Mobile, with the
cost reduction work done in 2021 and 2022 bearing fruit, producing
contribution margins now well over our initial 10% target at 11.6% (2021:
7.9%). Whilst we are aware that we have benefited from strong market growth
that may not continue, we have started 2023 well.
Of particular note is the 8.5% contribution from our Services segment, where
the result achieved is a significant step forward and gives an indication of
the potential that this part of our business has to drive profitability. As we
have previously stated, over the past 12 months we had built a profitable
order book of deliverables scheduled for 2022, for both assembled products and
installations, and were therefore able to produce a much stronger contribution
in the second half of the year. I am pleased to say that this position has
carried over into 2023, and we are expecting to report further progress in the
first half of 2023. By its nature the financial return from this segment may
have more volatility than the more predictable Solutions and Flowtech income
streams, but we continue to view the segment's value positively, as does the
wider market. A highlight has been our involvement in the Thames Tideway
project in central London where hydraulic power units and cylinders,
manufactured and fitted by our cross functional team, are powering many of the
sluice gates controlling this major upgrade to the sewer system.
In all our operating segments, we have responded to the inflationary pressures
that all businesses have faced, with gross margins maintained, and in some
cases improved, and the upward pressures on our transactional cost base capped
with careful management. Product pricing in our sector is well informed with
major manufacturer price changes widely flagged; we work in partnership with
our customers to pass these through as quickly as practicable after their
implementation, and this has helped to support some of our enhancement in
gross margins. Whilst we believe we have managed this process well, if
inflation recedes, gross margins may trend towards prior norms.
The improvements in operational cost we identified in our strategic plan,
detailed below, have also allowed us to reduce our footprint in terms of
property, energy and, personnel costs and this has added to the tools we have
used to manage this inflation risk. We do not operate a fixed approach to
salary and benefits across the Group, and this flexibility has allowed us to
manage employee requirements in the different sectors and geographies that we
operate. For example, in Northern Ireland where customer demand has been
particularly strong in a tight employment market, we have redesigned our bonus
structures to improve staff retention.
With regard to other infrastructure costs we have moved through rent review
points over the past 24 months for the majority of our mixed-use facilities,
warehousing and office space. These have seen steeper increases than previous
periods, for example rent per annum for our main Pimbo Road site in
Skelmersdale increased by 17.5% with effect from November 2021. With
distribution forming the majority of our operational activities, we have not
experienced some of the more acute impacts from the current energy market
issues, and have also been able to cover our increased spend within our
overall product pricing strategies.
With regard to the supply chain issues that the Group faced in 2021, these
dissipated during the course of the year, and although not as yet returning to
long term norms, volatility has reduced and we are now able to plan more
efficiently. We have continued to work closely with our key suppliers, and in
the majority of cases the lengthy lead times seen in 2021 and 2022 are now
reducing. In line with this the buffer stock holdings that we created to
manage this risk is being reduced; our view remains that by the end of 2023
this will have completely rebalanced, and will allow us to again target a full
year Turn & Earn KPI of 130% by 2025 and much reduced working capital and
net debt.
Developments in Group strategy and progress in 2022
From the beginning of 2020, we have undertaken a wide ranging redesign of many
aspects of our Group's business approach, and in the past 12 months we have
made considerable progress with many of the key projects:
Operational cost savings
In 2022 we focused on completing the key elements of our targeted reductions
with further productivity improvements in both warehousing and back-office
functions. The creation of the Flowtech entity (detailed below) brought
benefits in cost control. Of particular note is the closure of our Leicester
warehouse facility with effect from 31 December 2022. Our legal and property
advisors are working with a prospective new tenant who will allow us to exit
from our remaining lease liability in full in the first half of 2023. The
Leicester site employed 21 staff in warehousing roles, and covers c.40,000
square feet. All stock was moved to our largest unit in Skelmersdale, with
picking activities fully integrated. Whilst this change has introduced an
element of increased operational risk, we have sought to mitigate this by
modest changes in internal design, with further developments expected over
time, and have also taken on additional space at our second location nearby.
A key development target for the Group has been to consolidate engineering
skills into a hub and spoke structure with a main facility also in
Skelmersdale. This "Engineering Modification Centre" ("EMC") will be able to
perform all aspects of the product refinement required by many of our
customers and represents an important aspect of authorised distributor status
from our key suppliers. This approach is allowing us to build improvements in
technical training, quality control and cost management, which we see as an
important element of our future growth platform. Fully completed in March
2023, the EMC is now embedded into our Pimbo Road operation running alongside
our pick and ship operation.
After the work undertaken since the start of 2020, we have reduced costs
across all segments, most sharply illustrated with the reduction in headcount
since late 2021 and shown in the graph. These reductions have been made by a
mixture of natural wastage and voluntary redundancies to match the
productivity improvements we have now built and have contributed significantly
to our defence against inflationary pressures. We believe the newly formed
operational structures will allow further improvements to be made over time.
Branding and organisation
On 4 January 2022 we completed a plan to integrate those businesses that were
operating as part of our Flowtech segment - namely Flowtechnology UK,
Indequip, Beaumanor Fluidpower, and Hydravalve to come together into a single
commercial entity, badged as Flowtech with new livery and organisational
structure. This wide-ranging project achieved all our objectives with regard
to coordinating a single market position to support our e-business
aspirations, as well as allowing us to achieve our cost management goals.
Solutions and Services are also now consolidating under the single Fluidpower
Group banner, with regional variations such as the NHP brand in Ireland, and
we will therefore have also achieved our objective in creating an integrated
business that can service all addressable markets in the UK and Ireland. After
this period of significant change, prolonged by the COVID-19 pandemic, in 2023
our management teams are now returning to the customer centric agenda that we
are confident will use our redesigned capabilities to exploit the growth
potential available to us.
Digital
After an investment of £212,000 in the year, £973,000 in total to date, our
rebuilt web platform went 'live' in May 2022, with full functionality
completed in October 2022. During this period we transitioned our long-term
customers from a variety of legacy web platforms to this single site and,
although the project took significantly longer than originally planned, we
have learnt lessons and are now pleased with the capabilities that have been
created.
In parallel, we have also built an infrastructure for modern digital marketing
techniques, which will enhance the value of our web investment, and we expect
the impact of this to also build over time.
In early 2023, as our SEO rankings rise, we will continue to develop
functionality to improve conversion rates, as well as react to customer
feedback from the first few months' trading on the new architecture. Overall,
we remain of the view that marginal sales from search driven enquiries will be
a good source of new revenue, enhancing our "offline" growth potential, which
is now embellished with more insightful "data-driven" knowledge.
People
Our focus is now on building a long term framework that will allow all our
employees a clear line of sight for career progression and look to meet their
own aspirations. Again, this is an area in which we believe our sector has
been behind more progressive attitudes in competing industries, and our
maturing position will create an economic edge to attract and retain the best
people. The investment we instigated in our HR resources, starting in 2021,
has been enhanced with specialist recruitment to lead a newly formed Learning
& Development function, with traineeships enhanced to make full use of the
Apprenticeship Levy, and a new cornerstone initiative, "The Accelerate
Programme", providing broad based management training for potential managers
and directors of the future. Our first courses have now been held with 23
delegates selected for a full year series of events, representing our
commitment to ensuring staff development is to the fore in our ESG plan.
Whilst a strong culture in our approach to Health & Safety management is
clearly an essential, we also believe that we need to take a leading role in a
modernisation process across our industry. In this regard in the past two
years we have invested in recruitment and training for all employees involved
in our Health & Safety framework. Whilst the inherent risks in our large
distribution centres are clear, and therefore assessments can be focused and
continuously refined, in the activities of our Services segment the risk
profile is more varied, and therefore we have also chosen to invest further in
specialist skills to reinforce employee safety. Alongside our strategy to
align ourselves with world class suppliers we believe this approach creates a
comprehensive package of risk management practices.
The skill sets put together in 2021 in our Management Board are now firmly
established and able to lead further change, and, in time, fast paced M&A
integration. Members of our team have also been playing a leading role when it
comes to shaping the priorities for the next decade for our sector, with Group
employees continuing to hold directorships of our industry body, the British
Fluid Power Association (BFPA).
Market
Much of the expansion of the Group through acquisition activity in the period
2014 to 2018, created a strong market position in our key markets of the UK
& Ireland. Around us we have seen further consolidation to continue the
move towards a smaller number of key players, and evermore away from the
"owner-managed" structures that were prevalent in much of our sector's
history. The acquisition activity undertaken over recent decades by the global
manufacturers such as Parker Hannifin and Eaton Corporation, and most recently
evidenced by the absorption of Eaton Hydraulics into Danfoss Power Solutions,
has forced the distributor sector to consolidate and simplify to match with
these changes. We therefore believe that the strategy changes we have
implemented are effectively managing the inherent competition risk that we
face every day.
Current trading and outlook
2022 saw the completion of many of the key changes that we defined in our 2020
strategy review and in 2023 we will continue to pursue all remaining elements
with vigour. Much of what has been completed is now part of "business as
usual" for our divisional management teams; in 2022, and now carried forward
into the early part of 2023, we have seen the potential for returns coming
through in both our Fluidpower Group segments - Solutions & Services -
where many key changes were made in 2020 and 2021. Flowtech has some way to
go after its own fundamental changes in 2022, whilst introducing new
technologies, and it will look to regain momentum in 2023.
We have been successful to date at passing through upward pricing pressures,
albeit some of this has been covered by our cost reduction activities, most
notably the closure of our Leicester distribution centre. With supply chains
now more predictable, and at both sector and geographical level demand
remaining broadly good, we are confident that all the major strategy decisions
we have made will create additional shareholder value and will quickly feed
through into strong cash generation available for further investment.
Bryce Brooks
Chief Executive Officer
12 April 2023
Financial Review
"In a period in which the business has experienced extreme inflationary
pressures it is pleasing to report a significant increase in underlying
profitability. This has been achieved by focusing on maintaining the quality
of our gross margin and our continued efforts to extract cost from the
business, most notably by a reduction in our headcount".
Russell Cash, CFO
Overview
The CEO Year in Review section provides commentary on the results from each of
our three reporting segments. Without wishing to repeat what has been said
elsewhere I believe the following points are worthy of emphasis:
Ø The improvement in the gross profit percentage is, at least in part, due to
our ability to pass on price increases to our customers. The quality of our
gross margin remains integral to the way we operate the business
Ø The costs we have taken out of the business, notably as a result of the
reduction in headcount, has enabled us to report a reduction in underlying
operating overheads notwithstanding the significant inflationary pressures
which we have faced, and
Ø The improved performance within the Services segment is particularly
pleasing.
2022 2021 Change
£m
£m
£m / %
Unaudited Audited
Group revenue 114.8 109.1 5.2%
Gross profit 41.0 38.5 6.4%
Gross profit % 35.7% 35.3% 42bps
Distribution expenses (4.4) (4.7) 0.3
Administrative expenses before central costs and separately disclosed items (23.5) (23.7) 0.2
Underlying segment operating profit 13.1 10.1 3.0
Central costs (4.5) (4.4) (0.1)
Underlying operating profit * 8.6 5.7 2.9
Less Separately disclosed items (13.0) (2.0) (11.0)
Operating (loss)/profit (4.4) 3.7 (8.1)
Financing costs (1.2) (0.8) (0.4)
(Loss)/profit before tax (5.6) 2.9 (8.5)
Tax (0.7) (0.7) 0.1
(Loss)/Profit after tax (6.3) 2.1 (8.4)
Underlying EBITDA* 11.6 8.4 3.2
(*) Underlying operating profit is used as an alternative performance measure
to assess the trading performance of the business and is operating profit
before separately disclosed items which are amortisation and impairment of
acquired intangibles, impairment of goodwill, share based payments, and
restructuring costs. Underlying EBITDA is underlying operating profit prior to
depreciation charges and website amortisation.
Central costs
A summary of central costs is provided below:
2022 2021
£000
£000
Audited
Unaudited
Management 2,084 2,118
PLC costs 523 536
Finance & Internal Audit 864 732
Project Management/Health & Safety/other 1,039 1,034
Total 4,510 4,420
Management costs include the employment costs of the Executive Officers,
Management Board members excluding those that have specific segment
responsibilities, and the cost of the Head Office function. It absorbs Group
wide costs in a number of areas, notably professional fees and insurance
costs. Overall savings made in certain areas, notably a reduction in
professional costs have been offset by the full year impact of senior recruits
who now form part of a mature central management team.
PLC costs capture the salaries of Non-Executive Directors and professional
fees associated with our PLC status. The impact of an increased number of
Non-Executive Directors has offset reductions achieved in other areas of cost.
Finance & Internal Audit covers the salary costs of the central finance
and internal audit function. The increase in the year reflects a slightly
increased headcount and the impact of pay increases.
Other areas of cost primarily relate to our project management and central
health and safety teams.
Separately disclosed items
2022 2021
£000
£000
Share option costs 372 166
Amortisation of acquired intangibles 943 1,054
Impairment of acquired intangibles 168 673
Impairment of goodwill 10,072 -
Restructuring costs 1,411 74
Acquisition costs - 11
Total 12,966 1,978
Impairment of goodwill
The impairment of goodwill charge relates to three cash generating units:
Flowtechnology UK ("FTUK") (£7.1m), Orange County (£2.8m) and Hi-Power
Transport (£0.2m).
The cash generating units subject to impairment have been, and are expected to
remain, profitable parts of our business. However, the net present value of
future cash flows have been particularly impacted by changes to discount rates
related to external factors. The table below sets out the pre-tax discount
rates used this year and last year, the degree of impairment necessarily taken
this year and the impact that using last year's, less onerous, rates would
have had on the calculations.
Pre-tax discount rate Impairment position
2022 2021 2022 deficit Impact of change in discount rate £m 2022 deficit based on 2021 discount rates
£m
FTUK 13.1% 10.4% -7.1 23.0 Nil
Orange County 15.4% 10.7% -2.8 0.8 2.0
Hi-Power Transport 13.6% 6.9% -0.2 2.4 Nil
In summary had the discount rates been the same as last year there would have
been no requirement to impair FTUK or Hi-Power Transport and the impairment
against Orange County would have reduced by £0.8m.
Restructuring costs
Restructuring includes £1.1m costs relating to our exit from the
distribution centre at Leicester, write off of the net book value of old
websites £0.1m, and other costs £0.2m relating to the amalgamation of
business units implemented under the Group's development strategy as detailed
in the CEO's Year in Review section.
Taxation
The tax charge for the year was £680K (2021: £741k). If the impact of
impairment entries and prior period adjustments is removed the effective rate
is 21.5% (2021: 20.6%).
Net Debt
Our Net Debt position (excluding lease liabilities) increased by £0.6m from
£15.4m to £16.0m, with a summary of the key drivers summarised in the chart
below:
Cash generated from operations of £10.6m compares favourably to a prior year
figure of £8.0m; this was to be expected given 2021 was a year in which
certain of our business were still recovering from the impact of the COVID-19
pandemic. The investment we chose to make in increasing stock levels, combined
with the impact of improved revenue on our debtor position, contributed to an
overall £5.4m increase in working capital (2021:£8.7m), and it is the
carrying cost of this additional working capital that, as expected, has
increased net financing costs to £1.2m (2021:£0.8m) Our investment in
capital expenditure totalled £1.7m.
Lease liabilities, which are not included in the graph below, decreased by
£0.4m to £6.7m (2021: £7.1m).
In H2 2022 bank debt reduced by £3.7m (from £19.7m to £16.0m) and lease
liabilities by £0.3m (from £7.0m to £6.7m).
(*) Opening and closing figures exclude IFRS 16 related liabilities. IFRS16
debt reduced by £0.4m in 2022.
Banking facilities
Our year end balance sheet shows net £16.0m current liability in respect of
our net bank debt position. This was classified in this way as the revolving
credit facility was due to expire in November 2023, within a year from the
year end balance sheet date.
Under terms agreed in February 2023 our £20m revolving credit facility
provided by Barclays Bank was extended for a 3 year term to February 2026.
Covenant terms under the new agreement are consistent with those previously
enjoyed, and the base charge for credit facilities for the period of the
arrangement are SONIA+2.40% and are subject to a non-utilisation fee of
0.84%. Under the terms of the Agreement it is possible for a further
extension of one year to be granted subject to certain conditions being
satisfied. The Group also has a £5m overdraft facility which was reviewed in
February 2023 and on-going support was approved.
Summary
In a period in which the business has experienced inflationary pressures it is
pleasing to report a significant increase in underlying profitability. This
has been achieved by focusing on maintaining the quality of our gross margin
and our continued efforts to extract cost from the business, most notably by a
reduction in our headcount. The pressures on our cost base continue into 2023;
we remain alert to this and will continue to take all possible and appropriate
steps to mitigate the impact.
Whilst our supply chain has become less volatile, we are still experiencing
lead times for certain products which are materially in excess of what we
would view as normal and what we became familiar with prior to the impact of
COVID-19. This has manifested itself in an increase in inventory levels in
each of the last two financial years (total £10m). We have plans in place to
manage this down through 2023 and beyond, at the same time remaining mindful
of balancing this with the need to ensure we have ongoing availability of
products to satisfy customer demand.
Russell Cash
Chief Financial Officer
12 April 2023
Consolidated Income Statement
For the year ended 31 December
Note 2022 2021
£000
£000
Unaudited
Continuing operations
Revenue 114,766 109,107
Cost of sales (73,792) (70,609)
Gross profit 40,974 38,498
Distribution expenses (4,428) (4,683)
Administrative expenses before separately disclosed items: (27,960) (28,125)
- Separately disclosed items 3 (12,966) (1,978)
Total administrative expenses (40,926) (30,103)
Operating (loss)/profit 4 (4,380) 3,712
Financial expenses (1,192) (833)
(Loss)/profit from continuing operations before tax (5,572) 2,879
Taxation 5 (680) (741)
(Loss)/profit from continuing operations (6,252) 2,138
(Loss)/Profit for the year attributable to:
Owners of the parent (6,252) 2,138
Earnings per share
Basic earnings per share - continuing operations 7 (10.17p) 3.48p
Diluted earnings per share - continuing operations 7 (10.17p) 3.45p
Consolidated Statement of Comprehensive Income
2022 2021
£000
£000
Unaudited
(Loss)/Profit for the year (6,252) 2,138
Other comprehensive income
Items that will be reclassified subsequently to profit or loss
- Exchange differences on translating foreign operations 318 (342)
Total comprehensive income for the year (5,934) 1,796
Total comprehensive income for the year attributable to:
Owners of the parent (5,934) 1,796
Consolidated Statement of Financial Position
Note 2022 2021
£000
£000
Unaudited
Assets
Non-current assets
Goodwill 8 53,092 63,164
Other intangible assets 9 3,523 4,517
Right-of-use assets 6,091 6,925
Property, plant and equipment 7,234 6,891
Total non-current assets 69,940 81,497
Current assets
Inventories 31,580 30,531
Trade and other receivables 24,526 21,566
Prepayments 387 472
Cash and cash equivalents 3,972 4,562
Total current assets 60,465 57,131
Liabilities
Current liabilities
Interest-bearing borrowings 19,967 -
Lease liability 1,705 1,561
Trade and other payables 19,569 21,111
Tax payable 1,219 604
Total current liabilities 42,460 23,276
Net current assets 18,005 33,855
Non-current liabilities
Interest-bearing borrowings - 19,927
Lease liability 5,008 5,586
Provisions 317 309
Deferred tax liabilities 1,281 1,528
Total non-current liabilities 6,606 27,350
Net assets 81,339 88,002
Equity directly attributable to owners of the Parent
Share capital 30,746 30,746
Share premium 60,959 60,959
Other reserves 187 187
Shares owned by the Employee Benefit Trust (124) (276)
Merger reserve 293 293
Merger relief reserve 3,646 3,646
Currency translation reserve 159 (286)
Retained losses (14,527) (7,267)
Total equity attributable to the owners of the Parent 81,339 88,002
Consolidated Statement of Changes in Equity
Share capital £000 Share Other Shares Merger Merger Currency Retained Total
premium
reserve
owned by the EBT
reserve
relief
translation
losses
equity
£000
£000
£000
£000
reserve reserve
£000
£000
£000
£000
Balance at 30,746 60,959 187 (372) 293 3,646 343 (9,795) 86,007
1 January 2021
Profit for the year - - - - - - - 2,138 2,138
Other comprehensive income - - - - - - (535) 193 (342)
Total comprehensive income for the year - - - - - -
(535) 2,331 1,796
Transactions
with owners
Share options 96 - - (14) 82
settled - - - -
Share-based payment charge - - - - - - - 166 166
Other movements - - - - - - (94) 45 (49)
Total transactions with owners - - - 96 - - (94) 197 199
Balance at 31 December 2021
30,746 60,959 187 (276) 293 3,646 (286) (7,267) 88,002
Balance at
1 January 2022
30,746 60,959 187 (276) 293 3,646 (286) (7,267) 88,002
Loss for the year - - - - - - - (6,252) (6,252)
Other comprehensive income - - - - - - 318 - 318
Total comprehensive income for the year - - - - - - 318 (6,252) (5,934)
Transactions
with owners
Share options settled - - - 152 - - - (25) 127
Share-based payment charge - - - - - - - 372 372
Dividends paid - - - - - - - (1,228) (1,228)
Transfers between reserves - - - - - - 127 (127) -
Total transactions with owners - - - 152 - - 127 (1,008) (729)
Balance at 31 December 2022 30,746 60,959 187 (124) 293 3,646 159 (14,527) 81,339
Consolidated Statement of Cash Flows
Note 2022 2021
£000
£000
Unaudited
Cash flow from operating activities
Net cash from operating activities 10 5,014 (441)
Cash flow from investing activities
Acquisition of property, plant and equipment (1,645) (1,342)
Acquisition of intangible assets (212) (761)
Proceeds from sale of property, plant and equipment 65 525
Net cash used in investing activities (1,792) (1,578)
Cash flows from financing activities
Repayment of lease liabilities (1,673) (1,882)
Interest on lease liabilities (227) (246)
Other interest (925) (547)
Proceeds from sale of shares held by the EBT 172 108
Dividends paid 6 (1,228) -
Net cash used in financing activities (3,881) (2,567)
Net change in cash and cash equivalents (659) (4,586)
Cash and cash equivalents at start of year 4,562 9,235
Exchange differences on cash and cash equivalents 69 (87)
Cash and cash equivalents at end of year 3,972 4,562
Consolidated Statement of Cash Flows
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
Unaudited
At 1 January 2021 19,887 - 7,737 27,624
Cash flows:
Repayment - - (1,882) (1,882)
Other movements 40 - (59) (19)
Non cash:
Additions - - 1,424 1,424
Foreign exchange difference - - (73) (73)
At 31 December 2021 19,927 - 7,147 27,074
At 1 January 2022 19,927 - 7,147 27,074
Cash flows:
Repayment - - (1,673) (1,673)
Other movements 40 - - 40
Non cash:
Additions - - 1,369 1,369
Reclassification of liabilities (19,967) 19,967 - -
Other lease movements (190) (190)
Foreign exchange difference - - 60 60
At 31 December 2022 - 19,967 6,713 26,680
Other lease movements are adjustments for the reduction in value of the lease
liabilities following either the exercise of an early termination clause or an
agreement with the landlord.
Extract of Notes to the Consolidated Financial Information
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, Bollin Walk,
Wilmslow, SK9 1DP. The registered number is 09010518.
News updates, regulatory news, and financial statements can be viewed and
downloaded from the Group's website, www.flowtechfluidpower.com
(http://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
(mailto:info@flowtechfluidpower.com) .
2. Accounting Policies
2.1 Basis of preparation
These condensed unaudited consolidated financial statements have been prepared
in accordance with the accounting policies set out in the annual report for
the year ended 31 December 2021 except for new standards adopted for the year.
While the financial information included in this preliminary announcement has
been prepared in accordance with UK-adopted international accounting standards
in conformity with the requirements of the Companies Act 2006, this
announcement does not in itself contain sufficient information to comply with
UK-adopted international accounting standards.
The financial information set out in this preliminary announcement does not
constitute the Group's statutory financial statements for the years ended 31
December 2022 or 2021 as defined in section 435 of the Companies Act 2006 (CA
2006). The financial information for the year ended 31 December 2022 has been
extracted from the Group's unaudited financial statements. Statutory financial
statements for 2021 have been delivered to the Registrar of Companies. The
auditors reported on those accounts; their report was unqualified and did not
contain a statement under either Section 498(2) or Section 498(3) of the
Companies Act 2006.
2.2 Going concern
The financial statements are prepared on a going concern basis which the
Directors believe to be appropriate for the following reasons:
· The Group generated an underlying operating profit of £8.6m, a
£2.9m increase over £5.7m achieved in 2021.
· The Group is expecting to trade profitably in 2023 and beyond
· The Group is financed by revolving credit facilities totalling
£20m and a £5m overdraft facility, repayable on demand. These facilities
were renewed in February 2023 with the terms of the revolving credit facility
extended until February 2026, with an option to extend by a further year to
February 2027
· The Group remains compliant with all covenants contained in the
Banking Agreement
· At the end of 2022 the Group's Net Debt was £16.0 million (£9.0
million within the aggregate banking facilities which include a £5.0 million
overdraft facility).
The Directors have prepared forecasts covering the period to December 2024.
Naturally, these forecasts include a number of key assumptions notably
relating, inter alia, to revenue, margins, costs and working capital balances.
In any set of forecasts there are inherent risks relating to each of these
assumptions. If future trading performance significantly underperformed
expectations, management believe there would be the ability to mitigate the
impact of this by careful management of the Group's cost base and working
capital and that this would assist in seeking to ensure all bank covenants
were complied with and the business continued to operate well within its
banking facilities.
The Directors have considered reverse stress testing, based on revenue
reductions, to determine scenarios in which the Group banking covenants could
be breached. The Directors view the set of circumstances required for such a
situation to crystallise as highly unlikely and as such not reasonably
plausible scenarios.
The Directors believe the business will continue to operate within its agreed
banking facilities and comply with all banking covenants. As such the Group
therefore continues to adopt the going concern basis is preparing its
financial statements.
3. Segment reporting
From the beginning of 2021, Management reviews the operations of the business
based on three segments - Flowtech, Fluidpower Group Solutions and Fluidpower
Group Services. These operating segments are monitored by the Group's Chief
Operating Decision Maker and strategic decisions are made on the basis of
adjusted segment operating results. Inter-segment revenue arises on the sale
of goods between Group undertakings.
The Directors believe that the Underlying Operating Profit provides additional
useful information on underlying 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 result from continuing operations
is shown below. The principal adjustments made are in respect of the
separately disclosed items as detailed later in this note; the Directors
consider that these should be reported separately as they do not relate to the
performance of the segments.
Segment information for the reporting periods are as follows:
For the year ended 31 December 2022 Flowtech Fluidpower Fluidpower Inter-segmental transactions Central costs Total continuing operations
£000
£000
£000
Unaudited £000 Group Group
Solutions Services
£000 £000
Income statement - continuing operations:
Revenue from external customers 55,565 38,076 21,125 - - 114,766
Inter-segment revenue 1,706 1,008 868 (3,582) - -
Total revenue 57,271 39,084 21,993 (3,582) - 114,766
Underlying operating result (*) 6,887 4,405 1,804 - (4,510) 8,586
Net financing costs (141) (68) (5) - (978) (1,192)
Underlying segment result 6,746 4,337 1,799 - (5,488) 7,394
Separately disclosed items (8,240) (785) (3,329) - (612) (12,966)
(Loss)/profit before tax (1,494) 3,552 (1,530) - (6,100) (5,572)
Specific disclosure items
Depreciation and impairment on owned plant, property and equipment 867 157 179 - 2 1,205
Depreciation on right of use assets 707 695 73 - 195 1,670
Impairment of goodwill 7,105 - 2,967 - - 10,072
Impairment of acquired intangibles - - 168 - - 168
Amortisation 230 683 124 - - 1,037
Reconciliation of underlying operating result
Underlying operating result (*) 6,887 4,405 1,804 - (4,510) 8,586
Separately disclosed items (8,240) (785) (3,329) - (612) (12,966)
Operating (loss)/profit (1,353) 3,620 (1,525) - (5,122) (4,380)
(*) Underlying operating result is continuing operations' operating profit
before separately disclosed items detailed later in this note.
Segment information for 2021 has been re-stated following the movement of
Primary Components from Fluidpower Group Solutions to Flowtech segment, as
this reflects the information reported to the chief operating decision maker.
Some overheads costs relating to Divisional management have been
re-categorised as segment operating overheads to present a more comparable
segment result.
A reconciliation of the re-stated values to prior year is provided below this
table.
For the year ended 31 December 2021 Flowtech Fluidpower Fluidpower Inter-segmental transactions Central costs Total continuing operations
£000
£000
£000
(re-stated) £000 Group Group
Solutions Services
£000 £000
Income statement - continuing operations:
Revenue from external customers 57,552 34,158 17,397 - 109,107
Inter-segment revenue 5,164 970 833 (6,967) -
Total revenue 62,716 35,128 18,230 (6,967) 109,107
Underlying operating result (*) 7,543 2,689 (122) (4,420) 5,690
Net financing costs (141) (72) (20) - (600) (833)
Underlying segment result 7,402 2,617 (142) - (5,020) 4,857
Separately disclosed items (925) (723) (124) (206) (1,978)
Profit/(loss) before tax 6,477 1,894 (266) - (5,226) 2,879
Specific disclosure items
Depreciation and impairment on owned plant, property and equipment
773 137 175 - 1,085
Depreciation on right of use assets 656 615 192 - 180 1,643
Impairment of acquired intangibles 673 - - - - 673
Amortisation 247 683 124 - 1,054
Reconciliation of underlying operating result
Underlying operating result (*) 7,543 2,689 (122) - (4,420) 5,690
Separately disclosed items (925) (723) (124) - (206) (1,978)
Operating profit/(loss) 6,618 1,966 (246) - (4,626) 3,712
(*) Underlying operating result is continuing operations' operating profit
before separately disclosed items detailed below.
Reconciliation of re-stated segment information for FY 2021 to prior year Flowtech Fluidpower Fluidpower Inter-segmental transactions Central costs Total continuing operations
report
£000
£000
£000
£000 Group Group
Solutions Services
£000 £000
Revenue as per prior year report 57,299 40,545 18,230 (6,967) - 109,107
Revenue for Primary Components categorised to Flowtech segment 5,417 (5,417) - - - -
Total re-stated revenue 62,716 35,128 18,230 (6,967) - 109,107
Underlying operating result in prior year report 7,101 3,505 140 - (5,056) 5,690
Underlying operating result for Primary Components categorised to Flowtech 492 (492) - - - -
segment
Allocation of costs to Segments (50) (324) (262) 636 -
Underlying operating result, re-stated 7,543 2,689 (122) - (4,420) 5,690
A breakdown of central costs can be found in the Financial Review
2022 2021
£000
£000
Unaudited Audited
Separately disclosed items
Separately disclosed items within administration expenses:
- Acquisition costs - 11
- Amortisation of acquired intangibles (note 9) 943 1,054
- Impairment of acquired intangibles (note 9) 168 673
- Impairment of goodwill (note 8) 10,072 -
- Share-based payment costs 372 166
- Restructuring 1,411 74
Total separately disclosed items 12,966 1,978
Acquisition costs relate to stamp duty, due diligence, legal fees, finance
fees and other professional costs incurred in the acquisition of businesses.
Share-based payment costs relate to charges made in accordance with IFRS 2
'Share-based payment' following the issue of share options to employees.
Restructuring costs relate to restructuring activities of an operational
nature following acquisition of business units and other restructuring
activities in established businesses. In 2022 restructuring costs included
£627K (including £337K of redundancy costs) relating to the de-commissioning
of the distribution centre at, £106K for the write off of the old website
and other costs relating to amalgamation of business units currently underway.
4. Operating profit
The following items have been included in arriving at the operating profit for
continuing operations:
2022 2021
£000
£000
Audited
Unaudited
Depreciation of property, plant and equipment under right-of-use assets 1,670 1,643
Depreciation of tangible assets 1,205 1,084
Amortisation of intangible assets - website 94 -
Amortisation of intangible assets - customer relationships and brands 943 1,054
Impairment of intangible assets 168 673
Impairment of goodwill 10,072 -
Impairment loss/(gain) on trade receivables and prepayments 29 (1)
Loss on foreign currency transactions 23 24
Repairs and maintenance expenditure on plant and equipment 113 95
Services provided by the Group's Auditor
2022 2021
£000
£000
Unaudited Audited
Audit of the statutory consolidated and Company financial statements of 78 88
Flowtech Fluidpower plc
Amounts receivable by the Company's Auditor and its associates in respect of: 182 172
Audit of financial statements of subsidiaries of the Company
No other services were provided to the Company and its subsidiaries by the
Group's auditor. Services are provided by other professional advisers as
deemed appropriate by the Board.
5. Taxation
Recognised in the income statement
Continuing operations: 2022 2021
Audited
Unaudited
£000
£000
Current tax expense
UK Corporation tax 734 493
Overseas tax 185 241
Adjustment in respect of prior periods 9 (60)
Current tax expense 928 674
Deferred tax
Origination and reversal of temporary differences 21 106
Adjustment in respect of prior periods (183) (112)
Change in tax rate (86) 73
Deferred tax (credit)/charge (248) 67
Total tax charge - continuing operations 680 741
Reconciliation of effective tax rate 2022 2021
£000 £000
Unaudited Audited
(Loss)/Profit for the year (6,252) 2,138
Total tax (expense) (680) (741)
Loss/(Profit) excluding taxation (5,572) 2,879
Tax using the UK corporation tax rate of 19.00% (2021: 19.00%) (1,058) 547
Amounts not deductible 2,045 61
Adjustment in respect of prior periods (174) (172)
Other adjustments (133) 305
Total tax expense in the income statement - continuing operations 680 741
Change in corporation tax rate.
An increase in the UK corporation tax rate from 19% to 25% (effective 1 April
2023) was substantively enacted on 24 May 2021, and the UK deferred tax
position for the group as at 31 December 2022 has been calculated based on
this rate.
6. Dividends
2022 2021
£000
£000
Audited
Unaudited
Final dividend of 2.0p (2021: £nil) per share 1,228 -
Total dividends 1,228 -
7. Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable
to ordinary Shareholders by the weighted average number of ordinary shares
during the year.
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 year. For diluted loss per share the weighted
average number of ordinary shares in issue is not adjusted since its impact
would be anti-dilutive.
Year ended 31 December 2022 Year ended 31 December 2021
Unaudited Audited
Loss Weighted average number of shares Loss Profit Weighted average number of shares Earnings
after tax
per share
after tax
per share
£000
Pence
£000
Pence
Basic earnings per share
Continuing operations (6,252) 61,493 (10.17p) 2,138 61,493 3.48p
Diluted earnings per share
Continuing operations (6,252) 61,770 (10.17p) 2,138 61,894 3.45p
2022 2021
£000
£000
Audited
Unaudited
Weighted average number of ordinary shares for basic and diluted earnings per 61,493 61,493
share
Impact of share options 277 401
Weighted average number of ordinary shares for diluted earnings per share 61,770 61,894
8. Goodwill
2022 2021
£000
£000
Unaudited
Cost
Balance at 1 January 63,164 63,164
Balance at 31 December 63,164 63,164
Impairment
At 1 January - -
Impairment charge 10,072 -
At 31 December 10,072 -
Carrying amount at 31 December 53,092 63,164
Background
The Group uses trading activity as the basis for determining reporting
segments. The Group's reporting segments are Flowtech, Fluidpower Group
Solutions and Fluidpower Group Services. Goodwill has been allocated for
impairment testing purposes to 10 cash-generating units ("CGU") across these 3
segments (2021 - 14 CGUs). These CGUs represent the lowest level within the
Group at which goodwill is monitored for internal management purposes.
Various changes have been made in the current period in the identification of
CGUs and the allocation of goodwill to those units since the prior period. The
main changes are:
1. FTUK, Beaumanor, Hydravalve, and Indequip businesses were integrated into a
single brand called Flowtech (represented by the CGU referred to as "FTUK").
The combined business operates as a single commercial entity with a single
online presence; thus the businesses have been combined into one CGU
2. OEM customers in Primary Components business were transitioned into the HTL
brand
3. The remaining Primary Components business was merged into the FTUK platform.
(Note Primary Components was formerly a CGU in its own right but has now been
transitioned partly into FTUK and partly onto HTL )
With the above changes, and after taking into account the impairment of FTUK,
Orange County and Hi-Power Transport, the carrying amounts of goodwill
allocated now stands as at 31 December 2022 are:
Cash generating unit £000
FTUK 42,041
Primary Systems 751
HTL 3,938
HES 1,204
Hydroflex-Hydraulics Oud 2,050
Flowtechnology Benelux BV 1,015
Nelson Hi-Power 1,869
Derek Lane 224
Orange County -
Hi-Power Transport -
Total 53,092
Impairment tests
The carrying amount of each CGU was determined by calculating the sum of the
carrying amounts of all intangible assets (including goodwill) and tangible
assets attributable to that unit. These were then compared with the value in
use calculations for each CGU based on discounted cash flows of future period
forecasts. Management prepared forecasts for each CGU for a two year period,
(extending to five years where appropriate). All forecasts have been approved
by the Board.
Cash flows beyond the period forecast by management for each CGU were
extrapolated at an expected long-term growth rate of 2%. This growth rate does
not exceed the long-term average growth rate for the market in which the Group
operates.
Goodwill impairment charges in 2022
In total an impairment charge of £10,072k has been taken in 2022 across the
following CGUs:
Ø FTUK - £7,105k
Ø Orange County - £2,793k
Ø Hi-Power Transport - £174k
FTUK
An impairment charge of £7,105k has been taken leaving a balance of goodwill
of £42,041k. As with other CGUs the value in use calculation is sensitive to
a number of assumptions. In arriving at the impairment charge the forecasts
assumed a pre tax discount rate of 13.1% and a revenue growth rate of 4% in
each of 2024, 2025, 2026 & 2027. It should be noted that each 1% movement
in the discount rate has an impact of approximately £7m on the calculation
and each 1% movement in revenue an impact of approximately £6m. Movements in
revenue and discount rates are considered the factors to which the value in
use calculation is most sensitive.
FTUK is the principal component of the Flowtech segment. As alluded to in the
Chair's report and CEO year in review sections of the report 2022 was a period
in which the business underwent a significant degree of change and suffered
from challenging market conditions; nevertheless, the business generated a
11.9% return on revenue. Our ambition remains to see the segment as a whole
(FTUK plus Flowtechnology Benelux) deliver a return on revenue of at least
15%. The investment we have made in operational changes and in particular the
impact we expect our investment in our E-Business/Digital agenda provides us
with confidence that the assumptions used in deriving the value in use figures
are appropriate. We would hope that discount rates return to more traditional,
i.e. lower, levels and that this combined with an improved performance in
2023, will provide headroom within the calculation when next performed.
Orange County
The Orange County CGU was written down to its recoverable amount (£1,631k) by
recognising an impairment charge of £2,793k to the goodwill. This leaves
£472k in intangible assets (customer relationships) and a £85k deferred tax
liability at the end of the year. Management believes the forecast assumptions
underpinning the value in use of Orange County are sufficiently cautious. It
should be noted that each 1% movement in the discount rate has an impact of
approximately £120k on the calculation and each 1% movement in revenue an
impact of approximately £120k. Movements in revenue and discount rates are
considered the factors to which the value in use calculation is most
sensitive.
Notwithstanding this necessary accounting treatment, Management remains
confident that the business will continue to generate a positive contribution.
Hi-Power Transport
An impairment charge of £342k has been taken to eliminate the carrying value
of goodwill (£174k) and other intangible assets (£168k - see note 9).
Management believes the forecast assumptions underpinning the value in use of
Hi-Power Transport are sufficiently cautious. It should be noted that each 1%
movement in the discount rate has an impact of approximately £150k on the
calculation and each 1% movement in revenue an impact of approximately £180k.
Movements in revenue and discount rates are considered the factors to which
the value in use calculation is most sensitive.
Notwithstanding this necessary accounting treatment, Management remains
confident that the business will continue to generate a positive contribution.
Key assumptions used in value in use calculations
The Group has determined that the recoverable amount calculations are most
sensitive to changes in revenue growth rates, gross margins and discount
rates.
Discount rates have increased substantially over prior year due to increase in
cost of borrowing and risk-free rates. This has had a significant impact on
the VIU calculations for all CGUs and was a key factor in the need to impair
the goodwill of FTUK, Orange County and Hi-Power Transport. Comments in this
regard are provided in the Financial Review section.
Sensitivity to changes in key assumptions
The calculations to assess the value in use of each CGU are naturally based on
a series of assumptions; of particular note are those relating to revenue,
EBITDA margins and discount rates. The calculations are obviously sensitive to
deviations, in either direction, to these assumptions; the comments below seek
to provide some analysis and commentary around the most sensitive areas.
With regards to discount rates this is clearly driven by factors outside of
the control of the business; it is worthy of note that the discount rates used
to underpin the 2022 calculations are significantly higher than those used in
2021. It is of course hoped that economic/political factors return transition
to a less volatile position which would lead to discount rates returning to
more typical/traditional levels.
Two of our CGUs are showing marginal positions based on the calculations
performed, they are:
1. Primary Systems
Primary Systems - a £59k surplus with value in use of £6,121k compared with
a carrying value of £6,062k. The carrying value of goodwill is £751k and
other intangibles (net of associated deferred tax) £76k. It should be noted
that each 1% movement in the discount rate has an impact of approximately
£400k on the calculation and each 1% movement in revenue an impact of
approximately £280k. Movements in revenue and discount rates are considered
the factors to which the value in use calculation is most sensitive.
Primary Systems has undergone significant change in 2022 with a much-improved
trading performance as a result, particularly evident in the second half of
the year. 2023 should benefit from the impact of the majority of income/profit
from the Thames Tideway project; with the actions taken we are confident the
business can consistently deliver acceptable levels of profit beyond this
period. These factors underpin the assumptions used in the value in use
calculations.
2. Hydroflex
Hydroflex - a £279k surplus with value in use of £5,004k compared with a
carrying value of £4,725k. The carrying value of goodwill is £2,050k and
other intangibles (net of associated deferred tax) £388k. It should be noted
that each 1% movement in the discount rate has an impact of approximately
£500k on the calculation and each 1% movement in revenue an impact of
approximately £300k. Movements in revenue and discount rates are considered
the factors to which the value in use calculation is most sensitive.
Hydroflex Hydraulics has produced an improved trading performance in 2022 and
we expect this to be at least maintained in 2023 and beyond.
9. Other intangible assets
2022 Unaudited Acquired Customer relationships Acquired Brands Asset under construction Website Total
2021 Audited
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
£000
£000
£000
£000
£000
£000
£000
£000
£000
£000
Balance at 1 January 9,371 9,371 1,173 1,173 761 - - - 11,305 10,544
Transfer between asset categories - - - - (761) - 761 - - -
Additions - - - - - 761 212 - 212 761
Balance at 31December 9,371 9,371 1,173 1,173 - 761 973 - 11,517 11,305
Amortisation and impairment
Balance at 1 January 5,657 4,711 1,131 350 - - - - 6,788 5,061
Amortisation 901 946 42 108 - - 94 - 1,037 1,054
Impairment 168 - - 673 - - - - 168 673
Balance at 31December 6,726 5,657 1,173 1,131 - - 94 - 7,993 6,788
Carrying amount at 2,645 3,714 - 42 - 761 879 - 3,523 4,517
31 December
The impairment charge in 2022 relates to the intangible assets associated with
the Hi-Power Transport business. Amortisation is charged to administration
costs in the Consolidated Income Statement. The amortisation of customer
relationships and brands of £943K (2021; £1,054K) is a separately disclosed
item and is referred to as the amortisation of acquired intangibles.
10. Net cash from operating activities
2022 2021
£000 £000
Unaudited Audited
Reconciliation of profit before taxation to net cash flows from operations
Loss/(profit) from continuing operations before tax (5,572) 2,879
Depreciation and impairment of property, plant and equipment 1,205 1,084
Depreciation on right-of-use assets (IFRS 16) 1,670 1,643
Impairment of right-of-use assets (IFRS 16) 388 -
Finance costs 1,192 833
Loss/(gain) on sale of plant and equipment 57 (209)
Other movements - (95)
Amortisation of intangible assets 1,037 1,054
Impairment of intangible assets 168 673
Impairment of goodwill (note 8) 10,072 -
Cash settled share options (42) (26)
Equity-settled share-based payment charge 372 166
Exchange differences on non-cash balances 65 -
Operating cash inflow before changes in working capital and provisions 10,612 8,002
Change in trade and other receivables (2,851) (3,325)
Change in stocks (832) (8,764)
Change in trade and other payables (1,702) 3,496
Change in provisions 7 (59)
Cash generated from operations 5,234 (650)
Tax (paid)/reclaimed (220) 209
Net cash generated/(used) from operating activities 5,014 (441)
Annual General Meeting (AGM)
The AGM is to be held at 10am on 15 June 2023 at the Group's Headquarters,
Flowtech Fluidpower plc, Bollin House, Bollin Walk, Wilmslow SK9 1DP. The
Notice convening the Company's 2023 Annual General Meeting shall be published
on the Company's website and posted to shareholders who have elected postal
copies in due course.
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. Therefore, nothing in this document
should be construed as a profit forecast by the Company.
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