REG - Focusrite PLC - Final Results
08/12/2022 07:00
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RNS Number : 0440J Focusrite PLC 08 December 2022
Strictly Embargoed until 07.00, 8th December 2022
Focusrite plc
("Focusrite" "the Company" or "the Group")
Final Results for the Year Ended 31 August 2022
Focusrite plc (AIM: TUNE), the global music and audio products company,
announces its Final Results for the year ended 31 August 2022.
Financial and operational highlights
FY22 FY21 Change
Revenue (£ million) 183.7 173.9 +5.6%
Gross margin % 45.3% 48.4% -3.1ppts
Adjusted(1) EBITDA(2) (£ million) 41.7 47.5 -12.2%
Operating profit (£ million) 28.7 35.8 -19.8%
Adjusted(1) operating profit (£ million) 34.7 41.4 -16.2%
Basic earnings per share (p) 42.5 48.8 -12.9%
Adjusted(1) diluted earnings per share (p) 52.0 57.5 -9.6%
Total dividend per share (p) 6.0 5.2 +15.4%
Net debt/cash(3) (£ million) (0.3) 17.6 -£17.9m
Revenue growth of 5.6% reflects organic constant currency(4) decrease of 2.8%
more than offset by acquisitions and foreign exchange translation benefits.
Organic growth reflects maintaining the majority of demand from COVID-19 and
the benefit of new products
o Focusrite and Novation products down by -5.3% to £117.8 million (FY21:
£124.4 million) reflecting strong retention of sales against COVID-19 period
comparators. Growth of 17% compared to FY20.
o ADAM Audio revenue down by 25% to £17.8 million (FY21: £23.9 million)
against the prior year due to now resolved supply issues impacting
availability in the first half of the year as previously highlighted.
o Martin Audio grew by 56% to £31.9 million (FY21: £20.4 million),
surpassing pre-COVID-19 levels with strong growth in live markets helped by
the acquisition of Linea Research.
o Sequential grew by 206% to £16.2 million (FY21: £5.3 million),
reflecting a partial year comparator. Organic constant currency(3) growth is
18% reflecting successful new product introductions.
• Strong growth in our Rest of World region with Europe,
Middle East and Africa and North America broadly stable.
• Gross margin impacted by the one off duty benefit in the
prior year, an inflationary cost environment, particularly high freight rates
and increased component prices, partially offset by sales price increases.
• Acquisition of Linea Research, a long term supplier of
Martin Audio, completed in March 2022 for £12.3 million, and rights of the
iconic Oberheim brand completed in May 2022 for £4.5 million.
• Planned strong production levels throughout the year
enabled us to rebuild stock levels prior to the 2022 holiday season, reflected
in a year-end net debt balance(3) of £0.3 million (FY21: net cash £17.6
million)
• Launch of 22 new products across all brands throughout the
year.
• Continued investment in people and systems to deliver on
our strategy to be a Great Place to Work.
• Final dividend of 4.15p recommended, resulting in 6.0p for
the year, up 15% on prior year.
1 Comprising earnings adjusted for interest, taxation, depreciation and
amortisation.
2 Adjusted for amortisation of acquired intangible assets, sale of trademark
and other adjusting items
3 Net debt/cash defined as cash and cash equivalents, overdrafts and amounts
drawn against the RCF including the costs of arranging the RCF
4 Organic constant currency growth. This is calculated by comparing FY22
revenue to FY21 revenue adjusted for FY22 exchange rates and the impact of
acquisitions.
Commenting on the final year results Tim Carroll CEO, said:
"I am immensely proud of the Group's performance this past year: our
leadership teams continue to prove they can meet both ordinary and
extraordinary challenges head on and achieve strong results. Our content
creation brands continue to experience healthy demand and our live and
installed portfolio is back in full swing with the resurgence of live events.
For the current year, our first quarter trading has finished in line with our
expectations. Overall demand for the Group's portfolio of products has
remained strong.
"We remain mindful of the current significant global economic and political
challenges, as well as the ongoing cost pressures in the supply chain, but we
have worked hard to build back our inventory position. This provides greater
resilience against supply chain volatility and ensures we are able to meet
demand as we head into the key holiday season in FY23.
"We have also introduced a number of measures to maintain margins, through
pricing actions, refinement of our routes to market and ongoing review of our
production costs. With new product launches across the product portfolio
planned for FY23 and beyond we remain confident that the Group continues to
have significant organic growth potential within our existing brands. In
tandem, the Group has proven that it has the capability to successfully
execute on its proactive M&A strategy, carefully considering potential
acquisitions that are not only earnings enhancing, but can also add to our
market potential, expand our R&D footprint, and add scale and dynamism to
our business.
"All these factors combined leave us optimistic about our future prospects."
Availability of Annual Report and Notice of AGM
The Annual Report and Accounts for the financial year ended 31 August 2022 and
notice of the Annual General Meeting ("AGM") of Focusrite will be posted to
shareholders by 4 January 2023 and will be available on Focusrite's website at
www.focusriteplc.com.
Dividend timetable
The final dividend is subject to shareholder approval, which will be sought at
Focusrite's AGM on 3 February 2023.
The timetable for the final dividend is as follows:
3 February 2023 AGM to approve the recommended final dividend
12 January 2023 Ex-dividend Date
13 January 2023 Record Date
17 February 2023 Dividend payment date
- ends -
Enquiries:
Focusrite plc:
Tim Carroll (CEO) +44 1494 462246
Sally McKone (CFO) +44 1494 462246
Investec Bank plc (Nominated Adviser and Joint Broker) +44 (0) 20 7597 5970
David Flin
Ben Farrow
William Brinkley
Charlotte Young
Peel Hunt LLP (Joint Broker) +44 (0) 20 7418 8900
Paul Gillam
Michael Burke
James Smith
Belvedere Communications
John West +44 (0) 203 008 6866
Llew Angus +44 (0) 203 008 6867
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR)
Notes to Editors
Focusrite plc is a global audio products group that develops and markets
proprietary hardware and software products. Used by audio professionals and
musicians, its solutions facilitate the high-quality production of recorded
and live sound. The Focusrite Group trades under ten established brands:
Focusrite, Focusrite Pro, Novation, Ampify, ADAM Audio, Martin Audio, Optimal
Audio, Linea Research Sequential and Oberheim.
With a high-quality reputation and a rich heritage spanning decades, its
brands are category leaders in the music-making and audio recording
industries. Focusrite and Focusrite Pro offer audio interfaces and other
products for recording musicians, producers and professional audio facilities.
Novation and Ampify products are used in the creation of electronic music,
from synthesizers and grooveboxes to industry-shaping controllers and
inspirational music-making apps. ADAM Audio studio monitors have earned a
worldwide reputation based on technological innovation in the field of studio
loudspeaker technology. Martin Audio designs and manufactures
performance-ready systems across the spectrum of sound reinforcement
applications. Linea designs, develops, manufactures and sells market
innovative professional audio equipment globally. Sequential designs and
manufactures high end analogue synthesizers under the Sequential and Oberheim
brands.
The Company has offices in four continents and a global customer base with a
distribution network covering approximately 240 territories.
Focusrite plc is traded on the AIM market, London Stock Exchange.
Chairman's Report
Focusrite is unique as being the only global group of branded businesses in
the music technology industry listed on the London Stock Exchange. It is
therefore with great pride that I present this set of financial results, our
eighth as a public company, and one in which we have once again made
substantial progress.
We trace our origins back to 1989, and the foundation of Focusrite Audio
Engineering Ltd., which is still the largest operating company in the Group.
Our business has completely transformed and evolved since then, and now
trades under ten established brands: Focusrite, Focusrite Pro, Novation,
Ampify, ADAM Audio, Martin Audio, Optimal Audio, Sequential, Oberheim and
Linea Research. Our brands are recognised as category leaders in the
music-making, recording, live performance and electronic musical instrument
industries. We have offices on four continents and a global customer base with
a distribution network covering approximately 240 territories.
We have achieved success by pursuing our stated mission of growing both
organically and through the acquisition of complementary brands that address
similar market verticals.
Music technology encompasses several strands. Our original and core business
under the Focusrite brand is that of Audio Interfaces, used by musicians of
all abilities, amateur and professional, to record music using the computer as
the medium. Focusrite has become the leading brand globally in this field.
We have added to Focusrite with musical instruments (Novation, Sequential and
Oberheim synthesisers), loudspeakers for the recording studio (ADAM Audio) and
live performance and installations (Martin Audio). Martin Audio has created a
second brand, Optimal Audio, for installation in public spaces like bars,
restaurants, and other areas where low operating expertise is available, but
quality performance is expected. In the last year Martin Audio acquired Linea
Research, the supplier of amplifiers to Martin Audio and a well-established
and respected brand in its own right.
Within months of acquiring Martin Audio in 2019, the world was hit by
COVID-19. With demand for Martin Audio's products impacted by the pandemic,
Martin Audio's management did an outstanding job of managing costs and
refocussing the business on the installation market where government mandated
lockdowns were seen as presenting an opportunity for venue owners to invest in
assets in public performance spaces and houses of worship and I am pleased to
report that since the lifting of live music restrictions Martin Audio's
business has prospered with demand for festivals and touring solutions and
overall continuing to grow beyond pre-COVID levels.
Conversely, as many millions were forced into various lockdowns, Focusrite
experienced a substantial uplift in demand globally for our interface and
musical instrument products. As anticipated, demand and sales volumes for
home creation solutions have reduced from the unprecedented high levels of
demand during the peak of the pandemic but pleasingly remain materially ahead
of pre COVID-19 pandemic levels. Many trade sources cite continued strong
demand for streaming services and content creation, giving us confidence that
this strong demand is sustainable.
The Focusrite Scarlett product range continues to be a standout success. This
is a range of inexpensive, easy to set up and use, audio interfaces used by
musicians and others to record digitally, which is how music is mostly
recorded these days. By using our products, many musicians have rediscovered
their passion and learned to record for the first time at home. Others, most
notably podcasters, producers of content for radio, and voice actors in
television and film who are now also able to work remotely, also use our
technology at home. The change in working practices is now well established.
It is also cost effective and flexible, compared with having to bring talent
into a studio.
When sales of Scarlett rapidly increased during the lockdowns, our
manufacturing partners in Malaysia and China stepped up to the challenge.
Despite some supply chain challenges, notably with silicon chips, our
operations management and our partners deftly managed the situation to ensure
that we consistently met the demand. This was reflected in exceptional FY20
and FY21 performance. This sustained high level of demand is reflected in FY22
revenue, which is well above the pre pandemic levels of FY19, albeit not at
those peak levels.
This demand has been further boosted by the successful acquisition and
integration into the Group of Sequential, a classic American brand of
synthesizers which in turn has acquired the Oberheim brand. Two hugely popular
synthesizer brands under one roof, based in San Francisco, has enabled the
company to meet all our expectations and more, for this acquisition.
After the pandemic boom, FY22 has been a year of restoring normality and
stability. We have paid for our recent acquisitions with our existing cash
reserves and maintained a largely unleveraged balance sheet. We have rebuilt
our inventories, which were depleted during peak demand, achieved price
increases to support Group margins, which have come under significant
pressure, and since year end are finally seeing cost reductions in shipping.
We are managing other inflationary impacts and have turned in a Group
performance that is still significantly ahead of pre COVID results.
The outlook remains positive for the Group. We are continuing to invest in
new product development in all our businesses to grow each of them to deliver
increased market share objectives and seize new market opportunities. We are
investing in new brands and businesses that fit our strategic objectives to
build a truly great family of brands. This is an area where we employ a
dedicated business development manager and to which I personally contribute
through my network of contacts and recognition established over many decades
working in the industry.
In January 2022 I formally stepped down from my executive role; I am today
Non-executive Chairman of the Group, and I remain as committed as ever to the
success of the Group. I am grateful to the skill and efforts of the entire
executive leadership team, the business leadership teams and all our Group
employees, who continue to be the driving force of our success.
Music will always play a vital role in our lives and despite the many
macro-economic challenges we face, not least the consequences of the
continuing conflict in the Ukraine for which we hope for a swift and peaceful
conclusion, we look forward to a successful FY23.
Philip Dudderidge
Founder and Non-executive Chairman
CEO Statement
I am pleased to report our results for the financial year ended 31 August
2022. The Group has performed admirably during a period of unprecedented
global challenges, once again delivering revenue growth and executing on its
strategy of both organic growth and successful acquisitions, adding two new
brands to our family: Oberheim and Linea Research.
FY22 saw some return to normality as the COVID-19 pandemic subsided and the
resultant slow but steady return of the live sound business. Additionally,
demand for content creation solutions continued to be steady over the year,
compared to record high volumes in 2021 during the peak of worldwide
lockdowns. Most pleasingly demand remains materially higher than at pre
COVID-19 levels.
FY22 was not without its challenges, particularly in component supply issues;
high freight costs; war in Europe; heightened signs of recession and an
increased cost of living world-wide. Despite this the Group has fared well
throughout the period, by leveraging the size and scale of our organisation to
deftly negotiate component and freight costs, and by raising prices across
most brands to partially mitigate margin impact. Importantly, the Group
brought 22 new products to market, continued to invest in our infrastructure
to support a global organisation, and further refined our routes to market
approach.
Our employee base has grown to over 500 strong and is supported by a
distribution network covering over 240 territories. Investing in our people
is paramount to our success and we look wherever possible to promote from
within, whilst also hiring top talent from around the world, across all
divisions and brands.
Our key locations are in the UK (High Wycombe, Hertfordshire and London),
Germany (Berlin), Hong Kong, Mexico, Australia and the US (Los Angeles,
Nashville and San Francisco). Our employee base consists of an incredible
group of passionate individuals, many accomplished musicians, DJs, audio
engineers, live sound specialists and podcasters in their own right. The Group
is fortunate to have so many employees who use our solutions in real world
applications, bringing their feedback and experiences back into their work to
continually improve our offerings.
Creating a great place to work is one of the core pillars for our growth
strategy. The Group recruits and retains the top talent in our industry. We
continue to invest in our employees with tactical training, an increased HR
footprint, regular reviews, career advancement opportunities across the
brands, biannual surveys, and consistent communication. This past year, we
onboarded our first Group Head of People as well as a Head of HR for the US
region. From our various employee surveys, we know our employees highly
value Diversity and Inclusion (D&I) awareness, and champion green
initiatives and charitable efforts inside our industry. The Group has made
good strides in advancing all these causes, positioning itself to be an
industry leader on these fronts.
Our Operations
The Group's portfolio of products is sold in approximately 240 territories
across the Globe. We are acutely aware that the landscape in which customers
want to purchase our solutions is ever evolving, which in turn presents us
with new opportunities. Hence, we continue to refine our routes to market;
utilising a combination of retailers and system integrators (online as well as
bricks and mortar shops), regional distributors, and direct to end user via
our own e-commerce platform and in-app sales.
Last year we sold over 1.5 million physical products and had over 1.3 million
downloads of our various software titles. Across the Group, we launched 22 new
products along with numerous updates to existing ranges. Our manufacturing
approach is multifaceted, driven by the specific needs of each individual
brand, with a mixture of manufacturing on site and mass production in China
and Malaysia.
Our Markets
The Group's portfolio could be categorised into two, broad categories:
· Solutions that enable the creation of content - approx. 83% of FY22
revenue; and
· Solutions that enable the reproduction of sound - approx. 17% of FY22
revenue
hese two broad categories have distinct customers, routes to market and
product specific technical requirements.
Most of our products across Focusrite, Focusrite Pro, Novation, Ampify, ADAM,
Sequential and Oberheim are focused on Content Creation. These products are
used by a wide range of customers for creating music and audio content: from
absolute beginners, hobbyists to aspiring and seasoned professionals, many of
them household names.
Martin Audio, Optimal Audio and Linea Research products are focussed on
professional Audio Reproduction. These solutions offer best in class sound for
small bands to the largest professional tours and festivals, and for permanent
installations for bars, clubs, corporate, houses of worship, theatres and
performance halls.
Each of the individual business units continue to focus on innovation,
ensuring a robust roadmap of refreshes for current products whilst also
introducing completely new solutions. Content creation and live sound
reproduction workflows are constantly evolving, and the Group aims to lead the
industry by spending considerable effort and resources in our various R&D
efforts. Additionally, the Group has a very proactive stance towards
M&A, carefully considering potential acquisitions that are not only
earnings enhancing, but which can also expand our reach into existing and new
markets, and enhance our R&D capability.
The Group is committed to learning as much as we can from our customers,
actively collecting data during their on-boarding and user journey as they use
our solutions. Additionally, we collate our own data with industry market
sources to ensure that we are always on top of our customers' needs and buying
behaviours. Greater detail on our markets and customer types is provided
elsewhere in this report.
Operating review
Despite the numerous macroeconomic and global supply chain issues experienced
this year, the Group still delivered top line growth and made considerable
progress in restocking our distribution channels. We also progressed a number
of initiatives across routes to market, and ESG, and invested in our employees
and IT infrastructure across the Group. This investment, along with continued
heightened freight and component costs in the year, resulted in an adjusted
EBITDA below the record profits achieved in FY21, but still an admirable
performance, given the factors cited above and well above FY20 and the last
pre pandemic year of FY19.
Revenue for the Group was £183.7 million, up 5.6% from the previous year.
Our Content Creation focused brands; finished the year roughly flat over the
previous year, but this was against a very strong comparable in the previous
year driven by the lockdown boost. ADAM Audio was materially impacted by
component shortages that caused stock-outs on their very popular A Series
mid-range monitors and consequently this impacted the release for the refresh
on this line. This was partially offset by the full year effect and strong
performance from Sequential which joined the Group in FY21. Looking forward to
FY23, we expect to see recovery to more normal levels of performance at ADAM
Audio.
Our Audio Reproduction brands, all witnessed strong growth, increasing 56%
over prior year. This was primarily fuelled by the return of live events
across the globe and the addition of Linea Research in March.
Purchase of Linea Research
Linea Research manufacturers professional power amplifiers and digital signal
processors and joined the Group in March 2022. The acquisition has helped
secure amplifiers for Martin Audio (which is a long-standing customer of Linea
Research) during this critical time. This was achieved using the Group's
considerable expertise in sourcing components thereby helping to shore up
supply. Since joining the Group, Linea Research has significantly increased
production to meet market demand that continues to grow, alongside further
integration into the Group and investment in people to fuel continued growth
for the future.
Linea Research significantly increases the total addressable market for the
Group by having our own brand sales of professional electronics to the
professional live and installed sound sector.
Purchase of Oberheim Brand
Oberheim Electronics was founded in 1969 and rose to prominence as a
synthesizer producer throughout the 1970s. By the mid-80s, it had risen to
prominence and powered the characteristic sound of hits like Jump by Van
Halen, 1999 by Prince, and Flash by Queen, among many others.
Changing musical tastes combined with delays in introducing new products
resulted in the Oberheim brand all but disappearing by the late 1980s, but the
keyboards continued to be prized by collectors, with vintage instruments often
fetching over $20,000 on the second-hand market.
Recognising this value and through our relationship with Tom Oberheim, the
Group acquired all the IP and trademarks relating to Oberheim synthesisers in
May 2022. Our strategy is to collaborate with Tom to bring to life an entire
portfolio of Oberheim instruments, to expand our share of the synthesizer
market and to offer an alternative that appeals beyond the core Sequential
customer base. While it is early days on this journey, the market interest and
positive feedback we have received, particularly regarding the recent launch
of the OBX8 has been extremely encouraging and we look forward to our revival
of this legendary brand.
Current economic challenges
As the pandemic began to subside, a number of challenges related to COVID-19
remained throughout the year. Additionally, as the year progressed new global
macro factors have also added complexity and concern across our industry, like
many others. As with previous years, the Group has met these challenges head
on, working tirelessly to ensure a steady and reliable flow of products to our
channel; protecting the well-being of our employees, and mitigating the impact
of cost inflation on gross margin.
Component availability and pricing, as cited in last year's report, is an
ongoing concern that virtually every manufacturer has had to deal with. During
this past year, demand for silicon and wafers has continued to increase,
causing lead times and pricing to remain at unprecedented levels. The Group
has had to face leads times as long as 36 months as well as spot buys on the
open market at exaggerated prices. We have benefited from placing early orders
during the onset of COVID-19, resulting in most of the major components
flowing in on a regular basis. However, we have encountered numerous occasions
where shipments have not arrived on time, requiring us to look at even more
elevated spot buys or the potential of stock outs in our channel. We continue
to monitor and mitigate this issue rigorously, leveraging the size and scale
of the Group's overall component needs to negotiate priority and better
pricing.
Likewise, freight and logistics costs have also continued throughout last year
at unprecedented high pricing levels, although we have seen reductions since
year end. During the second half of last year, the Group did see some
reduction on lead times as well as pricing, but these still finished the year
materially higher than in previous years. Again, the Group has leveraged our
scale to address this issue, and in addition, has negotiated with a number of
major resellers to collect up their orders directly from China and thus take
on the freight and duty cost themselves.
Beyond working on the above issues as a Group as opposed to individual brands,
we also put through price increases throughout last year to help offset some
of the gross margin impact. These price increases were calculated by looking
at mid to long term forecasts on costs, price elasticity models for every
category, and discount structures for our channel.
The Group has kept a watchful eye on rising global economic issues around
inflation, cost of living, and the protracted war in Ukraine. Over the past
few years, the Group has invested more into our IT infrastructure enabling us
to monitor the current and projected future performance of our businesses
better and thereby improving the speed and quality of our decision-making.
Brand overview
Focusrite and Focusrite Pro
Our Focusrite branded family of audio interfaces, Scarlett and Clarett, offer
customers high quality solutions to capture and process audio. Across this
past year, while demand levels were not as high as during the pandemic
periods, demand for our audio interfaces has remained at steady levels, and
materially up over pre pandemic volumes. Additionally, we have expanded our
suite of FAST plug-ins, offering both perpetual licenses as well as rent to
own schemes.
This past year, we introduced a new Focusrite branded suite of products
focused on Podcasting. Podcasting is now a well established media form in its
own right and with a massive following. There is a growing number of new
podcasts every month, and in turn growing advertising revenue. To serve these
customer's unique needs, we launched the Vocaster series in June 2022. These
solutions have received rave reviews in both mainstream magazines such as the
New York Times, Macworld and Forbes, as well as with key influencers and sites
dedicated to Podcasting.
The Focusrite Pro suite of solutions provides professional audio engineers and
facilities with the best quality audio in scalable systems that fit the need
for any professional workflow. This year's performance continued to be
impacted by component shortages leading to a decline in sales over the prior
year. We expect supply to remain constrained in this area over the coming
year.
Novation and Ampify
Electronic music, and its many genres, continues to grow and to democratise
the art of music creation. This past year, we introduced three new products to
our controller keyboard line: the Launchkey88, the FL Studio Mini and FLStudio
37. These new offerings offer more choices to musicians looking for tight
integration with the world's most popular music creation software.
Ampify expands the Group's electronic music offerings into free to download
iOS and cross-platform desktop solutions that allow anyone to experiment with
and create high-quality soundtracks. Our iOS music creation app, Launchpad
OS, is one of the most popular electronic music apps available. Over the past
year, both offerings had 1.28 million downloads, with roughly 192,000 in-App
purchases. Last year, we began monthly and annual subscription services for
both platforms. This year the number of subscribers grew by 44% and the
monthly recurring revenue grew by 51%.
ADAM Audio
ADAM Audio professional studio monitors are known internationally as one the
most accurate and reliable suite of reference monitors available. 2022 has
brought with it much anticipated product launches for ADAM Audio, most
notably, the all new A Series. The A Series builds on and reinvents our
industry standard AX models, trusted in thousands of studios across the globe.
The A Series has been the largest launch in ADAM Audio's history, with a
successful rollout of all five models and strong demand. Due to various
component shortages and lockdowns during the first half, the A Series shipped
much later than originally planned, with products not getting into the channel
until late in the second half of the year. This resulted in a period of almost
five months where supply of the old AX series was limited, and the new A
Series was not available. Across all our brands, ADAM Audio was the most
impacted from component issues, but we are pleased to report that supply and
production are now flowing smoothly again. There is also more on the horizon
as its portfolio roadmap has been reviewed and we aim to fulfill these plans
with an expanded R&D team over the coming year.
Martin Audio
Martin Audio remains and has extended its lead as the UK's largest
manufacturer of professional loudspeakers for both live and installed sound.
Following the pandemic, FY22 was the first year that live performances
returned in full force including some of the world's largest festivals such as
BST Hyde Park and Glastonbury where Martin Audio graced the main stages once
again. Major system sales of products capable of throwing 30 metres plus
followed and brought a host of new rental partners to the Martin Audio fold.
This was further supported by runaway sales of our flexible TORUS constant
curvature system for throws of 15 - 30 metres, which won many plaudits and
fans throughout the live sound community. Further refinement to our 3D system
design software - Display3 - has been well received and has enabled rental
partners to better understand the performance of our sound systems.
Installations which provided a bed rock of revenue in FY21 further accelerated
in FY22, as much like live sound, people around the world ventured out in ever
bigger numbers to re-experience venues for hospitality and entertainment. This
meant a further increase in sales of ranges designed for up to 15m throws,
most notably with our popular CDD and ADORN install ranges as well as fuelling
yet further sales of TORUS.
"Supply-chain" was the watch word of the industry in 2022. Decisions taken
during the height of the pandemic around long term relationships with
suppliers contributed to Martin Audio being better placed than many as demand
surged across the industry. Equally, this year the team has worked proactively
to mitigate supply challenges, and this has helped with a continuity of supply
against a backdrop of elevated demand.
Optimal Audio
Optimal Audio delivered meaningful revenue for the first time and reaffirmed
the belief that the brand has a bright future targeting commercial audio
sectors with electronics and speakers for throws up to 15 metres. This year
the brand signed 50 distribution agreements, and added notable products
including more ceiling and on-wall speakers as well as further enhancing its
WebApp, seen as the key to the success of the eco-system approach of the
brand.
In its first full year of trading Optimal Audio returned a small profit as we
continue to invest in R&D for future growth in the commercial audio space.
Linea Research
In March of this year Linea Research, a long time supplier of amplifiers to
Martin Audio joined the Focusrite family. Linea Research has begun to work
closely with Martin Audio, to improve supply chain planning and robustness and
to work collaboratively on new product ideas. Performance in the five months
in which Linea Research has been part of the Group has exceeded expectations.
Sequential
This year concludes the first complete fiscal year with Sequential as a member
of the Group. Sequential products continued to win awards from the industry,
with Music Radar declaring Take 5 as its Best Hardware Synth of 2021, and
Prophet-5 picking up the Award for Technical Achievement in the Musical
Instrument Hardware category at the National Association of Music Merchants
TEC Awards in June 2022.
Demand for analogue synthesizers continues to be strong and Sequential managed
production and component inventory carefully throughout the year, avoiding any
major interruptions to the continued supply of all existing products, from the
entry-level Take 5 through to its higher-end models.
Tragically, Dave Smith, founder of Sequential and leader of the engineering
team, died unexpectedly in May 2022. We pay tribute to the immense
contributions he made to the art of synthesizer design and intend to carry his
spirit of design innovation into the future. We offer our heartfelt
condolences to his family, friends and colleagues.
Several members of the product team have stepped into expanded roles, and the
company remains fully equipped to bring new products to market on time. The
Sequential team expanded to 21 full-time team members, with approximately half
of them engaged in research and development.
In May 2022, the Group added the Oberheim brand to its portfolio by acquiring
all the IP and trademarks owned by Tom Oberheim. We launched the Oberheim
OBX8 keyboard shortly afterwards. The Oberheim OBX8 was the culmination of a
year-long design collaboration between Tom Oberheim and the Sequential team,
and the acquisition and product together represent the welcome return of the
iconic brand. With this second leading synthesizer brand, the Group can
dramatically expand its market reach and appeal to a wider range of
synthesizer buyers. We are at work on producing a full product line of
Oberheim offerings.
The return of Oberheim was enormously exciting news within the industry. As
Trent Reznor, Academy Award winner and creative force behind Nine Inch Nails,
put it in a Forbes magazine article covering the revival of Oberheim: "The
incredible Oberheim sound absolutely holds its own in the present." The new
OBX8 product design won over many fans and became an immediate success. Our
production capacity continues to be absorbed with fulfilling the heavy order
interest.
We remain excited about the product roadmap and overall potential for these
two legendary brands and plan multiple new products to drive growth throughout
FY23 and beyond.
Routes to Market
The Group's routes to market strategy is constantly evolving. We are investing
considerable time and resource in order to improve efficiency and margin in
this area. We aim to ensure we are on top of customer buying behaviours,
trends and opportunities in every region we service.
Our content creation brands utilise a combination of brick-and-mortar shops,
e-tail focused resellers, distributors and our own direct to end user
e-stores. Our audio reproduction channel includes rental companies, system
integrators, distributors, and sales directly to end customers.
We continue to invest in people and infrastructure in local regions, allowing
us to service our resellers and end users locally and in their own language.
Most regions have their own demand generation teams, working with local
artists and the community to ensure our products are represented and resonate
with customers.
Regional review
The Group reports regional performance in three groups: North America, EMEA
and Rest of World (comprising APAC and LATAM). Top line revenue numbers for
North America and EMEA were flat year over year, with ROW growing at 30%.
North America
North America remains our largest region for the Group, accounting for 41% of
total revenue in FY22. This past year, and coming off very high prior year
comparatives, our Content Creation brands finished at 95% compared to the
prior year. Our Audio Reproduction brands, coming off a very low base from
lockdowns, had a very strong performance at 69% up over prior year. Our
North American operations include sales and marketing, customer support,
finance, and remote employees across product and engineering. Last year's
creation of one unified team in the US has settled in well and allowed the
group to continue to leverage the size and scale of our brands.
Europe Middle East and Asia (EMEA)
Europe remains our second largest region, comprising 38% of total revenue in
FY22. Eight out of ten of the Group's brands are headquartered in Europe. As
part of our route to market evolution, all our Content Creation brands now
have a centralised sales and marketing team focused on the EMEA region. This
new structure, formally started on 1 September 2022 will give us one unified
team representing the totality of our Content Creation brands to our
resellers.
We believe this structure will allow us to scale our demand generation efforts
and work closer with our local resellers and distributors to ensure our brands
are front of mind with their customers. Our Content Creation brands, coming
off very high pandemic level comparisons and facing headwinds caused by the
conflict in Ukraine and concerns about recession, still managed to turn in a
good performance, finishing approximately 10% down when compared to the prior
year. Our Audio Reproduction brands, coming off a low base during lockdowns,
also turned in a strong performance, finishing the year 103% up on the prior
year.
Rest of World (ROW)
The ROW region comprises Asia Pacific (APAC) and Latin America (LATAM).
Overall, ROW represents 21% of the Group's total revenue in FY22, up 30%
compared to the previous year and in line with our initiatives to grow this
region. Our Content Creation brands had a strong year, finishing the year 38%
up versus the prior year. This was partially due to the continued investment
in the region. LATAM now has a team of eight people across the region for
sales, marketing and support functions. For APAC, this past year saw the Group
go direct in Australia, setting up our own logistics and warehouse to supply
our Content Creation brands directly to the reseller channel.
Additionally, more localised content and demand generation efforts proved
fruitful in both China and Japan, areas where the Group will continue to
invest. For our Audio Reproduction brands, ROW finished the year 12% up versus
the prior year. This was lower than the growth in other regions primarily due
to ROW's live sound and installed business coming back much earlier in 2021
than in other regions.
Summary and Outlook
I am immensely proud of the Group's performance this past year: our leadership
teams continue to prove they can meet both ordinary and extraordinary
challenges head on and achieve strong results. Whilst there is still much well
publicised uncertainty about global markets, we continue to see the strengths
of our brands driving healthy demand across the entire portfolio. For the
current year, our first quarter trading has finished in line with our
expectations. Overall demand for the Group's portfolio of products has
remained strong.
We remain mindful of the current significant global economic and political
challenges, as well as the ongoing cost pressures in the supply chain, but we
have worked hard to build back our inventory position. This provides greater
resilience against supply chain volatility and ensures we are able to meet
demand as we head into the key holiday season in FY23.
We have also introduced a number of measures to maintain margins, through
pricing actions and ongoing review of our production costs. With new product
launches across the product portfolio planned for FY23 and beyond we remain
confident that the Group continues to have significant organic growth
potential within our existing brands. In tandem, the Group has proven that
it has the capability to successfully execute on its proactive M&A
strategy, carefully considering potential acquisitions that are not only
earnings enhancing, but can also add to our market potential, expand our
R&D footprint, and add scale and dynamism to our business.
All these factors combined leave us optimistic about our future prospects.
Tim Carroll
Chief Executive Officer
Financial Review
Overview
Overall the Group has had a resilient year, delivering revenue growth of 5.6%,
but the global macro headwinds have resulted in a decline in adjusted EBITDA
of 12.2% and a decline of 9.6% in adjusted diluted earnings per share (EPS).
Income statement
2022 2022 2022 2021 2021 2021
£m £m £m £m £m £m
Adjusted Non-underlying(1) Reported Adjusted Non-underlying(1) Reported
Revenue 183.7 - 183.7 173.9 - 173.9
Cost of sales (100.4) - (100.4) (89.8) - (89.8)
Gross profit 83.3 - 83.3 84.1 - 84.1
Administrative expenses (48.6) (6.0) (54.6) (42.7) (5.6) (48.3)
Operating profit 34.7 (6.0) 28.7 41.4 (5.6) 35.8
Net finance income (expense) 1.9 - 1.9 (0.8) - (0.8)
Profit before tax 36.6 (6.0) 30.6 40.6 (5.6) 35.0
Income tax expense (6.0) 0.2 (5.8) (6.9) 0.2 (6.7)
Profit for the period 30.6 (5.8) 24.8 33.7 (5.4) 28.3
(1) Non underlying costs and income as defined in note 2 and note 7 to the
financial statements.
Revenue
Revenue for the Group grew 5.6% from £173.9 million to £183.7 million;
adjusting for acquisitions and constant currency this is an organic decline of
2.8%. Sequential was acquired at the end of April 2021 and FY21 included four
months of revenue, Linea Research was acquired in March 2022 and FY22 includes
six months of revenue.
The Euro average exchange rate was €1.18 (FY21: €1.14). Sterling has
weakened against the US dollar from $1.36 in FY21 to $1.31 in FY22. This has
increased reported revenue but the currency impact is broadly neutral at a
gross profit level as the majority of cost of sales are also charged in US
dollars.
FY22 Revenue FY22 Acquisition FY22 Organic FY21 FY21 Exchange FY21 Constant Currency FY22 FY22
Revenue Revenue Growth OCC Growth(1)
Focusrite 97.2 97.2 102.1 1.5 103.6 -4.8% -6.2%
Novation 20.6 20.6 22.3 0.3 22.6 -7.6% -8.9%
ADAM Audio 17.8 17.8 23.8 -0.4 23.4 -25.2% -24.0%
Martin Audio 31.9 (3.1) 28.8 20.4 0.3 20.7 56.4% 39.5%
Sequential 16.2 (10.0) 6.2 5.3 - 5.3 205.7% 17.9%
Total 183.7 (13.1) 170.6 173.9 1.7 175.6 5.6% -2.8%
(1) OCC (organic constant currency growth). This is calculated by comparing
FY22 revenue to FY21 revenue adjusted for FY22 exchange rates and the impact
of acquisitions.
Revenue growth of 5.6% for the full year has improved since the half year
(HY22: -2.5% reported), with revenue in the second half of the year growing by
15.5% compared with the second half of FY21. Revenue in the second half was
helped by improved component supply which was a significant issue in the
previous 18 months, a strong dollar (with 41% of the Group's sales in North
America), and the introduction of new products across several of our brands,
in particular the new A Series in ADAM Audio and OB-X8 in Sequential, both of
which have been launched to critical acclaim.
The Focusrite segment comprises the products used in the recording and
broadcasting of music or voice, the primary ranges being Scarlett and Clarett,
declined by 6.2% on an organic constant currency basis and 4.8% on an organic
basis to £97.2 million (FY21: £102.1 million). Revenue for the Novation
synthesizer and controller ranges decreased, on a reported and organic
constant currency basis by 7.55% and 8.9% respectively to £20.6 million
(FY21: £22.3 million). Both segments are against strong comparators,
particularly during the first half of FY21, and included sales to rebuild
stock in our channel to be ready for the forthcoming holiday season.
ADAM Audio makes studio monitors of the type used by many of the Group's
customers. Revenue has reduced by 25% in the year (24% on an organic constant
currency basis) to £17.8 million (FY21: £23.8 million). With the
resolution of the problems experienced in the transition of the A Series range
in the first half of the year, ADAM Audio's revenue strengthened in the second
half to £9.4 million from £8.4million in the first half, and with the
successful launch of the A series expects to see revenue improvements in the
upcoming year.
Martin Audio has built on the growth seen in the first half of the year of 44%
with full year reported revenue growth of 56% (39% on an organic constant
currency basis reflecting the acquisition of Linea Research in March 2022) and
with revenue of £31.9 million for the year, compared to £20.4 million in
FY21. The resurgence in live sound following COVID-19 lockdowns has
contributed to this growth, as has the extension of the Optimal range, now
contributing £1 million to Martin Audio's overall sales.
Sequential also had a strong second half with growth of 82% leading to full
year growth of reported revenue of over 200% (18% on an organic constant
currency basis: FY21 includes only 4 months of sales from Sequential's
acquisition in April 2021). The introduction of the OB-X8 Synthesiser in the
final quarter of the year supported this growth, being the first of the new
Oberheim products, following the acquisition of the Oberheim brand in May
2022.
FY22 Revenue FY22 Acquisition FY22 Organic FY21 FY21 Exchange FY21 Constant Currency FY22 FY22
Revenue Revenue Growth OCC Growth(1)
North America 74.5 (4.8) 69.7 74.6 2.4 77.0 -0.1% -9.4%
EMEA 70.1 (6.8) 63.3 69.3 (1.9) 67.4 1.2% -6.1%
Rest of the World 39.1 (1.5) 37.6 30.0 1.2 31.2 30.3% 20.5%
Total 183.7 (13.1) 170.6 173.9 1.7 175.6 5.6% -2.8%
(1) OCC (organic constant currency growth). This is calculated by comparing
FY22 revenue to FY21 revenue adjusted for FY22 exchange rates and the impact
of acquisitions.
North America represents 41% of the Group's revenue and saw negative 9%
organic constant currency revenue decline, against a particularly strong FY21
COVID tailwind. Due to the strength of the dollar during the year reported
revenue was broadly flat between years. Compared to FY20 the Group's revenue
in this region is still ahead by 46% on a reported basis. Focusrite brands
grew by 6% on a reported basis in the second half, with channel stock
returning to levels in line with our service expectation, but against strong
full year comparators, resulted in a full year decline of 5%. ADAM Audio's
stock situation was particularly weak in this region, with reported revenue
for the full year lower by 50%. This was more than offset by the exceptional
growth for Martin Audio which grew by 56% for the full year on a reported
basis.
EMEA, which represents 38% of Group revenue, grew marginally by 1.2% (-6.1% on
an organic constant currency basis) to £70.1 million. This growth was led
by Martin Audio, where sales more than doubled in this region for the year.
Both Focusrite and ADAM Audio reported overall revenue decreases across the
year, against strong comparators.
ROW comprises mainly APAC and LATAM and represents the remaining 21% of Group
revenue. Revenue in ROW grew strongly by 30.3% (20.5% on an organic constant
currency basis), with growth across the majority of our brands. This region
was particularly strong for in APAC, as we continue to strengthen our local
presence in these markets, launching our own distributor in Australia in
December 2021, resulting in 55% reported revenue growth for the year for our
Focusrite brands in this region.
Segment profit
Segment profit is disclosed in more detail in note 7 to the Group's financial
statements 'Business Segments'. The revenue is compared with the directly
attributable costs to create a segment profit. The only major change has been
the inclusion of Linea Research upon acquisition and the inclusion of
Focusrite and Focusrite Pro into one segment, reflecting the way these brands
are now managed
Gross profit
In FY22, the gross margin was 45.3% down from 48.4% in FY21, which included a
one-off benefit from US duty rebates of £1.5 million (0.9% points of margin).
The remainder of the decline was principally due to the high freight rates and
the increased costs from component spot buys experienced in the first half of
the year continuing into the second half, with sea freight rates only recently
starting to reduce to closer to pre pandemic levels. Going forward the Group
is mindful of the current inflationary environment on costs, and whilst we
seek to mitigate this through pricing, as we have done this year, we expect
some impact from promotional pricing over the competitive holiday season,
which may offset some of the benefits from lower freight.
Importantly, the gross margin remains higher than the historic pre COVID-19
levels of 42.2% in FY19. Since FY19 structural factors, such as improved
routes to market, with more products being sold either directly to dealers
rather than distributors or directly to the consumer together with focused
cost and price management and, reducing royalties and tariffs, have
successfully more than offset the increased costs of components such that
margins have improved.
Administrative expenses
Administrative expenses consist of sales, marketing, operations, the
uncapitalised element of research and development and central functions such
as legal, finance and the Group Board. These expenses were £54.6 million, up
from £48.4 million last year. These costs also include depreciation and
amortisation of £7.0 million (FY21: £6.1 million), amortisation of acquired
intangible assets, £5.1 million (FY21: £4.0 million) and non-underlying
items, £0.9 million (FY21: £1.6 million), which are discussed further below.
Excluding these items, administrative costs were £41.6 million (FY21: £36.6
million), an increase of £5.0 million over the prior year.
Acquisitions partially contributed to this increase with the annualisation of
Sequential contributing £0.9 million and the inclusion of Linea Research a
further £0.4 million. With the opening of markets travel and marketing
costs have increased, although not to pre COVID levels, as teams adjust to a
hybrid way of working, adding £1.5 million of cost this year. In addition,
we have strengthened our IT infrastructure and a central team now supports all
Group companies, with standard approaches to security and governance, and an
agreed roll out plan for our Group ERP system, Oracle Netsuite.
We continue to invest in our product teams and local sales and marketing, with
distribution now managed by a local team in Australia, the costs of which have
been offset by increased gross profit in this market.
Adjusted EBITDA
EBITDA is a non-GAAP measure but it is widely recognised in the financial
markets and it is used within the Group, as adjusted for non underlying items,
as a key performance measure and as the basis for some of the incentivisation
of senior management within the Group. Adjusted EBITDA decreased from £47.5
million in FY21 to £41.7 million in FY22. This was primarily as a result of
the factors affecting costs and gross margin as described above.
2022 2022 2022 2021 2021 2021
£m £m £m £m £m £m
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
Operating profit 34.7 (6.0) 28.7 41.4 (5.6) 35.8
Add - amortisation of intangible assets 4.8 5.1 9.9 4.1 4.0 8.1
Add - depreciation of tangible assets 2.2 2.2 2.0 - 2.0
EBITDA 1 (#_ftn1) 41.7 (0.9) 40.8 47.5 (1.6) 45.9
1 EBITDA is defined as earnings before tax, interest, depreciation, and
amortisation. Adjusted EBITDA includes items treated as non-underlying which
are explained in note 15.
Depreciation and amortisation
Depreciation of £2.2 million (FY21: £2.0 million) is charged on tangible
fixed assets on a straight-line basis over the assets' estimated useful lives.
Amortisation on non-acquired intangibles is mainly charged on capitalised
development costs, writing-off the development cost over the life of the
resultant product. Development costs related to an individual product are
written-off over a periods of between two years to ten years reflecting the
different lifespans of the products across our brands. Normally, the
capitalised development costs are greater than the amortisation, reflecting
the continued investment in product development in a growing group of
companies.
During FY22, capitalised development costs were £7.9 million (FY21: £4.9
million), compared with amortisation of £3.9 million (FY21: £3.5 million).
As expected, our development costs have increased this year as the Group's
R&D teams build out the future product roadmap, investing in the
development of the new products launched during the year and we have begun to
capitalise costs for Sequential, with £1.6 million being capitalised from
this brand in the year. In addition, this year we acquired licences to utilise
certain technologies which have added £1.7 million to intangible assets.
Non-underlying items
In FY22 the Group acquired Linea Research with associated acquisition costs
relating to the transaction of £0.6 million (FY21: £0.7 million relating to
Sequential acquisition). In addition, as part of the acquisition, the Group
has agreed to pay employee bonuses if agreed gross profit targets to May 2023
are achieved. It is currently anticipated that these targets will be
achieved and £0.1 million of non-underlying costs has been included for these
bonuses, which will continue pro rata in FY23. Also included is £1.1 million
(FY21: £0.8 million) relating to a bonus for Sequential employees, based on
achieving gross profit targets to December 2022. These costs have been
offset in FY22 by £0.8 million of income relating to the sale of a trademark.
In FY21 a further £0.1 million of employee related costs related to
restructuring has also been included in non-underlying costs. Non-underlying
items also include amortisation of the intangible assets from acquisitions of
£5.1 million (FY21: £4.0 million). This has increased due to the inclusion
of amortisation on the Sequential and Linea Research brands. See note 7 to
the financial statements.
Foreign exchange and hedging
Sterling has marginally strengthened against the euro between years, but has
weakened more significantly against the US dollar.
Exchange rates 2022 2021
Average
USD:GBP 1.31 1.36
EUR:GBP 1.18 1.14
Year end
USD:GBP 1.16 1.38
EUR:GBP 1.16 1.12
Sterling has weakened against the average US dollar rate from $1.36 to $1.31.
The US dollar accounts for 41% of Group revenue but over 80% of cost of sales
so this has increased revenue but is neutral in terms of gross profit.
The Euro comprises approximately a quarter of revenue but little cost. The
Group has continued entering into forward contracts to convert euro to
sterling. The policy adopted by the Group is to hedge approximately 75% of the
euro flows for the current financial year (year ended August 2022) and
approximately 50% of the euro flows for the following financial year (FY23).
In FY22, approximately three-quarters of euro flows were hedged at €1.13,
and the average transaction rate was €1.18, thereby creating a blended
exchange rate of approximately €1.14. In FY21, the equivalent hedging
contracts were at €1.11, again close to the transactional rate of €1.14
and so creating a blended exchange rate of €1.12.
Finance income of £2.3 million (FY21: £nil million) includes a large gain
from retranslation of US dollar balances within the Group, which is not
expected to re occur.
Corporation tax
In FY22, the corporation tax charge totalled £5.7 million on reported profit
before tax of £30.5 million, an effective tax rate of 18.9% (FY21: 19.3%).
Adjusting for non-underlying items the effective tax rate is 16.2% (FY21:
17.0%) on adjusted profit before tax of £36.5 million. Going forward we
expect the effective tax rate to remain broadly in line with the UK corporate
tax rate.
Earnings per share
The basic EPS for the year was 42.5 pence, down 12.9% from 48.8 pence in FY21.
This decrease is broadly in line with the reduction in operating profits,
partially offset by the exchange gain in financial income due to an
exceptionally strong dollar at year end. The alternative measure including
the dilutive effect of share options, is the adjusted diluted EPS. This
decreased by 9.6% from 57.5 pence in FY21 to 52.0 pence in FY22.
2022 2021 Change
pence pence %
Basic 42.5 48.8 (12.9)%
Diluted 42.1 48.2 (12.7)%
Adjusted(1) basic 52.5 58.2 (9.8)%
Adjusted(1) diluted 52.0 57.5 (9.6)%
1 Adjusted for amortisation of acquired intangible assets, sale of trademark
and other adjusting items. See reconciliation note 2 to the financial
statements
Balance sheet
2022 2021
£m £m
Non-current assets 87.5 62.8
Current assets
Inventories 48.3 20.8
Trade and other receivables 28.9 16.3
Cash 12.8 17.3
Current liabilities (including bank loans) (54.2) (25.6)
Non-current liabilities (18.0) (7.3)
Net assets 105.3 84.3
Non-current assets
The non-current assets comprise: goodwill of £13.7 million, other intangible
assets of £62.0 million and property, plant and equipment of £10.9 million.
The goodwill of £13.7 million (FY21: £10.1 million) relates to acquisitions
as follows: £0.4 million for Novation purchased in 2004, £4.7 million for
ADAM Audio purchased in July 2019, £2.4 million for Martin Audio purchased in
December 2019, £2.8 million for Sequential purchased in April 2021 and £3.4
million for Linea Research purchased in March 2022.
The other intangible assets of £62.0 million (FY21: £49.1 million) consist
mainly of capitalised research and development costs and acquired intangible
assets relating to product development and brand. The capitalised development
costs have a carrying value of £13.1 million (FY21: £9.1 million). This
increase of £4.0 million comprises the excess during the year of capitalised
development costs (£7.9 million) over the amortisation (£3.9 million). The
increase represents the ongoing investment in our product teams across the
Group and the capitalisation of costs in Sequential this year. Approximately
65% of development costs are capitalised and they are amortised over the life
of the relevant products.
Acquired capitalised development costs had a carrying value of £24.2 million
(FY21: £21.0 million) at the end of the year, and had increased due to the
inclusion of Linea Research's development costs of £5.7 million and the
retranslation impact of the Sequential acquired assets of £1.0 million less
the annual amortisation charge of £3.5 million.
The remaining intangible assets, totalling £24.8 million (FY21: £19.1
million), include brands acquired as part of the acquisitions, to be amortised
over ten years for ADAM Audio and 20 years for Martin Audio, 15 years for
Sequential and nine years for Linea Research. In May 2022 this year the
Group purchased the Oberheim brands and trademarks from Tom Oberheim for £4.5
million, with an initial payment of £1 million paid in May and the remainder
in annual planned payments to FY28. This replaces any future royalty
payments and provides a home for Tom to work with our Sequential team to
further develop the Oberheim product range.
Tangible assets have increased this year from £3.6 million at the end of FY21
to £10.9 million at the end of FY22 due to the recognition of two new
property leases and the addition of the property acquired as part of Linea
Research. Martin Audio has renewed its lease on its existing site for a
further 10 years and Focusrite has a planned move to new offices in High
Wycombe.
Working capital
At the end of the year, working capital was 19.9% of revenue (FY21: 6.6%).
This planned increase arises from the Group rebuilding stock to historic
norms to support customer demand, particularly ahead of the busy Thanksgiving
and Christmas holiday season in 2022. In addition, the Group is holding higher
than average levels of raw materials to ensure component supply is secure
during FY23. Debtor balances are also high due to strong sales in the final
quarter of the year, but as the Group has continued to place great emphasis on
the timely collection of debts, this is expected to reduce during FY23.
Creditors continue to be paid on time.
As we move to supply customers through more direct routes to market this has
also led to an increase in inventory being directly held by the Group rather
than by distributors. With the launch of our distributor in Australia in
FY22, we now hold £2.0 million of stock in this market to supply our
customers.
Cash flow
( )
2022 2021
£m £m
Cash and cash equivalents at beginning of year 17.3 15.0
Foreign exchange movements 0.7 -
Cash and cash equivalents at end of year 12.8 17.3
Net (decrease)/increase in cash and cash equivalents (per Cash Flow Statement) (5.2) 2.3
Change in bank loan (13.2) 11.9
(Decrease)/increase in Net Cash (18.4) 14.2
Add back: equity dividend paid 3.2 2.6
Add back: acquisition of business (net of cash acquired) 10.9 13.9
Free cashflow (4.3) 30.7
Add back: non-underlying items 0.9 0.8
Underlying free cashflow(1) (3.4) 31.5
(1) Defined as cashflow before equity dividends, acquisition of subsidiary
(net of cash acquired) and adjusting items.
In FY22, the net debt balance at the year-end was £0.3 million (FY21: net
cash £17.6 million). The Group has a £40 million revolving credit facility
(RCF) with HSBC and NatWest due to expire in December 2024. At the year end
the Group had drawn down £13.2 million of the RCF to fund the acquisitions of
Linea Research and the Oberheim brand as well as our working capital
rebuild.
The underlying free cash flow for the full year was a cash outflow of £3.4
million (FY21: cash inflow of £31.5 million) leading to a year end net debt
position of £0.3 million (FY21: net cash £17.6 million). Within this, the
movement in working capital was an outflow of £26.9 million (FY21: inflow of
£1.7 million), largely due to improvements in production and supply as the
year progressed enabling a planned rebuild of our inventory levels. Capital
investment this year totalled £12.5 million (FY21: £6.6 million), of this
£8.4 million related to capitalised R&D reflecting the Group's ongoing
commitment to product development. We expect this level of investment to
continue into FY23 to support the Group's product roadmap. A further £1.0
million related to the cash impact of the acquisition of the Oberheim brand.
Dividend
The Board is proposing a final dividend of 4.15p pence per share (FY21 final
dividend: 3.7 pence), which would result in a total of 6.0p pence per share
for the year (FY21: 5.2 pence). This represents an adjusted earnings dividend
cover of 8.7 times (FY21: 11.1 times).
Summary
The Group has once again delivered a robust financial performance, despite the
prevailing global economic headwinds, and against very strong comparators.
Much of the growth achieved during the COVID period has been maintained, and
in some regions has continued to increase from this new, larger base. As
planned, with production at record levels, FY22 has enabled us to rebuild our
inventory in addition to increasing stock in our various channels, ready
for the FY23 holiday season. In addition, we have added two new exciting
brands to the Focusrite family, as well as delivering new products across all
our existing brands, providing strong foundations for our future
performance. We have a largely unleveraged balance sheet and are inherently
highly cash generative. We have achieved price increases to support margins,
and are managing other inflationary impacts to help support future growth.
Sally McKone
Chief Financial Officer
Principal Risks and Uncertainties
Risk management plays an important role in everything we do at Focusrite and
its objective is to add the maximum sustainable value to all of our
activities.
Overview
As with any business, we face risks and uncertainties especially as the
business grows throughout the world. Effective risk management helps support
the successful delivery of our strategic objectives. We have an established
risk management framework to identify, assess, mitigate and monitor the risks
we face as a business and help deliver a balance between risk and opportunity.
Risk Appetite
During the year we reviewed and amended our risk appetite and have set a clear
scale for how we categorise and quantify risk. All business teams are
responsible for identifying and assessing their risks, both current and
emerging, and measuring them against the defined criteria, considering the
likelihood of occurrence and the potential impact to the Group.
Risk Management
A principal risk is a risk or combination of risks that can seriously affect
the performance, future prospects or reputation of the Group. This includes
those risks that would threaten our business model, future performance,
solvency or liquidity and are aligned to our strategic goals and priorities.
Our principal risks have been determined and reviewed by the General Executive
Committee and wider executive team and approved by the Board.
Risk Culture
The Board sets the risk culture for the business. Each risk has a single risk
owner who is responsible for the monitoring and mitigation of that risk on an
ongoing basis. The principal risks and their changes are reviewed by the
General Executive Committee. Their involvement ensures that the importance of
risk management flows throughout the Group and risk assessments are included
in new projects, business cases and strategic planning.
Emerging Risks
We seek to identify changes in existing risks, whilst also ensuring that there
is appropriate focus on emerging risks. The consequences of the COVID-19
pandemic, the war in Ukraine and the threat of a long-lasting global recession
dominate the changing and emerging risks we face as a business. We continue to
monitor inflationary pressures, the resilience of our supply chain, changes in
both routes to market and the retailer landscape and our ability to attract,
retain and motivate talent not only in order to try and predict emerging and
changing risks but also to ensure that we have an appropriate mitigation plan
in place.
In previous years we viewed climate change as an emerging risk but now it is a
principal risk that is assessed and the consequences managed through our risk
management process.
Current Focus
We monitor and update our principal risks during the year. In doing so, we
assess changing and emerging risks and the progress of our risk mitigation
plans.
We have reduced the risk associated with our intellectual property following
implementation of the Group's brand protection program. As a result, this is
no longer deemed a principal risk. In addition, the risk of a customer or the
systems we rely on to support them failing is covered by the cyber risk and
the new macro-economic risk categories.
Finally, the principal risk relating to COVID-19 has been removed, in line
with the UK government's roadmap to living with COVID and as we have embedded
the oversight and controls into our existing processes.
Risks in the Year Ahead
We will continue to embed the risk management approach into existing processes
and ways of working to drive greater integration of risk management. We will
work with risk owners to evolve and improve our approach to risk management
and ability to manage uncertainties in the external environment.
We will continue to support the integration of the actions required to meet
the requirements of the Task Force on Climate-Related Financial Disclosures
(TCFD) into our risk management process.
Principal Risks
Our principal risks are those considered by the General Executive Committee to
post the most potential threat to the smooth operation of the business. The
table below (not in priority order) sets out our principal risks, a summary
description of the risk, the connection with our strategy, and a summary of
key controls in place to mitigate the impact should a risk come to fruition.
Naturally risks change over time and so whilst the list is our current set of
principal risks we see it as a live document. There will be unknown risks or
risks currently assessed as less material, that may also have an adverse
effect on the business in time.
Principal risk/uncertainty · Mitigation
Business strategy development and implementation à Change v prior year and residual risk
• We have worked collaboratively with our contractual partners through
the challenges of the past 12 months to strengthen our relationships.
As the world emerges from the COVID-19 pandemic, uncertainty remains and
therefore being able to implement our acquisition strategy and our move to • We offer credit terms where necessary
direct to reseller remains a strategic priority against a backdrop of strain
on the channel, in particular retailers having financial difficulties.
Impact on the business
• If our products fail to win customers our existing brands will
weaken which means we may lose and/or not win new customers.
• This would also lead to reduced margin and pricing not keeping up
with inflation and/or customer trends.
Risk Mitigation
• We are increasing the different customer channels and markets in
which we operate and continually monitor product performance and customer
trends.
Product innovationá Change v prior year and residual risk
The market for the Group's products remains characterised by continued Risk that our products fall out of favour with our customers if we do not
evolution in technology, evolving industry standards, frequent new competitive adapt to changing needs, trends and demands and as such
product introductions and - particularly in the post pandemic environment -
changes in customer needs. The Group invests in designing and developing we lose market share/revenue, in an increasingly competitive market.
products that customers want to buy, at appropriate price points. Failure to
meet the design, quality and value expectations will quickly see customers
turn away from our products.
Impact on the business
• We have continued to develop and build our innovative product
pipeline across our markets.
Risk mitigation
• We undertake continuous consumer and customer feedback into trends
and insights in order to predict trends and adapt our product offering
accordingly.
Product Supplyá Change v prior year and residual risk
• The threat of scarcity of raw materials may result in the over
purchase of such materials as and when available in order to ensure the
Due to the global supply chain issues, risks to our ability to service availability of materials for production.
customer demand are real and present.
• The cost increases arising from supply and transportation challenges
remain a risk to the business.
Impact on the business
• The unavailability of products that are essential for the Group to
operate will have an impact on sales, cash flows and revenue.
Risk mitigation
• The Group has continued to communicate regularly with key
semi-conductor companies instead of via distributors and the appointment of a
full-time sourcing manager has helped to ensure the availability of materials
to the Group.
• Where possible, the Group has also continued to make spot purchases
of components in order to ensure their future availability.
Information security, data privacy, business continuity and cyber risks à Change v prior year and residual risk
• Investment in our cyber shields and efforts to support and drive
employee awareness of phishing attacks and how to respond appropriately have
The unencumbered availability and integrity of the Group's IT systems is continued.
ever critical to successful trading.
Impact on the business
The threat of a cyber security breach or an unauthorised or malicious attack
is an ongoing and increasingly sophisticated risk that the Group believes • Disruption to our information systems may have a significant impact
would negatively impact its reputation. Similarly, the inadvertent processing on our sales, cash flows and profits.
of customer or employee data in a manner deemed unethical or unlawful could
result in significant financial penalties, remediation costs, reputational • A cyber security breach could lead to unauthorised access to, or
damage and/or restrictions on our ability to operate. loss of, personal and/or sensitive information.
Risk Mitigation
• The Group's business continuity plan has been updated.
• Regular system and security patching is in
· place including the use of vulnerability scanning to identify security
weakness.
• We also run regular phishing campaigns to raise awareness and such
exercises are supported by training and guidance.
·
People á Change versus prior year and residual risk
• The appointment of a full time Group Head of People and a dedicated
talent manager has seen the number of vacancies and time to recruit reduce.
People are critical to the Group's ability to meet the needs of its customers
and end users and achieve its goals as a business. This requires the retention • See pages 48 and 49 within our Annual Report for our Great Place to
of senior managers and technical personnel as well as on our ability to Work strategic pillar
attract, motivate and retain highly qualified People.
Impact on the business
• We continue to rely on key individuals to contribute to the success
of the Group. We need our people to develop their skills in order to future
proof the Group's business whilst being able to attract, retain and motive
People.
Risk Mitigation
• Employee surveys have been expanded across the Group and regular
pulse surveys help ensure that Focusrite is a great place to work.
• Sharing people resources across the Group creates opportunities for
career development and promotion opportunities.
• The Board consider succession planning, remuneration and the
skills, diversity and experience of the Group's people to ensure there are
plans for People's development.
Macroeconomic/Geopolitical conditions á Change versus prior year and residual risk
• Changing geopolitical situations, in particular the effect of
tensions in various parts of the world, have resulted in greater global
The effect of the difficult global macroeconomic situation, rising cost volatility.
inflation and the ongoing impact of the war in Ukraine is predicted to heavily
impact FY23. The broader global political situation with China is also
something that we monitor given our contract manufacturing presence there.
Impact on the business
• Political dynamics, which are outside of our control, are driving
economics which are likely to have a lasting effect on the global economy.
Risk mitigation
• We have continued to build scale and diversification through our
enhanced product offerings and expanded geographic reach
• Regular management reviews monitor financial results, end markets,
alternative product supply arrangements and competitor behaviour.
Climate Change á Change v prior year and residual risk
• Significant work to prepare for TCFD, in particular, identifying and
modelling the key climate risks and opportunities has also been undertaken.
Climate change is a multi-faceted risk to the business at many levels. Failure
to deliver on climate change initiatives, particularly around the reduction in • A number of key brands have switched to the use of recycled
the use of energy and carbon within required timescales, will have short, materials.
medium and long-term climate change risks to residents, businesses and
infrastructure.
Impact on the business
• Reputational impact arising from the failure to adequately address
societal concerns.
• Reduced availability of raw materials could result in price rises or
interruptions to supply.
• Less sustainable product and supply options impact our market
position
Risk mitigation
• Systems to monitor and reduce the environmental impact of our
operations and ensure compliance with environmental legislation are in place.
• Managing our operations towards a low-carbon future e.g. through the
use of recycled materials in order to sustain the longevity and prosperity of
the business.
• Sustainability criteria is embedded throughout the product design
process in order to mitigate risks and identify opportunities to deliver our
Planet objectives.
• For information on our Planet objectives, see page 53 in our Annual
Report.
FORWARD-LOOKING STATEMENTS
Certain statements in this announcement are forward-looking. Although the
Directors believe that their expectations are based on reasonable assumptions,
any statements about future outlook may be influenced by factors that could
cause actual outcomes and results to be materially different.
Consolidated Income Statement
For the year ended 31 August 2022
Note 2022 2021
£000 £000
Revenue 4 183,733 173,935
Cost of Sales (100,453) (89,805)
Gross Profit 83,280 84,130
Administrative Expenses (54,619) (48,356)
Adjusted EBITDA (non-GAAP measure) 41,663 47,548
Depreciation and Amortisation 20,21 (6,991) (6,133)
Adjusting items:
Amortisation of acquired intangible assets (5,116) (4,013)
Other adjusting items 7 (895) (1,628)
Operating profit 28,661 35,774
Finance income 2,286 48
Finance costs (398) (784)
Profit before tax 30,549 35,038
Income tax expense 8 (5,773) (6,759)
Profit for the period from continuing operations 24,776 28,279
Earnings per share
Basic (pence per share) 10 42.5 48.8
Diluted (pence per share) 10 42.1 48.2
The accompanying notes on pages 30 to 40 form part of these abbreviated
financial statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 August 2022
Note 2022 2021
£000 £000
Profit for the period (attributable to equity shareholders) 24,776 28,279
Items that may be subsequently reclassified to the income statement
Exchange differences on translation of foreign operations (486) (726)
(Loss)/gain on forward exchange contracts (1,009) 445
Tax on hedging instrument 199 (85)
Total comprehensive income for the period 23,480 27,913
Consolidated Statement of Financial Position
As at 31 August 2022
Note 2022 2021
£000 £000
Assets
Non-current assets
Goodwill 13,728 10,054
Other intangible assets 11 61,964 49,066
Property, plant and equipment 10,870 3,646
Deferred tax assets 938 -
Total non-current assets 87,500 62,766
Current assets
Inventories 48,340 20,749
Trade and other receivables 28,520 14,775
Cash and cash equivalents 12,758 17,339
Current tax asset 413 869
Derivative financial instruments - 716
Total current assets 90,031 54,448
Current liabilities
Trade and other payables (36,348) (23,673)
Other liabilities (1,641) (774)
Current tax liabilities (1,066) -
Provisions (1,840) (1,092)
Bank loan (13,054) -
Derivative financial instruments (293) -
Total current liabilities (54,242) (25,539)
Net current assets 35,789 28,909
Total assets less current liabilities 123,289 91,675
Non-current liabilities
Deferred tax (9,130) (5,996)
Other liabilities (8,843) (511)
Provisions - (1,069)
Bank loan - 248
Total non-current liabilities (17,973) (7,328)
Total liabilities (72,215) (32,867)
Net assets 105,316 84,347
Capital and Reserves
Share capital 59 59
Share premium 115 115
Merger reserve 14,595 14,595
Merger difference reserve (13,147) (13,147)
Translation reserve (1,015) (529)
Hedging reserve (293) 716
EBT reserve (1) (1)
Retained earnings 105,003 82,539
Equity attributable to the owners of the Company 105,316 84,347
Total Equity 105,316 84,347
The financial statements were approved by the Board of Directors and
authorised for issue on 8 December 2022. They were signed on its behalf by:
Tim Carroll
Sally McKone
Chief Executive Officer Chief Financial Officer
Consolidated Statement of Changes in Equity
For the year ended 31 August 2022
Share capital Share premium Merger reserve Merger difference reserve Translation reserve Hedging reserve EBT reserve Retained earnings Total
£000 £000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 September 2020 58 115 14,595 (13,147) 197 220 (1) 54,861 56,898
Profit for the period - - - - - - - 28,279 28,279
Transfer of reserve - - - - - 51 - (51) -
Other comprehensive income - - - - (726) 445 - (85) (366)
Total comprehensive income - - - - (726) 496 - 28,143 27,913
Transactions with shareholders 1 - - - - - (1) - -
Share based payments deferred tax deduction - - - - - - - 786 786
Share based payments current tax deduction - - - - - - - 690 690
EBT shares issued - - - - 1 660 661
Share-based payments - - - - - - - 632 632
Shares withheld to settle tax obligations - - - - - - - (739) (739)
Premium on shares in lieu of bonuses - - - - - - - 60 60
Dividends paid - - - - - - - (2,554) (2,554)
Balance at 31 August 2021 59 115 14,595 (13,147) (529) 716 (1) 82,539 84,347
Profit for the period - - - - - - - 24,776 24,776
Other comprehensive income - - - - (486) (1,009) - 199 (1,296)
Total comprehensive income - - - - (486) (1,009) - 24,975 23,480
Share based payments deferred tax deduction - - - - - - - (1,131) (1,131)
Share based payments current tax deduction - - - - - - - 723 723
EBT shares issued - - - - - - - 674 674
Share-based payments - - - - - - - 1,120 1,120
Shares withheld to settle tax obligations - - - - - - - (865) (865)
Premium on shares in lieu of bonuses - - - - - - - 202 202
Dividends paid - - - - - - - (3,234) (3,234)
Balance at 31 August 2022 59 115 14,595 (13,147) (1,015) (293) (1) 105,003 105,316
Consolidated Cash Flow Statement
For the year ended 31 August 2022
2022 2021
Note £000 £000
Operating activities
Profit for the financial year 24,776 28,279
Income tax expense 8 5,773 6,759
Net interest (1,888) 736
Loss on disposal of PPE 24 4
Loss on disposal of intangible assets 105 498
Gain on sale of trademark (830) -
Amortisation of intangibles 9,883 8,126
Depreciation of PPE 2,223 2,022
RDEC Credit (369) -
Share-based payments charge 1,313 973
Operating cashflow before movements in working capital 41,010 47,397
(Increase) decrease in trade and other receivables (12,316) 3,533
(Increase) in inventories (27,591) (1,023)
Increase (decrease) in trade and other payables 12,988 (773)
Operating cash flows before interest and tax 14,091 49,134
Net interest (330) (311)
Income tax paid (3,380) (9,741)
Cash generated by operations 10,381 39,082
Net foreign exchange movements (1,918) (566)
Net cash from operating activities 8,463 38,516
Investing activities
Purchase of property, plant and equipment (1,045) (1,126)
Purchase of intangible assets (3,095) (591)
Capitalised R&D costs (8,368) (4,894)
Proceeds from disposal of intangible assets 830 -
Acquisition of business, net of cash acquired (10,923) (13,948)
Net cash used in investing activities (22,601) (20,559)
Financing activities
Proceeds from loans and borrowings 13,228 7,353
Repayments of loans and borrowings - (19,335)
Payment of lease liabilities (1,168) (1,057)
Equity dividends paid (3,234) (2,554)
Net cash used in financing activities 8,826 (15,593)
Net (decrease) increase in cash and cash equivalents (5,312) 2,364
Cash and cash equivalents at the beginning of the year 17,339 14,975
Foreign exchange movements 731 -
Cash and cash equivalents at the end of the year 12,758 17,339
Notes to the Final Results
For the year ended 31 August 2022
1. BASIS OF PREPARATION
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 August 2022 or 2021 but is derived
from those accounts. Statutory accounts for 2021 have been delivered to the
registrar of companies, and those for 2022 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006
Going concern assumption
The Board of Directors has a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence and meet
their liabilities as they fall due for a period of at least 12 months from the
approval of these financial statements ('the going concern period').
Accordingly, the financial statements have been prepared on a going concern
basis.
The Group meets its day-to-day working capital requirements from cash balances
and a revolving credit facility of £40.0 million which is due for renewal in
December 2024. The availability of the revolving credit facility is subject to
continued compliance with certain covenants.
The Directors have prepared projected cash flow forecasts for the going
concern period. These forecasts include a severe but plausible downside
scenario, which includes potential impacts from risks identified from the
business including
• Loss of or reduction in key revenue streams
• Recessionary impact of reduction in revenue and margin across revenue
streams.
• Loss of key distribution contracts
Whilst climate change is considered to bring both risks and opportunities to
the Group, as outlined in our ESG section on pages 46 to 60 in our Annual
Report , we do not consider there to be a significant quantifiable risk in
the short term, other than the potential loss of a distributor due to the
increasing likelihood of extreme weather events, and this is included as one
of scenarios. Component supply is still considered to be a risk, although
the situation is improving. Our first scenario, the loss of key revenue
streams, considers the impact of being unable to supply a major product group.
The base case covers a period of at least 12 months from the date of signing
and includes demanding but achievable forecast growth. The forecast has been
extracted from the Group's FY23 budget and three-year plan for the period from
September 2024 to August 2026.
Key assumptions include:
· Future growth assumptions consistent with those recently achieved by
the business and adjusted for the annualisation of recent acquisitions.
Working capital requirements in line with historic trends
· Continued investment in research and development in all areas of the
Group.
· Dividends consistent with the Group's dividend policy
· No additional investment in acquisitions in the forecast period
· Interest rates in line with those prevailing as at 31 August 2022
· Foreign exchange rates in line with those prevailing as at 31 August
2022
Throughout the period the forecast cash flow information indicates that the
Group will have sufficient cash reserves and headroom on the loan facility to
continue to meet its liabilities throughout the forecast period.
The Directors have modelled severe but plausible downside scenarios of the
three risks identified above, including the Group experiencing all three
downsides simultaneously. This model assumes that purchases of stock would, in
time, reduce to reflect reduced sales, if they occurred. The Group would
also respond to a revenue shortfall by taking reasonable steps to reduce
overheads within its control. In this scenario, a draw down from the loan
facility of an average of £30 million for a period of 8 months is expected,
however the Group would be expected to remain well within the terms of its
loan facility with the leverage covenant (net debt to adjusted EBITDA) in the
period not exceeding the maximum of -2.5x.
Separately, the Directors estimate that if the Group were to experience a
shortfall in revenue of greater than 30% permanently from the start of the
forecast period, debt and leverage could rise to the upper limits allowed by
the banking covenants by June 2023. This scenario includes consequential
reductions in the purchases of stock and overheads. As an additional measure,
the Directors could also cancel the dividend.
However, the Directors' view is that any scenario of a revenue shortfall of
greater than the severe yet plausible scenario above is not realistic.
In practice, the Group is still currently experiencing high levels of consumer
registrations and customer demand, and therefore the revenue levels have been
maintained at expected levels since year end. The Group has continued to
invest in stock prior to the holiday season, with the Group's net debt balance
reducing from net position of £0.3 million reported at year end to
approximately net debt of £10 million at 5 December 2022, which is expected
to improve following the upcoming 2022 holiday season. As a result the
Directors are confident that the Group and Company will have sufficient funds
to continue to meet their liabilities as they fall due for at least 12 months
from the date of approval of the financial statements and therefore have
prepared the financial statements on a going concern basis.
2 ALTERNATIVE PERFORMANCE MEASURES ('APMs')
The Group has applied certain alternative performance measures ('APMs') within
these financial results. The APMs presented are used in discussions with the
Board, management and investors to aid the understanding of the performance of
the Group. The Group considers that the presentation of APMs allows for
improved insight to the trading performance of the Group. The Group consider
that the term 'Adjusted' together with an adjusting items category, best
reflects the trading performance of the Group.
Adjusting items are those items that are unusual because of their size, nature
or incidence, and are applied consistently year on year. The Directors
consider that these items should be separately identified within their
relevant income statement category to enable full understanding of the Group's
results. Items included are acquisition costs, earnout payable to employees of
acquired businesses, profit on sale of trademarks and restructuring costs.
The following APMs have been used in these financial results:
· Organic constant currency growth - this is calculated by comparing
FY22 revenue to FY21 revenue adjusted for FY22 exchange rates and the impact
of acquisitions. As shown in the Financial Review.
· Adjusted EBITDA - comprising earnings adjusted for interest, taxation,
depreciation, amortisation and adjusting items. This is shown on the face of
the income statement.
· Adjusted operating profit - operating profit adjusted for adjusting
items. See reconciliation below
· Adjusted earnings per share ('EPS') - earnings per share excluding
adjusting items. See reconciliation below
· Free cash flow - net decrease in cash and cash equivalents excluding
net cash used acquisitions, movements on the bank loan and dividends paid.
See reconciliation below.
· Underlying free cash flow - as free cash flow but adding back
adjusting items. See reconciliation below
· Net debt - comprised of cash and cash equivalents, overdrafts and
amounts drawn against the RCF including the costs of arranging the RCF.
Profit definitions Adjusted EBITDA Adjusted Operating Profit Adjusted Diluted Earnings Per Share
Reported:
Operating Profit 28,661 28,661
Profit after tax 24,776
Add back (deduct)
Underlying depreciation and amortisation 6,991
Amortisation on acquired intangibles 5,116 5,116 5,116
Acquisition costs 565 565 565
Gain on sale of trademark (830) (830) (830)
Earnout in relation to acquisition 1,160 1,160 1,160
Tax on sale of trademark 156
Tax on earnout in relation to acquisition (314)
Adjusted 41,662 34,672 30,631
Weighted average number of total ordinary shares including dilutive impact 58,917
Adjusted diluted EPS (p) 52.0
Cashflow definitions Free cash flow Adjusted free cash flow
Net (decrease in cash and cash equivalents during the year (5,312) (5,312)
Add back dividends paid 3,234 3,234
Add back cash outflow in relation to acquisition of business 10.923 10,923
Change in bank loan (13,228) (13,228)
Add back; adjusting items - 895
Free cashflow/Adjusted free cashflow (4,383) (3,488)
Definition of net debt Net debt
Cash and cash equivalents 12,758
Bank loan (13,228)
RCF arrangement fee 174
Net debt (296)
3 acquisition of a subsidiary
On 10 March 2022, the Group completed the acquisition of 100% of the share
capital of Linea Research Holdings Limited (Linea Research). The total
consideration was £12.3 million payable on completion with a further £0.5
million to be paid in cash subject to certain performance conditions being
satisfied in the period ending May 2023. The acquisition was funded by a
combination of existing cash resources and a drawdown of £5 million on the
existing revolving credit facility of £40 million with HSBC and Natwest.
A long time supplier and partner to Martin Audio, Linea Research was formed in
2003 by a team of experienced professional audio specialists, and they design,
develop, manufacture and market innovative professional audio equipment
globally. Their products include a range of ground-breaking amplifiers,
including the world renowned M Series together with Digital Signal Processors,
audio networking and software products.
The addition of Linea Research brings a world class development team to the
Group and enables us to further strengthen the product roadmap for the Audio
Reproduction division, with planned developments across the Martin and Linea
ranges.
For the 6 month period between the acquisition and 31 August 2022, Linea
contributed revenue of £3.1 million and a profit before tax of £0.8 million
to the Group. If the acquisition had occurred on 1 September 2021, management
estimates that Linea Research's revenue would have been £6.0 million and
profit before tax for the year would have been £1.4 million. In determining
these amounts management has assumed that the fair value adjustments,
determined provisionally, that arose on the date of acquisition would have
been the same if the acquisition had occurred on 1 September 2021.
Acquisition-related costs
The Group incurred acquisition-related costs of £565,000 on legal fees and
due diligence costs. These have been included in adjusting items to give
investors a better understanding of the costs related to the acquisition of
Linea Research. Additionally, because of their size, nature and the fact that
they vary from acquisition to acquisition, the Group considers it a better
reflection of the trading performance to show these separately.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired, and
liabilities assumed at the date of acquisition:
Recognised values on acquisition £000
Developed technology 3,675
Intellectual property rights and development 1,600
Brand 850
OEM relationships 50
Distributor relationships 50
Order book 275
Intangible assets 6,500
Property, plant and equipment 1,535
Cash 1,354
Working capital 1,505
Acquired deferred tax liability (47)
Deferred tax liability (1,957)
Net identifiable assets and liabilities at fair value 8,890
Goodwill recognised on acquisition 3,387
Consideration paid 12,277
The deferred tax liability has been estimated by applying the uplift in asset
fair value to the average expected corporate tax rates over the life of the
assets.
Measurement of fair values
The valuation techniques used for measuring the fair value of material assets
acquired were as follows:
Assets acquired Valuation technique
Property, plant and equipment Cost approach
Other intangible assets Income approach (multi-period excess earnings method "MEEM")
The key assumption used is the forecast revenues attributable to the
existing asset.
Brand Income approach (relief from royalty method)
The key assumption used is the forecast revenues attributable to the existing
asset.
Fair values measure on a provisional basis
Linea Research was acquired six months prior to the end of this reporting
period. If new information is obtained within one year of the date of
acquisition about the facts and circumstances that existed at the date of
acquisition that identifies adjustments to the above amounts or any additional
provisions that existed at the date of acquisition, then the accounting for
the acquisition will be revised.
Goodwill
The goodwill recognised is attributable to:
· the skills and technical talent of the Linea Research workforce;
· income growth potential from new products, future relationships and
a proportion of synergies;
· alignment to the Group's existing customer base; and
· strong strategic fit.
Intangible assets sensitivity analysis
In assessing the estimated useful life of the intangible assets, management
considered the sensitivity in the forecast sales on the valuation of the
developed technology and brand. The following table details the sensitivity to
a 10% increase and decrease in the sales forecast and related cost of sales
impact this would have on the valuation of the assets.
Valuation impact
Asset Cost 10% sales increase 10% sales decrease
Developed technology 3,675 845 (845)
Intellectual property rights and development 1,600 490 (490)
Brand 850 95 (95)
Total 6,125 1,430 (1,430)
In 2021 the Group purchased Sequential LLC for £14,595,000, resulting in
acquired intangible assets additions of £12,212,000 and goodwill of
£2,397,000 arising due to this business combination.
4 Revenue
An analysis of the Group's revenue is as follows:
Year ended 31 August 2022 * Year ended 31 August 2021
North America EMEA Rest of World Total North America EMEA Rest of World Total
£000 £000 £000 £000 £000 £000 £000 £000
Focusrite 47,558 30,936 18,692 97,186 49,438 39,038 13,619 102,095
Novation 8,603 8,088 3,892 20,583 9,706 9,242 3,314 22,262
ADAM Audio 3,964 9,036 4,797 17,797 8,073 11,849 3,943 23,865
Martin Audio 8,084 14,176 9,658 31,918 4,787 6,983 8,628 20,398
Sequential 6,300 7,874 2,075 16,249 2,629 2,164 506 5,299
Distribution - - - - - 16 - 16
Total 74,509 70,110 39,114 183,733 74,633 69,292 30,010 173,935
The amount of revenue sold to external customers in the UK was £21,830,000
(2021: £19,510,000).
5 Business segments
Information reported to the Board of Directors for the purposes of resource
allocation and assessment of segment performance is focused on the main
product groups which the Group sells. Similarly, the results of Novation and
Ampify also meet the aggregation criteria set out in IFRS 8 Segmental
Reporting. The Group's reportable segments under IFRS 8 are therefore as
follows:
Focusrite - Sales of Focusrite and Focusrite Pro
branded products
Novation - Sales of Novation or Ampify branded
products
ADAM Audio - Sales of ADAM Audio branded products
Martin Audio - Sales of Martin Audio branded products
Sequential - Sales of Sequential branded products
Distribution - Distribution of third-party brands
including KRK, Stanton, Cerwin-Vega,
and sE Electronics
(ceased August 2020)
Segment revenues and results
The accounting policies of the reportable segments are the same as the Group's
accounting policies described in note 3 of the full Annual Report. Segment
profit represents the profit earned by each segment without allocation of the
share of central administration costs including Directors' salaries,
investment revenue and finance costs, and income tax expense. This is the
measure reported to the Board of Directors for the purpose of resource
allocation and assessment of segment performance.
Central administration costs comprise principally the employment-related costs
and other overheads incurred by the Group. Also included within central
administration costs is the charge relating to the share option scheme of
£1,313,000 for the year ended 31 August 2021 (2021: £973,000).
The following is an analysis of the Group's revenue and results by reportable
segment:
Year ended 31 August
2022 2021
Restated*
£'000 £'000
Revenue from external customers
Focusrite 97,186 102,095
Novation 20,583 22,262
ADAM Audio 17,797 23,865
Martin Audio 31,918 20,398
Sequential 16,249 5,299
Distribution - 16
Total 183,733 173,935
Segment profit
Focusrite 45,108 50,338
Novation 8,132 7,965
ADAM Audio 8,941 14,040
Martin Audio 14,280 9,471
Sequential 6,819 2,341
Distribution - (25)
83,280 84,130
Central distribution costs and administrative expenses (53,724) (46,728)
Adjusting items (note 7) (895) (1,628)
Operating profit 28,661 35,774
Finance income 2,286 48
Finance costs (398) (784)
Profit before tax 30,549 35,038
Tax (5,773) (6,759)
Profit after tax 24,776 28,279
*From 1 September 2021, "other cost of sales" cost allocations across
intercompany sales have been realigned to better reflect the allocation of
freight and warehousing costs between segments. This has resulted in changes
to segmental profit as previously reported in the year to 31 August 2021. As
required by IFRS 8, comparative information has been restated as indicated by
"restated" in the Operating segments note. The revision does not result in any
changes to the consolidated income statement, consolidated statement of
financial position or consolidated statement of cash flows.
The Group's non-current assets, analysed by geographical location, were as
follows:
2022 2021
£'000 £'000
Non-current assets
North America 21,311 15,104
Europe, Middle East and Africa 66,189 45,277
Rest of the World - 2,385
Total non-current assets 87,500 62,766
UK 63,543 43,363
Information about major customers
Included in revenues shown for FY22 is £51.3 million (FY21: £53.2 million)
attributed to the Group's largest customer, which is located in North America.
Amounts owed at the year end were £7.9 million (FY21: £4.2 million).
6 Profit for the year
Profit for the year has been arrived at after charging/(crediting):
Year Ended 31 August
2022 2021
Note £000 £000
Net foreign exchange gains 2,364 333
Loss on disposal of property, plant and equipment 23 4
Research and development costs 4,178 2,374
Depreciation and impairment of property, plant & equipment 2,223 2,022
Amortisation of intangibles 11 9,883 8,126
Cost of inventories within cost of sales 94,481 76,488
Staff costs 25,244 22,138
Gain on sale of trademark 7 (830) -
Movement in expected credit loss (26) 1
Share based payments 1,313 973
7 Adjusting ITEMS
The following adjusting items have been declared in the period
Year ended 31 August
2022 2021
£000 £000
Acquisition Costs 565 716
Gain on trademark (830) -
Earnout accrual in relation to acquisition 1,160 788
Restructuring - 124
Adjusting items 895 1,628
Amortisation of acquired intangible assets 5,116 4,013
Total adjusting items for adjusted EBITDA 6,011 5,641
Acquisition costs in FY22 relate to the acquisition of Linea Research. The
earnout accrual relates to the remaining amount due on the $4 million classed
as employee remuneration rather than contingent consideration in relation to
Sequential, acquired during FY21, and an amount due in respect of Linea
Research of £0.1 million. The remaining accrual relating to Sequential is
payable directly to employees and is subject to the achievement of gross
profit targets and their continuing employment with Sequential until December
2022.
Acquisition costs in FY21 relate solely to the acquisition of Sequential,
restructuring costs relate to the merger of the US-based subsidiaries into one
operating company from 1 September 2021.
8 Tax
Year ended 31 August
2022 2021
£000 £000
Corporation tax charges
Over provision in prior year (11) (367)
Current year 6,523 8,099
6,512 7,732
Deferred taxation
Over provision in prior year (438) (265)
Current year (301) (708)
5,773 6,759
Corporation tax is calculated at 19% (2021: 19%) of the estimated taxable
profit for the year. Taxation for the US and Germany subsidiaries are
calculated at the rates prevailing in the respective jurisdiction.
The tax charge for each year can be reconciled to the profit per the income
statement as follows:
Year ended 31 August
2022 2021
£000 £000
Current taxation
Profit before tax on continuing operations 30,549 35,038
Tax at the UK corporation tax rate of 19% (2021: 19%) 5,804 6,657
Effects of:
Expenses not deductible for tax purposes 168 615
Deferred tax assets recognition - (1,385)
Other differences (49) (28)
Additional UK tax reliefs (140) -
Prior period adjustment (449) (367)
Effect of change in standard rate of deferred tax 173 1,147
Impact of foreign tax rates 266 120
Tax charge for the year 5,773 6,759
Expenses not deductible relate to the costs of acquiring Linea Research
Holdings Limited and entertainment expenses.
Tax credited directly to equity
In addition to the amount charged to the income statement and other
comprehensive income, the following amounts of tax have been recognised in
equity:
2022 2021
£'000 £'000
Share based payment deferred tax deduction (1,131) 786
Share based payment current tax deduction 723 690
(408) 1,476
The net corporation tax creditor is £653,000 (2021: debtor £869,000). The
prior year debtor related to overpayments to tax authorities throughout the
year and has been settled during the year ended 31 August 2022
An increase in the UK corporation rate from 19% to 25% (effective 1(st) April
2023) was substantively enacted on 24(th) May 2021. This will increase the
Company's future current tax charge accordingly. Deferred taxes as at 31(st)
August 2022 have been calculated based on these rates, reflecting the expected
timing of reversal of the related temporary differences.
9 Dividends
The following equity dividends have been declared:
Year to Year to
31 August 2022
31 August 2021
Dividend per qualifying ordinary share 6.0p 5.2p
During the year, the Company paid an interim dividend in respect of the year
ended 31 August 2022 of 1.85 pence per share.
On 8 December 2022, the Directors recommended a final dividend of 4.15 pence
per share (2021: 3.7 pence per share), making a total of 6.0 pence per share
for the year (2021: 5.2 pence per share).
10 Earnings per share ('EPS')
The calculation of the basic and diluted EPS is based on the following data:
Year ended 31 August
Earnings 2022 2021
£'000 £'000
Profit after tax 24,776 28,279
Adjusting items (note 7) 6,011 5,641
Tax on adjusting items (156) (165)
Total underlying profit for adjusted EPS calculation 30,631 33,755
Year ended 31 August
2021 2020
Number Number
'000 '000
Number of shares
Weighted average number of ordinary shares for the purposes of basic EPS 58,294 57,993
calculation
Effect of dilutive potential ordinary shares:
Share option plans 623 725
Weighted average number of ordinary shares for the purposes of diluted EPS 58,917 58,718
calculation
EPS Pence Pence
Basic EPS 42.5 48.8
Diluted EPS 42.1 48.2
Adjusted basic EPS 52.5 58.2
Adjusted diluted EPS 52.0 57.5
The Group presents basic and diluted EPS data for its ordinary shares. Basic
EPS is calculated by dividing the profit attributable to ordinary shareholders
by the weighted average number of ordinary shares outstanding during the
period. For diluted EPS, the weighted average number of ordinary shares is
adjusted for the dilutive effect of potential ordinary shares arising from the
exercise of granted share options.
At 31 August 2022, the total number of ordinary shares issued and fully paid
was 58,661,639. This included 262,929 (FY21: 554,712) shares held by the EBT
to satisfy options vesting in future years. The operation of this EBT is
funded by the Group so the EBT is required to be consolidated, with the result
that the weighted average number of ordinary shares for the purpose of the
basic EPS calculation is the net of the weighted average number of shares in
issue 58,661,639 (58,488,351) less the weighted average number of shares held
by the EBT 367,333 (FY21: 495,323). It should be noted that the only right
relinquished by the Trustees of the EBT is the right to receive dividends. In
all other respects, the shares held by the EBT have full voting rights.
The effect of dilutive potential ordinary share issues is calculated in
accordance with IAS 33 and arises from the employee share options currently
outstanding, adjusted by the profit element as a proportion of the average
share price during the period.
The effective tax rate on the items above is much lower than the Group's
overall effective tax rate, as the majority items are not deductible for
corporation tax. The impact of tax on the adjusting items is shown in note 2
(APMs).
11 OTHER INTANGIBLE ASSETS
Intellectual Property Internally generated development Acquired development costs Licences Trademark Computer software Brands Total
£000 £000 £000 £000 £000 £000 £000 £000
Cost
At 1 September 2020 580 23,690 19,943 166 826 1,527 14,300 61,032
Additions -
Acquired separately - - - 30 229 330 - 589
Products developed during the year 2 4,894 - - - - 4,896
Business combinations - - 6,142 - - - 6,070 12,212
Transfers (175) - - - - 175 - -
Disposals - (2,839) - - - (447) - (3,286)
Foreign exchange - - (188) - - - (350) (538)
At 31 August 2021 407 25,745 25,897 196 1,055 1,585 20,020 74,905
Additions
Acquired separately - - - 1,684 - 44 4,535 6,263
Products developed during the year 21 7,851 - - 385 - - 8,257
Business combinations - - 5,650 - - - 850 6,500
Transfers (21) 21 - - - - - -
Disposals - - - - (1) (245) - (246)
Foreign exchange - - 1,032 - - - 913 1,945
At 31 August 2022 407 33,617 32,579 1,880 1,439 1,384 26,318 97,624
Amortisation
At 1 September 2020 520 15,506 2,152 122 464 826 1,068 20,658
Charge for the year 1 3,463 2,780 41 287 321 1,233 8,126
Transfers (114) - - - - 114 - -
Eliminated on disposal - (2,371) - - - (455) - (2,826)
Foreign exchange - 9 (81) - - 27 (74) (119)
At 31 August 2021 407 16,607 4,851 163 751 833 2,227 25,839
Charge for the year 3,938 3,457 61 301 467 1,659 9,883
Eliminated on disposal - - - - (141) - (141)
Foreign exchange - 17 39 - - - 23 79
At 31 August 2022 407 20,562 8,347 224 1,052 1,159 3,909 35,660
Carrying amount
At 31 August 2022 - 13,055 24,232 1,656 387 225 22,409 61,964
At 31 August 2021 - 9,138 21,046 33 304 752 17,793 49,066
At 31 August 2020 60 8,184 17,791 44 362 701 13,232 40,374
(#_ftnref1)
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