REG - Focusrite PLC - Half year results
25/04/2023 07:00
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RNS Number : 2959X Focusrite PLC 25 April 2023
Strictly embargoed until 07:00: 25 April 2023
Focusrite plc ("Focusrite" or "the Group")
Half year results for the six months ended 28 February 2023
Focusrite plc, the global music and audio products company supplying hardware
and software used by professional and amateur musicians and the entertainment
industry, today announces its half year results for the six months ended 28
February 2023.
Commenting on the results, Tim Carroll CEO said:
"Focusrite plc is a much bigger business since pre-COVID with eleven brands
operating globally across different, but complementary markets. This past half
year has showcased just how well the Group's diversification strategy has paid
off, giving us increased resilience in the face of global and industry wide
headwinds.
"Revenue in our Content Creation division has been impacted by industry-wide
surplus channel inventory and softening in demand along with a planned channel
inventory reduction ahead of a large product release programme coming in the
second half. Pleasingly, our Audio Reproduction division, as anticipated,
has experienced strong growth and is now ahead of pre pandemic levels.
Despite challenging markets, the Group is still showing material growth over
pre pandemic levels and has retained our strong market share, underscored by
rock solid brand positions."
Key financial metrics
HY23 HY22
Revenue (£ million) 86.2 92.9
Gross Margin 47.1% 46.6%
Adjusted(1) EBITDA(2) (£ million) 18.1 22.2
Operating profit (£ million) 11.5 16.3
Adjusted(1) operating profit (£ million) 14.2 19.1
Basic earnings per share (p) 14.4 23.1
Adjusted(1) diluted earnings per share (p) (4) (HY22: restated) 18.0 26.2
Interim dividend per share (p) 2.1 1.85
Net (debt)(3) cash (£ million) (13.2) 18.0
Highlights
· Revenue decreased by 7.2% reflecting an organic constant currency(5)
decrease of 19.0%, with market and channel weakness impacting the Focusrite
and Novation brands, partially offset by strong double digit growth in the
remaining brands
o Content Creation brands revenue was down by 16.1% to £67.4 million (HY22:
£80.4 million) with Focusrite and Novation impacted by surplus channel
inventory levels and a some softening in the market due to global
macroeconomic issues, together with a planned reduction of inventory in
advance of upcoming product releases. ADAM and Sequential showing strong
growth with prize winning product launches and are helped by weaker prior year
comparators
o Audio Reproduction brands revenue is up by 50.7% to £18.8 million (HY22:
£12.5 million) benefitting from a resurgence in live events and a strong
performance from Linea Research, acquired in March 2022.
· Growth in EMEA region of 3.4% following ongoing changes to strengthen our
routes to market. North America was impacted by high levels of inventory in
the channel and ROW by market weakness in APAC
· Acquisition of Sonnox on 19 December 2022 for cash consideration of £7.2
million (net of cash acquired of £1.9 million) has performed to plan and is
contributing positively to the Group
· Gross margin at 47.1% (HY22: 46.6%) is 0.5% points higher than HY22 and
3.0% points higher than H2 FY22. Freight costs have reduced significantly,
with some of that benefit reinvested in promotions to support sales
· Adjusted(1) EBITDA(2 )at £18.1 million, down from HY22 at £22.2
million, reflecting lower sales, notwithstanding stronger gross margins and
strong cost control
· Operating profit of £11.5 million (HY22: £16.3 million) impacted by
increased amortisation from acquisitions and new product launches
· Launch of 21 new products, including a new Sequential synthesiser and a
range of Martin speakers all expected to contribute in the second half of this
year
· Net debt(3) of £13.2 million (HY22: net cash £18.0 million) has
increased to fund acquisitions and to support higher inventory levels during a
period of key product transitions
· Interim dividend of 2.1 pence, 13.5% growth compared to HY22 dividend of
1.85 pence
Trading since the half year has remained solid. The outlook for the Group is
positive with inventory in the channel beginning to improve and continued
strength in the buoyant live sound market. We anticipate revenue growth in
the second half to be in line with expectations, driven by a number of planned
key product introductions alongside elevated costs due to promotions for
existing products. We continue to execute on our established and proven
growth strategy combining organic growth with focussed M&A activity.
1 Adjusted for amortisation of acquired intangible assets, sale of trademark
and other adjusting items detailed in note 4 to the Interim Statement
2 Comprising earnings adjusted for interest, taxation, depreciation and
amortisation.
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 Restated to include the deferred tax credit arising on the amortisation of
acquired intangibles, which was not previously included. See note 1.8 to the
interim financial statements
5 Organic constant currency growth. This is calculated by comparing HY22
revenue to HY23 revenue adjusted for HY23 exchange rates and the impact of
acquisitions.
Enquiries:
Focusrite plc:
Tim Carroll (CEO) +44 1494 462246
Sally McKone (CFO) +44 1494 462246
Investec Bank plc (Nominated Adviser and Joint Broker) +44 20 7597 5970
David Flin
Ed Knight
William Brinkley
Peel Hunt LLP (Joint broker) +44 20 7418 8900
Paul Gillam
Michael Burke
James Smith
Belvedere Communications +44 20 3008 6864
John West
Llew Angus
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 Group trades under eleven established brands: Focusrite,
Focusrite Pro, Novation, Ampify, ADAM Audio, Martin Audio, Optimal Audio,
Linea Research, Sequential, Oberheim and Sonnox.
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 design and manufacture 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 synthesisers 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 Research 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. Sonnox is a leading designer of
innovative, high quality, award-winning audio processing software plug-ins for
professional audio engineers.
The Group 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 of the London Stock Exchange.
Business and operating review
Overview
We are pleased to report our financial results and summary of operations for
the six months ended 28 February 2023.
Overall demand for the Group's products across our Content Creation and Audio
Reproduction divisions has remained resilient notwithstanding the challenging
macroeconomic backdrop and our diversification across these two divisions has
proven to be an effective strategy over the past four years. When the pandemic
hit during FY20 and live events were effectively shut down, our Content
Creation division experienced unprecedented growth, offsetting the large
decline in the Audio Reproduction division revenue. This past half year,
demand for Content Creation solutions has softened albeit it remains at a
higher level than pre-pandemic. However, we have seen demand for our Audio
Reproduction product portfolio exceeding pre-pandemic levels, supported by new
products developed during the pandemic and a strengthened supply chain,
especially since the acquisition of Linea Research in March 2022. With revenue
for our Audio Reproduction brands up 50.7% and our Content Creation brands
down 16.1%, overall Group revenue for HY23 is down 7.2% when compared to
HY22. On an organic constant currency basis, the Audio Reproduction division
was up 25.3% with the Content Creation division down 25.2%, resulting in Group
revenue down 19.0%.
The Group's stronger gross margins at 47.1% (HY22: 46.6%) have been the result
of proactively managing our logistics and routes to market, as well as
increasing prices on some elements of our product portfolio. These efforts,
along with a continued easing in freight costs, normalising of component
prices, and a reduction in supply chain issues have resulted in an improvement
in gross margin compared with both H1 and H2 of the prior year.
In December 2022, the Group announced that it had acquired Sonnox, a leading
software developer of audio plug-ins and tools used in every aspect of the
audio industry, including music production, television, film, and live
broadcasting. Sonnox is based near Oxford, United Kingdom. Beyond the
additional revenue of Sonnox's portfolio, many opportunities for collaboration
between Sonnox and the Group's other industry leading brands are being
pursued. This was one of the key reasons for making the acquisition and we
are extremely pleased with the integration and co-collaboration achieved to
date.
People, Culture and Strategy
One of our greatest assets is our enormously talented and passionate group of
employees who work tirelessly to develop and improve our industry leading
brands. They are committed to audio excellence and have rallied around a
common mission of 'Removing Barriers to Creativity' with great enthusiasm.
Our customer base continues to grow, encompassing a much wider range of users
from the beginner or enthusiast level right through to professionals and
corporate, educational or other enterprise facilities. At all levels, our
customers depend on our products and solutions to provide the highest quality
audio possible in an environment where our technology aids their experiences,
instead of getting in the way.
Our growth strategy is centred around innovation, market expansion and
lifetime value for our customers, as well as creating a great place to work.
The Group has executed well on all of these, adding new products to our
portfolio, expanding our global reach in strategic areas, and maintaining
industry leading Net Promoter Scores ('NPS').
Environmental, Social and Governance ('ESG') priorities form an important and
growing pillar of the culture across the Group, centred around the objective
of creating a 'Great Place to Work', not just for employees but also within
society and the environment. We have expanded our efforts on eNPS (employee
Net Promoter Score), talent acquisition, Diversity and Inclusion (D&I)
initiatives, wellness programmes, community employment opportunities and
charitable work to involve all of our business units across the globe.
Our ESG work relating to the environment continues to develop and since our
last Annual Report, we have made solid progress towards having our first
standalone TCFD report, which we expect to complete this year. Alongside this,
the Group is also working with McGrady Clarke and utilising the Ecoinvent
Database to help us plan out our Science Based Targets trajectory. In
parallel, new products across the Group will incorporate recycled materials
and plastic free boxes wherever feasible.
Operating review
Our Group's portfolio consists of eleven leading brands across five main
businesses, which are categorised into two divisions, Content Creation and
Audio Reproduction.
Content Creation includes:
o Focusrite Audio Engineering (FAEL): Focusrite, Focusrite Pro, Novation and
Ampify
o ADAM Audio
o Sequential and Oberheim
o Sonnox
Audio Reproduction consists of:
o Martin Audio: Martin Audio, Optimal Audio and Linea Research
Segmental analysis can be found in the table below:
Six months to Six months to Year to
28 February 2023
28 February 2022 31 August
2022
£'000 £'000 £'000
Revenue from external customers
Focusrite 40,084 54,914 97,186
Novation 8,241 10,511 20,583
ADAM Audio 10,161 8,420 17,797
Sequential 8,679 6,589 16,249
Sonnox(1) 306 - -
Content Creation 67,471 80,434 151,815
Martin Audio (including Optimal Audio and Linea Research(1)) 18,772 12,459 31,918
Audio Reproduction 18,772 12,459 31,918
Total 86,243 92,893 183,733
(1) Revenue from date of acquisition
Content Creation
Our Content Creation brands bring best in class audio recording technology,
electronic music instruments and controllers, and studio reference monitors to
content creators at all levels.
Our products are showcased in the finest recording and postproduction studios
in the world, as well as in the homes of millions of hobbyists and aspiring
professionals. Over the pandemic, across our 2020 and 2021 financial years,
we saw accelerated growth as more customers sought solutions for creating and
streaming content. This half year has seen a slight softening in the market
due to global macroeconomic issues, as well as a phasing of inventory into the
channel in late FY22 to ensure that adequate supply for the November and
December holiday season was available. Overall, revenue in HY23 is down
16.1% compared to HY22, but demand compared with pre pandemic levels is still
materially higher, with external customer registrations over the November and
December 2022 holiday season up 22.1% compared to the same period in 2019.
Focusrite audio interfaces, comprised of our Scarlett, Clarett and Vocaster
ranges, are a suite of audio interfaces designed to allow both beginners and
professionals alike to create the best quality audio possible. These products
are core to home recording and audio streaming.
During this half year inventory in our sales channels reduced by approximately
one month compared to a slight build in the first half of last year, resulting
in lower sales into the channel compared to the first half of FY22, in part
due to preparations for a programme of product releases in the second half of
this year. Global macroeconomic issues have impacted all regions, with
market data indicating that North America was down at least 8%, and other
regions declining further. However the sell-through to customers is still
significantly ahead of pre-pandemic levels, and we have retained market share,
consistently appearing as top sellers on leading external e-Commerce sites in
the US and Europe. Vocaster sales have been below expectations due to a
decrease in new podcasts since the end of the high growth experienced during
the pandemic. We have reset our expectations for this product set, but still
believe it is a viable segment. Overall, these factors resulted in a 27.1%
decline in revenue, when compared with HY22. The Group is expecting a
stronger second half driven by new product introductions.
Focusrite Pro offers a suite of solutions for professionals that employ audio
over "audio over internet protocol" (AOIP) technology for scale in enterprise
solutions. This sector of our business was the hardest hit by the AKM chip
manufacturer's fire in Japan in October 2020 that required in a re-engineering
of much of the portfolio, with many products in the portfolio only coming back
into the market very late in the first half, after over 24 months'
disruption. On a like for like basis, revenue decreased by 16.0% compared to
HY22. Despite supply issues, underlying demand for the products has
continued to be strong, fuelled by the ever-increasing amount of new content
being generated for consumers, wider acceptance of enhanced formats, such as
Dolby ATMOS, and more and more professionals adopting networked audio. The
re-engineering of these products will complete in the second half with a
return to normal shipping levels expected later in the year.
Our Novation brand is dedicated to the art of the electronic musician, and
offers a range of solutions including groove boxes, controllers, synthesizers
and desktop and iOS creation apps. This past year saw the introduction of
several new keyboard controllers, including the Launchkey 88, Sound on Sound's
winner for "Best Performance Controller". Revenue for Novation products was
down 21.9% during the first half, due mainly to tough comparatives with the
same period last year that saw a number of new product introductions as well
as a period of component rework on most of the brand's synthesizers, due to
component issues. We are expecting Novation to perform better in the second
half due to availability of the reworked synthesizers, and a number of new
product introductions.
ADAM Audio, based in Berlin, is a globally recognised brand with a passionate
team focused on delivering world-class monitor speakers for audio content
creators. ADAM Audio's portfolio of reference monitors encompasses the
T-Series, A-Series, and S-Series. The T-Series speakers are award winning
reference monitors designed for the home studio market. The A-Series are used
in both high-end home studios and professional facilities alike, and the
enterprise level S-Series are showcased in some of the most prestigious audio
production facilities in the world. ADAM had a solid recovery coming off a
weak first half last year when component shortages impacted T-Series products
as well as the launch of the new A-Series. Both product lines are in full
production with good line of sight on components as well as finished
inventory. The new A-Series won the prestigious Sound on Sound "Best Studio
Monitor" award for 2022. Revenue for ADAM was up 21.9% in HY23 compared to
HY22.
Sequential, based in San Francisco, was acquired in April 2021. The Sequential
brand is legendary in the industry and is synonymous with world class analogue
synthesizers. It has been at the forefront of electronic music innovation for
over 40 years. Additionally, last May, the Group acquired the exclusive
rights to another prestigious synthesizer brand, Oberheim, which now operates
under the Sequential entity as a separate brand. Since acquiring Oberheim,
we have launched the OBX8, a modern day faithful recreation of three classic
Oberheim synthesizers. The OBX8 has won numerous industry awards during this
first half and is considered the most coveted high-end synthesizer on the
market. Sequential also released the Trigon6, a Sequential branded
synthesizer with unique filtering that has very recently been introduced into
the market. The Group continues to expand Sequential's distribution and
demand generation activities by leveraging the scale of the Content Creation
division's highly effective global sales teams. Overall, Sequential had a
strong first half, with revenues increasing by 33.5% when compared to the same
period in the previous year.
Audio Reproduction
Our Audio Reproduction brands provide high quality, professional solutions for
both permanent installations and live sound events. During the first half of
the year the division has seen continued growth in installations as well as a
global bounce back in live sound purchases. In addition to strong organic
growth, the Group acquired Linea Research in March 2022. Linea Research has
integrated well into the wider Group, providing a consistent supply of power
amplification technology for Martin Audio's solutions as well as continuing to
offer its own product line to a range of OEM customers. Optimal Audio, our
commercial audio brand, also saw growth year over year as we began shipping
complete systems after a period of unavailability due to component shortages
late last year. As a result, overall revenues for the Audio Reproduction
division are up 50.7% compared to the prior year with a strong sales pipeline
across all sectors giving us cause for optimism for the second half.
Research and development
R&D remains a cornerstone of our Group's strategy. In this period, the
Group launched 21 new products to market as well as a host of software and
hardware upgrades. As reported above, the Group has a very important set of
product introductions scheduled for the second half of this financial year
with major launches planned in most brands across the portfolio.
Regional review
Six months to 28 February 2023 Six months to 28 February 2022 Year to
31 August 2022
£'000 £'000 £'000
North America 36,309 39,763 74,509
Europe, Middle East and Africa ('EMEA') 36,644 35,424 70,110
Rest of World ('ROW') 13,290 17,706 39,114
Total 86,243 92,893 183,733
North America
North America represented 42% of total revenue during the half year.
Focusrite, Novation, ADAM Audio, and Sequential/Oberheim products are sold
through similar sales channels, whilst Martin Audio's North America business
is transacted through a mix of live/tour sound rental companies, system
integrators, and direct to end-users. In North America we continue to invest
in sales, marketing, logistics and customer service to support both
divisions. Revenue for the Group's brands in North America was down 8.7%
compared to HY22, reflecting the issues discussed in the divisional analysis
above.
The Group's Content Creation portfolio was down 15.3% year over year in North
America. This was partially due to some softness in the market as well as
reduced shipments on a number of key products that are undergoing product
transitions in the second half.
Our Audio Reproduction portfolio was up 70.9%, highlighting the return to
growth in this market as the impact of the easing of lockdowns restrictions
has paved the way for a return to live music.
EMEA
EMEA was our largest region during the half, representing 43% of total revenue
for the Group. Revenue for the Group's brands in EMEA was up 3.4% when
compared to HY22. Like North America, our Content Creation portfolio,
Focusrite, Novation, ADAM Audio and Sequential/Oberheim, utilise a very
similar set of distributors and resellers. At the beginning of this fiscal
year, the Group initiated a consolidated "go to market" strategy for our
Content Creation brands across EMEA. This has proven to be very successful,
giving us more leverage within our channel, and providing a scalable structure
for future growth and expansion. Overall, our EMEA's Content Creation division
was down 9.0% compared to HY22, driven by softer demand, a planned reduction
of inventory in advance of product releases in the second half and a phasing
of inventory late last fiscal year to ensure adequate inventory levels for the
holiday season.
Our Audio Reproduction division, Martin, Optimal and Linea Research, transact
through a combination of distributors, system integrators and live sound
rental companies. This division saw strong growth of 91.5%, when compared to
HY22 with revenues now above pre-pandemic levels, albeit from a relatively
low base last year.
ROW
ROW comprises all other regions outside of EMEA and North America, principally
made up of Asia Pacific ('APAC') and Latin America ('LATAM') and constitutes
15% of total Group revenue. Both regions had a challenging first half,
primarily driven by macroeconomic issues that have impacted these areas more
significantly than others.
APAC, like North America and EMEA, utilises similar distribution and reseller
channels for the Content Creation division. Our Audio Reproduction division
utilises a combination of distributors, system integrators and rental
companies. APAC has been a very challenging region during the first half, due
to a combination of high inflation, currency swings, and continuing COVID
lockdowns. For our Content Creation division, APAC was down 33.8% compared
to HY22, with the majority of the decline in China, South Korea, and Japan.
For the Audio Reproduction business, APAC was down 4.3%, illustrating just how
impactful the above mentioned factors have been in these regions when compared
to the very high growth rates elsewhere across the globe.
LATAM was similarly impacted in the Content Creation division, down 39.6%
Compared to HY22. This was partially offset with Audio Reproduction being up
370%, albeit from a very low base in the prior year.
For both regions in ROW, we are seeing positive signs of both divisions
re-stabilising and demand starting to increase again. We continue to view both
these regions as potential high growth areas and will continue to invest in
people, localisation efforts, and refined routes to market.
We are confident that both regions will revert to positive growth in the near
future.
Financial Review
Overview
Against a difficult and often volatile economic backdrop, the Group delivered
revenue of £86.2 million, 7.2% lower than during the six months to 28
February 2022 and adjusted(1) EBITDA (2) of £18.1million, 18.8% lower than
the comparable period, with the lower sales volumes resulting in lower profits
despite stronger gross margins and actions taken to manage costs.
Reported operating profit was £ 11.5 million (HY22: £16.3 million) and
reduced for the same reasons. Similarly, adjusted(1) diluted EPS(3). of 18.0
pence is lower than the prior year's of 26.2 pence (restated - see note 1.8).
Income statement
HY23 HY23 HY23 HY22 HY22 HY22
£m £m £m £m £m £m
Restated(3) Restated(3) Restated(3)
Adjusted Adjusting items(1) Reported Adjusted Adjusting items(1) Reported
Revenue 86.2 - 86.2 92.9 - 92.9
Cost of sales (45.6) - (45.6) (49.6) - (49.6)
Gross profit 40.6 - 40.6 43.3 - 43.3
Administrative expenses (26.4) (2.7) (29.1) (24.2) (2.8) (27.0)
Operating profit 14.2 (2.7) 11.5 19.1 (2.8) 16.3
Net finance (expense)/income (0.6) - (0.6) 0.2 - 0.2
Profit before tax 13.6 (2.7) 10.9 19.3 (2.8) 16.5
Income tax expense (3.0) 0.6 (2.4) (3.8) 0.8 (3.0)
Profit for the period 10.6 (2.1) 8.5 15.5 (2.0) 13.5
HY23 HY23 HY23 HY22 HY22 HY22
£m £m £m £m £m £m
Adjusted Adjusting items(1) Reported Adjusted Adjusting items(1) Reported
Operating profit 14.2 (2.7) 11.5 19.1 (2.8) 16.3
Add - amortisation of intangible assets 2.8 1.5 4.3 1.9 2.2 4.1
Add - depreciation of tangible assets 1.1 - 1.1 1.2 - 1.2
EBITDA (2) 18.1 (1.2) 16.9 22.2 (0.6) 21.6
1 Adjusted for amortisation of acquired intangible assets, sale of trademark
and other adjusting items detailed in note 4 to the Interim Financial
Statements
2 Earnings Before Interest, Tax, Depreciation and Amortisation
3 Restated to include the deferred tax credit arising on the amortisation of
acquired intangibles, which was not previously included. See note 1.8 to the
interim financial statements.
Revenue
Revenue for the Group declined by 7.2% to £86.2 million (HY22: £92.9
million) which, adjusting for acquisitions and constant currency, represents
an organic constant currency decline of 19.0%. Linea Research was purchased in
March 2022 and contributed revenue of £2.4 million, ahead of our
expectations, in the first half of FY23. Sonnox was acquired in December
2022 and contributed £0.3 million, in line with our expectations.
As previously reported the Group's divisions have faced macroeconomic and
industry challenges during this first half.
Within the Content Creation division, the easing of component supply issues
resulted in industry-wide restocking across sales channels in FY22, at a time
when demand was being impacted by cost-of-living issues, resulting in
significant surplus inventory across the channels by the beginning of HY23.
As a result, HY23 experienced channel de-stocking and a consequent slowing of
orders which, together with a planned reduction ahead of a programme of
product releases in the second half which resulted in a 27.1% decline for
Focusrite (35% on an organic constant currency basis). However, ADAM Audio
and Sequential both delivered significant double-digit growth, although both
are reporting against comparators impacted by the lack of availability of
components in the first half of FY22. The Audio Reproduction division has
seen a resurgence in demand in the live music sector, across most geographies,
with the exception of Asia. Overall this division experienced strong growth
despite some ongoing component supply issues.
Pleasingly, underlying demand has continued to remain at levels significantly
higher than pre pandemic, with the current half year still 52% ahead of HY20
on a reported basis for our Content Creation division. During the second
half of the year we expect inventory to begin to reduce across our
distribution channels, and together with the introduction of new products
later in the year, we expect a greater weighting of sales in the second half
of the year and into H1 2024.
HY23 Reported HY23 Acquisitions(2) HY23 As adjusted HY22 Reported HY22 Exchange(1) HY22 As adjusted Reported Growth OCC Growth(1)
Focusrite 40.1 - 40.1 54.9 6.6 61.5 -27.1% -35.0%
Novation 8.2 - 8.2 10.5 1.0 11.5 -21.9% -28.7%
ADAM 10.1 - 10.1 8.4 0.7 9.1 21.9% 12.2%
Sequential 8.7 - 8.7 6.6 1.0 7.6 33.5% 15.6%
Sonnox 0.3 (0.3) - - - - N/A N/A
Content Creation 67.4 (0.3) 67.1 80.4 9.3 89.7 -16.1% -25.2%
Martin 18.8 (2.4) 16.4 12.5 0.7 13.2 50.7% 25.3%
Total 86.2 (2.7) 83.5 92.9 10.0 102.9 -7.2% -19.0%
1 Organic constant currency (OCC) growth rate is calculated by comparing
FY23 revenue to FY22 revenue adjusted for FY23 exchange rates and the impact
of acquisitions
2 Linea Research acquired in March 2022, Sonnox acquired in December 2022
Currency impact
Both the Euro and the US Dollar strengthened during the period (with detail of
rate movements provided on the following pages). This has resulted in a
£10.0 million positive translation impact on revenue for the Group for HY23
relative to HY22. However, at the profit level the USD effect is mitigated by
the purchases of inventory in USD from the manufacturers in China and Malaysia
and the Euro effect on profit is largely mitigated by the Group's hedging
policy, such that the translation impact between periods is not material.
Segment profit
Segment profit is disclosed in more detail in note 3 to the Interim Financial
Statements named, 'Operating Segments'. These segments compare the revenue
of the products of the relevant brands with the directly attributable costs to
create segment profit.
Gross profit
In HY23, the gross margin was 47.1%, up from 46.6% in HY22 and 3.0% points
higher than the second half margin in FY22 of 44.1%. As expected freight
costs eased during the half year, returning to pre pandemic levels,
benefitting margin by 4.1% points. This was largely offset by a reduction in
product margins as cost increases in the second half of FY22 began to impact,
together with the promotional campaigns, highlighted during the year end
results, which were in place to ensure we remained competitive in the current
very price sensitive market environment.
We expect promotional activity on existing products to continue into the
second half of the year for the Content Creation brands at a higher level than
previously anticipated, with Audio Reproduction beginning to benefit from a
price increase put into effect from March 2023. As a result, we expect gross
margins to reduce slightly for the remainder of the year.
Administrative expenses
Administrative expenses consist of sales, marketing, operations, the
uncapitalised element of research and development (partially offset by the
Research and Development Expenditure Credit regime ('RDEC') tax credit of
£0.4 million) and central functions such as legal, finance and the Group
Board. These expenses were £29.2 million, up from £27.0 million last year.
Excluding adjusting costs of £2.7 million (HY22: £2.8 million) (see
Adjusting items section), the operating costs were £26.5 million (HY22:
£24.2 million).
The increase in administrative expenses of £2.3 million is due mainly to both
an increase in amortisation of intangible assets of £0.9 million, reflecting
the recent launches of new products and the impact of companies acquired since
the first half of FY22 which contributed an additional £0.8 million of this
increase. During the half year, the Group restructured to realign teams to
our new regional and brand organisational structure, resulting in a reduction
of 14 roles across the Group at a one-off cost of £0.4 million and annualised
savings of £0.6 million.
Adjusted EBITDA
Adjusted EBITDA is an alternative performance measure which is widely used by
securities analysts, investors and other interested parties to evaluate the
profitability of companies. It is also used within the Group as the basis
for some of the incentivisation of senior management at both the operating
company level and the Group level. Adjusted EBITDA decreased from £22.2
million in HY22 to £18.1 million in HY23, a decrease of 18.8%. The decrease
of £4.1 million was due to lower sales volume, not fully offset by increased
gross margins and relatively stable underlying operating costs. A
reconciliation of adjusted EBITDA to operating profit can be found in note 4.
Depreciation and amortisation
Depreciation is charged on tangible fixed assets on a straight-line basis over
the assets' estimated useful lives, normally ranging between two and five
years. Amortisation is mainly charged on capitalised development costs,
writing-off the development cost over the life of the resultant product. The
life spans of the products vary across our brands, from three years for
Focusrite and Novation, up to eleven years for Martin Audio and fifteen for
Sequential, reflecting the different lifespans of the products.
The amortisation of the acquired intangible assets totalled £1.5 million
during the period (HY22: £2.2 million) and has been disclosed within
adjusting items. This year we have amended our accounting policy relating to
the amortisation of acquired intangibles under development, such that it now
commences from the date of first usage of the underlying product rather than
from the date of acquisition of the business, and this has resulted in a £1.0
million reversal of amortisation charged in previous periods. This has
offset the underlying increase of amortisation of acquired intangibles due to
the Sonnox acquisition this year and the full period impact of Linea Research,
acquired in FY22.
Across the Group, £4.3 million of development costs were capitalised (HY22:
£3.2 million) and the amortisation of capitalised development costs was £2.3
million (HY22: £1.5 million). Further details are shown in note 8, with
added disclosure to highlight the movement from technology, products and
patents in development to those now in use.
Adjusting items
In HY23 adjusting items totalled £2.7 million (HY22 £2.8 million),
comprising £0.3 million which related mainly to the due diligence costs for
the acquisition of Sonnox that was completed on 19 December 2022, £0.5
million related to the earn-outs put in place after the acquisitions of
Sequential and Linea Research in prior years, £0.4 million related to
restructuring activities in the half year and £1.5 million related to
amortisation of acquired intangible assets.
In HY22, the adjusting items included £0.3 million which related to the due
diligence costs for the acquisition of Linea Research that was completed on 10
March 2022, £1.1 million related to the Sequential earn out, and £2.2
million related to amortisation of acquired intangible assets offset by £0.8
million of income from the sale of a trademark.
Foreign exchange and hedging
The exchange rates were as follows:
Exchange rates HY23 HY22 FY22
Average
USD:GBP 1.19 1.35 1.31
EUR:GBP 1.15 1.18 1.18
Period end
USD:GBP 1.21 1.34 1.16
EUR:GBP 1.14 1.20 1.16
The average USD rate has strengthened to $1.19 for HY23 (HY22: $1.35). The
USD accounts for over half of Group revenue but nearly all of the cost of
sales so there is a useful natural hedge.
The Group enters into forward contracts to convert Euro to GBP. The policy
adopted by the Group is to hedge approximately 75% of the Euro flows for the
current financial year (year ending August 2023) and approximately 50% of the
Euro flows for the following financial year (year ending August 2024).
In HY23, approximately three-quarters of Euro flows were hedged at €1.17,
and the average transaction rate was €1.15, thereby creating a blended
exchange rate of approximately €1.16. In HY22, the equivalent hedging
contracts were at €1.13, versus the transactional rate of €1.18 and so
creating a blended exchange rate of €1.15.
Hedge accounting is used, meaning that the hedging contracts have been matched
to income flows and, providing the hedging contracts remain effective,
movements in fair value are shown in a hedging reserve in the balance sheet,
until the hedge transaction occurs.
Corporation tax
The effective tax rate for the period has increased to 22.4% (HY22: 18.6%), as
a result of brought forward losses are now being fully utilised, a greater
proportion of the Group's profits arising outside the UK and the increase in
the UK headline corporation tax rate from 1 April 2023. In both years the rate
has been impacted by the disallowance for corporation tax of certain adjusting
item costs for corporation tax, including depreciation of acquired intangibles
and costs relating to due diligence on acquisitions. Since September 2020
the Group has been part of the RDEC tax scheme for R&D credits, and as a
result a credit of £0.4 million has been recognised against uncapitalised
R&D costs within Administrative expenses, which is taxable.
Earnings per share ('EPS')
The basic EPS for the half year was 14.4 pence, down 37.7% from 23.1 pence in
HY22. This decrease has largely resulted from the change in reported profit
after tax. The weighted average number of shares used for the calculation
has increased marginally compared to the prior year at 58,494,265 shares
(HY22: 58,215,504 shares). The more comparable measure, excluding adjusting
items and including the dilutive effect of share options, is the adjusted
diluted EPS. This decreased to 18.0 pence, from 26.2 pence in HY22
(restated), a decrease of 31.3%. This measure has been restated to include the
deferred tax credit arising on the amortisation of acquired intangibles, which
was not previously included. See note 1.8 to the financial statements.
HY23 HY22 FY22
Pence Pence(1) Pence(1)
Basic 14.4 23.1 42.5
Diluted 14.3 22.8 42.1
Adjusted basic 18.2 26.5 50.5
Adjusted diluted 18.0 26.2 49.9
(1) Restated to include the deferred tax credit arising on the amortisation of
acquired intangibles, which was not previously included. See note 1.8 to the
interim financial statements.
Balance sheet
HY23 HY22 FY22
£m £m £m
Non-current assets 95.2 66.2 87.5
Current assets
Inventories 50.7 25.7 48.3
Trade and other receivables 27.5 23.7 28.9
Cash 13.5 17.8 12.8
Current liabilities
Trade, other payables and provisions (30.3) (29.9) (41.2)
Bank loan or overdraft (26.8) 0.2 (13.1)
Non-current liabilities
Deferred tax (10.6) (6.2) (9.1)
Other non-current liabilities (8.6) (3.4) (8.8)
Net assets 110.6 94.1 105.3
Working capital(1) 47.9 19.5 36.0
(1) Working capital is defined as Inventories plus trade and other receivables
less trade and other payables and provisions
Non-current assets
The non-current assets comprise: goodwill, brands, patents and capitalised
development costs; property, plant and equipment; and software.
The goodwill totals £16.4 million (HY22: £9.7 million). The increase is
due to the addition of Linea Research at £3.4 million and Sonnox at £2.7
million, together with foreign exchange movements on the existing items.
The total cost of the brands is £26.4 million (HY22: £19.8 million). This
has increased due to the addition of the Linea Research brand (£0.9 million),
Oberheim brand (£4.7 million) and Sonnox brand (£0.4 million). The majority
of brands are being amortised over 10 and 15 years with Martin over 20
years. At 28 February 2023 the brands had carrying value, net of
amortisation, of £21.6 million compared to £16.8 million as at 28 February
2022.
The capitalised technology and patent costs comprise acquired and internally
generated technology and patent costs for products currently in use. The
amortisation periods range from three years to fifteen years depending on the
expected life of the products. The shorter amortisation periods are more
usual for Focusrite and Novation products and the longer periods for the ADAM
Audio monitors, Martin Audio live speakers and Sequential synthesisers. The
capitalised technology and patent costs as at 28 February 2023 had a carrying
value, net of amortisation, of £34.9 million (HY22: £30.9 million).
Capitalised technology and patent costs still under development comprise
acquired and internally generated technology and patent costs for products
currently still in development. The cost of these items has increased from
£8.3 million at 1 September 2022 to £8.5 million at the 28 February 2023, as
a result of our ongoing investment in new products, net of the transfer of
£3.4 million of costs to products now in use. These costs are not amortised
and, following a review of our calculations this year, we have reversed £1.0
million of amortisation on acquired intangibles in development which had been
incorrectly amortised from the date of acquisition and not the date of use.
Based on current trading and management forecasts, we have conducted
impairment reviews for those subsidiaries impacted by difficult markets with
no impairments to the carrying value of the intangible assets being deemed
necessary. This will be reassessed at the year-end for any evidence of any
permanent diminution in value.
Overall, amortisation of the intangible assets totals £4.4 million (HY22:
£4.1 million). This is split between amortisation of intangible assets
acquired as part of the acquisitions of £1.5 million (HY22: £2.2 million),
and other amortisation of £2.9 million (HY22: £1.9 million). The
amortisation of acquired intangible assets has been treated as an adjusting
item. The difference in the period between ongoing amortisation of
development costs and capitalised development costs is £2.0 million (HY22:
£1.7 million).
The remaining £13.8 million (HY22: £8.6 million) of non-current assets
consist mainly of right of use assets relating to the Group's leased offices
and warehouses, tooling equipment for the manufacture of products and other
intangible assets such as software and trademarks. This has increased since
the last year due to the acquisition of the Linea offices and the inception of
a new lease as Focusrite moves to a new headquarters in High Wycombe.
Working capital
Working capital at 28 February 2023 was 27.0% of the last 12 months revenue
(HY22: 11.4%). Working capital has increased at the half year, as we build
inventory to support product transitions and launches in the second half of
the year and due to a low level of trade creditors at the half year, due to
the phasing of production levels, which we expect to increase by the year
end. We anticipate that the inventory position will remain stable across the
second half of the year, but creditors will have normalised by the end of the
year enabling the Group to return to historic and more resilient levels of
working capital at around 20% of revenue. As is our practice, creditors
continue to be paid in a timely manner.
Cash flow
HY23 HY22 FY22
£m £m £m
Cash and cash equivalents at the beginning of the year 12.8 17.3 17.3
Foreign exchange movements 0.1 - 0.7
Cash and cash equivalents at the end of the year 13.5 17.8 12.8
Net increase/(decrease) in cash and cash equivalents (per Cash Flow Statement) 0.6 0.5 (5.2)
Change in bank loan (13.7) - (13.2)
(Increase)/decrease in net debt (13.1) 0.5 (18.4)
Add back equity dividend paid 2.4 2.2 3.2
Add back acquisition of subsidiary (net of cash acquired) 7.2 - 10.9
Free cash (outflow)/inflow (3.5) 2.7 (4.3)
Add back non underlying items (cash outflow) 1.2 0.6 0.9
Underlying free cash (outflow)/inflow (1) (2.3) 3.3 (3.4)
( )
(1)Defined as cashflow before equity dividends, acquisition of subsidiary (net
of cash acquired) and adjusting items.
The underlying free cash outflow in HY23 was £2.3 million, which was -2.7% of
revenue. In the comparative period, the underlying free cash inflow was
£3.3 million which was 3.5% of revenue. Underlying free cash flow as a
percentage of revenue is a key performance measure within the Group and forms
an element of the incentivisation metrics for senior management across the
Group. We expect underlying free cashflow this year to be lower than our
historic norm of approximately 10- 12% of revenue due to the impacts on
inventory outlined above.
Reported free cash outflow is -4.0% of revenue and is impacted by similar
issues as underlying free cashflow. In the current first half year adjusting
items relate to the payment of the final payment of the Sequential earn out
and the acquisition costs and restructuring costs as outlined in note 4 to the
Interim Financial Statements. In the prior year they related to payment of
the first part of the Sequential earn out and the income received from the
sale of a trademark.
The net debt balance at the period end was £13.2 million (HY22: net cash of
£18.0 million and FY22: net debt of £0.3 million). The net debt includes
the arrangement fee for the RCF of £0.1 million which is being amortised
across the period of the facility. The increase in net debt since the
beginning of HY22 principally reflects the increase in working capital noted
above, the acquisition of Sonnox for £7.2 million in December 2022 and the
acquisition of Linea Research for £12.3 million in March 2022. The Group
has a £40 million revolving credit loan facility split evenly between HSBC
and NatWest due for renewal in December 2024. As at the balance sheet date
£26.9 million was drawn down from the facility (HY22: nil, FY22 £13.2
million).
Dividend
The Board has approved an interim dividend of 2.1p (HY22: 1.85p) an increase
of 13.5%, in line with the Group's progressive dividend policy, and reflecting
the Board's confidence in the Group's prospects and future cash generating
prospects.
Summary and Outlook
Focusrite plc is a much bigger business since pre-COVID with eleven brands
operating globally across different, but complementary markets. This past half
year has showcased just how well the Group's diversification strategy has paid
off, giving us increased resilience in the face of global and industry wide
headwinds.
Revenue in our Content Creation division has been impacted by some
industry-wide surplus channel inventory and softening in demand along with a
planned channel inventory reduction ahead of a large product release programme
coming in the second half. Pleasingly, our Audio Reproduction division, as
anticipated, has experienced strong growth and is now ahead of pre pandemic
levels. Despite challenging markets, we are still showing material growth
over pre pandemic levels and have retained our strong market share,
underscored by rock solid brand positions.
Trading since the half year has remained solid. The outlook for the Group is
positive with inventory in the channel beginning to improve and continued
strength in the buoyant live sound market. We anticipate revenue growth in
the second half to be in line with expectations, driven by a number of planned
key product introductions alongside slightly elevated costs due to promotions
for existing products. We continue to execute on our established and proven
growth strategy combining organic growth with focussed M&A activity.
Tim Carroll Sally McKone
Chief Executive Officer Chief Financial Officer
24 April 2023 24 April 2023
Risks and Uncertainties
The Board has considered the principal risks and uncertainties as presented in
the 2022 Annual Report and has determined that they broadly remain relevant to
the rest of this financial year, with the updates as set out below. Such risks
and uncertainties could have a material impact on the Group's performance
although they are not expected to cause the Group's actual results to differ
materially from the expected results.
People
The job market changed post-pandemic with candidates now having more choice.
We continue to experience skill shortages in some areas, namely in technical
and in lower skilled production/warehouse roles. Our recruitment process has
been successfully accelerated and we now promote all vacancies internally
which has helped us to fill some vacancies more quickly. In addition, and in
conjunction with our commitment to being "a great place to work", we have
taken steps to increase training and upskill our people.
ESG and our sustainability strategy
Our aim is to become industry leaders in environmental sustainability. We
shared our Strategy and Targets on page 53 of the 2022 Annual Report, which
includes having a target to reduce and neutralise product Green House Gas
emissions by 2030. Additionally, we have started to incorporate the Taskforce
on Climate-related Financial Disclosures (TCFD) recommendations into our
processes ahead of the mandatory compliance deadline at the end of this
financial year. More information about our identified Climate Risks and
Opportunities can be seen across pages 43 to 57 of the FY22 Annual Report.
In the first half of this year, we have continued with our programme of
linking tree planting to wood consumption in our products across the group -
ensuring there is a minimum of 10x more wood growing in the world than we
consumed. Through these efforts, we have already planted over 70,000 new
trees. Our dedication to sustainability remains a top priority, and we look
forward to sharing progress on our initiatives and commitment to the Science
Based Targets Initiative.
Doing Business in China
Whilst we have a long-established relationship with our business partners in
China political discourse is becoming more strained with governments around
the world implementing measures to protect their domestic interests.
Geo-political tensions have been heightened by Russia's invasion of Ukraine
and increased concerns with regard to China's policy towards Taiwan. We
recognise that we are highly dependent on China both for its supply of
electronic components and the provision of contract manufacturing and, like
many companies who sell electronic hardware, have limited alternative options.
We monitor the stances governments take and consider how they may affect our
business. We recognise that we will need to create effective policies to
identify applicable prohibitions and implement responsive procedures such as
running restricted party screenings in order to know exactly with whom we are
doing business and whether those parties are restricted.
Export control laws creating restrictions on exporting goods are extensive and
continue to expand. We monitor legislation and have established relationships
with Chinese legal advisers who advise us on compliance with the law and
evaluate our long-term goals and business plans. In addition import tariffs on
Chinese products affect our profit margins. We continually assess supply
chains to identify where vulnerabilities lie and, where possible, we
restructure those supply chains to reduce the risk of violations or excessive
costs. We continue to explore contract manufacturing opportunities in
countries outside of China.
Cost inflation
Cost inflation continues to be widely reported and remains prevalent in most
of our major markets. Indications of how cost inflation is impacting the
discretionary income available to customers has been felt across all
industries and revenue growth has been impacted by macro-economic uncertainty.
By remaining competitive in the market and offering premium and desirable
products we aim to mitigate this by continuing to be the first choice for
customers.
The Group's customers continue to operate in a range of different sectors
which reduces the risk of a downturn in a particular sector. As a global Group
we operate in different countries and therefore are less exposed if particular
countries are impacted. The Group continues to have no operations or customers
in Russia, Belarus or Ukraine, a market previously providing an annual revenue
of approximately £2million.
Forward looking statements
The risks and uncertainties facing the Group were reported in detail in the
2022 Annual Report and are monitored closely by the Group. The forward-looking
statements in this 2023 Half Year Report cannot be relied upon as a guarantee
or prediction of future performance. We, like all businesses, continue to face
known and unknown risks, uncertainties and other factors, many of which are
beyond our control, which may mean our actual results differ from those
expressed in this first half year report.
Condensed Consolidated Income Statement
For the six months ended 28 February 2023
Note Six months to Six months to Year to
28 February 2023
28 February 2022
31 August 2022
£'000 £'000 £'000
Revenue 2 86,243 92,893 183,733
Cost of sales (45,619) (49,630) (100,453)
Gross profit 40,624 43,263 83,280
Administrative expenses (29,163) (27,810) (55,449)
Other income - 830 830
Adjusted EBITDA (non-GAAP measure) 18,053 22,222 41,663
Depreciation and amortisation (3,858) (3,146) (6,991)
Adjusting items for Adjusted EBITDA:
Amortisation of acquired intangible assets (1,504) (2,236) (5,116)
Adjusting items 4 (1,230) (557) (895)
Operating profit 11,461 16,283 28,661
Finance income 712 351 2,286
Finance costs (1,290) (106) (398)
Profit before tax 10,883 16,528 30,549
Income tax expense 5 (2,434) (3,075) (5,773)
Profit for the period from continuing operations 8,449 13,453 24,776
Earnings per share
From continuing operations
Basic (pence per share) 7 14.4 23.1 42.5
Diluted (pence per share) 7 14.3 22.8 42.1
Condensed Consolidated Statement of Other Comprehensive Income
For the six months ended 28 February 2023
Six months to Six months to Year to
28 February 2023
28 February 2022
31 August 2022
£'000 £'000 £'000
Profit for the period 8,449 13,453 24,776
Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations (999) (1,375) (486)
Gain/(loss) on forward foreign exchange contracts designated and effective as 194 (144) (1,009)
a hedging instrument
Tax on hedging instrument (38) 27 199
Total comprehensive income for the period 7,606 11,961 23,480
Profit attributable to:
Equity holders of the Company 7,606 11,961 23,480
Condensed Consolidated Statement of Financial Position
Note 28 February 2023 28 February 2022 31 August 2022
£'000 £'000 £'000
Assets
Non-current assets
Goodwill 16,377 9,710 13,728
Other intangible assets 8 67,909 49,984 61,964
Property, plant and equipment 10,865 6,466 10,870
Deferred tax assets - - 938
Total non-current assets 3 95,151 66,160 87,500
Current assets
Inventories 50,681 25,717 48,340
Trade and other receivables 27,470 22,404 28,520
Derivative financial instruments 9 - 572 -
Current tax asset - 702 413
Cash and cash equivalents 9 13,527 17,813 12,758
Total current assets 91,678 67,208 90,031
Current liabilities
Trade and other payables (26,451) (27,168) (36,348)
Other liabilities (1,448) (987) (1,641)
Current tax liabilities (990) - (1,066)
Provisions (1,327) - (1,840)
Bank loans and arrangement fee 9 (26,760) 211 (13,054)
Derivative financial instruments 9 (99) (1,711) (293)
Total current liabilities (57,075) (29,655) (54,242)
Net current assets 34,603 37,553 35,789
Total assets less current liabilities 129,754 103,713 123,289
Non-current liabilities
Deferred tax (10,561) (6,182) (9,130)
Other liabilities (8,550) (3,442) (8,843)
Total non-current liabilities (19,111) (9,624) (17,973)
Total liabilities (76,186) (39,279) (72,215)
Net assets 110,643 94,089 105,316
Equity and liabilities 59 59
Capital and reserves
Share capital
59
Share premium 115 115 115
Merger reserve 14,595 14,595 14,595
Merger difference reserve (13,147) (13,147) (13,147)
Translation reserve (2,014) (1,904) (1,015)
Hedging reserve (99) 572 (293)
EBT reserve (1) - (1)
Retained earnings 111,135 93,799 105,003
Equity attributable to owners of the Company 110,643 94,089 105,316
Total equity 110,643 94,089 105,316
Condensed Consolidated Statements of Changes in Equity
For the six months ended 28 February 2023 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 2022 59 115 14,595 (13,147) (1,015) (293) (1) 105,003 105,316
Profit for the period - - - - - - - 8,449 8,449
Other comprehensive (expense)/income for the period - - - - (999) 194 - (38) (843)
Total comprehensive (expense)/income for the period - - - - (999) 194 - 8,411 7,606
Transactions with owners of the Company:
Share-based payment deferred tax deduction in excess of remuneration expense - - - - - - - (12) (12)
Share-based payment current tax deduction in excess of remuneration expense - - - - - - - 25 25
Shares from EBT exercised - - - - - - - 556 556
Share-based payments - - - - - - - (341) (341)
Shares withheld to settle employees' tax obligations associated with - - - - - - - (185) (185)
share-based payments
Premium on shares awarded in lieu of bonuses - - - - - - - 106 106
Dividends paid - - - - - - - (2,428) (2,428)
Balance at 28 February 2023 59 115 14,595 (13,147) (2,014) (99) (1) 111,135 110,643
Condensed Consolidated Statements of Changes in Equity (Continued)
For the six months ended 28 February 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 2021 59 115 14,595 (13,147) (529) 716 (1) 82,539 84,347
Profit for the period - - - - - - - 13,453 13,453
Other comprehensive (expense)/income for the period - - - - (1,375) (144) - 27 (1,492)
Total comprehensive (expense)/income for the period - - - - (1,375) (144) - 13,480 11,961
Transactions with owners of the Company:
Share-based payment deferred tax deduction in excess of remuneration expense - - - - - - - (1,091) (1,091)
Share-based payment current tax deduction in excess of remuneration expense - - - - - - - 598 598
Shares from EBT exercised - - - - - - 1 591 592
Share-based payments - - - - - - - 499 499
Shares withheld to settle employees' tax obligations associated with - - - - - - - (865) (865)
share-based payments
Premium on shares awarded in lieu of bonuses - - - - - - - 202 202
Dividends paid - - - - - - - (2,154) (2,154)
Balance at 28 February 2022 59 115 14,595 (13,147) (1,904) 572 - 93,799 94,089
Condensed Consolidated Statements of Changes in Equity (Continued)
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 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 for the period - - - - (486) (1,009) - 199 (1,296)
Total comprehensive (expense)/ income for the period - - - - (486) (1,009) - 24,975 23,480
Share-based payment deferred tax deduction in excess of remuneration expense - - - - - - - (1,131) (1,131)
Share-based payment current tax deduction - - - - - - - 723 723
EBT shares issued - - - - - - - 674 674
Share-based payments - - - - - - - 1,120 1,120
Shares withheld to settle employees' tax obligations associated with - - - - - - - (865) (865)
share-based payments
Premium on shares awarded 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 Statement of Cash Flow
For the six months ended 28 February 2023
Note Six months to Six months to Year to
28 February 2023
28 February 2022
31 August 2022
£'000 £'000 £'000
Cash flows from operating activities
Profit for the period 8,449 13,453 24,776
Adjustments for:
Income tax expense 2,434 3,075 5,773
Net interest charge/(income) 578 (228) (1,888)
Loss on disposal of property, plant and equipment - 15 24
Loss/(gain) on disposal of intangible assets 27 (24) 105
Gain on sale of trademark - (830) (830)
Amortisation of intangibles 8 4,389 4,093 9,883
Depreciation of property, plant and equipment 1,085 1,289 2,223
Other non cash items (377) - (369)
Share-based payments charge (341) 515 1,313
Operating cash flow before movements in working capital 16,244 21,358 41,010
Decrease/(increase) in trade and other receivables 1,315 (7,592) (12,316)
Increase in inventories (2,341) (4,966) (27,591)
(Decrease)/increase in trade and other payables (9,421) 2,491 12,988
Operating cash flow before interest and tax 5,797 11,291 14,091
Net interest (paid)/received (636) 246 (330)
Income tax paid (915) (2,722) (3,380)
Cash generated by operations 4,246 8,815 10,381
Net foreign exchange movements (878) (1,266) (1,918)
Net cash inflow from operating activities 3,368 7,549 8,463
Cash flows from investing activities
Purchases of property, plant and equipment (1,078) (378) (1,045)
Purchases of intangible assets 8 (1,079) - (3,095)
Capitalised R&D costs 8 (4,296) (5,024) (8,368)
Proceeds from disposal of intangible assets - 978 830
Acquisition of subsidiary, net of cash acquired 10 (7,153) - (10,923)
Net cash used in investing activities (13,606) (4,424) (22,601)
Cash flows from financing activities
Proceeds from loans and borrowings 15,706 - 13,228
Repayments of loans and borrowings (2,000) - -
Payment of right of use liabilities (405) (478) (1,168)
Equity dividends paid (2,428) (2,154) (3,234)
Net cash generated from/(used in) financing activities 10,873 (2,632) 8,826
Net increase/(decrease) in cash and cash equivalents 635 493 (5,312)
Cash and cash equivalents at beginning of the period 12,758 17,339 17,339
Net foreign exchange movement 134 (19) 731
Cash and cash equivalents at end of the period 13,527 17,813 12,758
Notes to the Condensed Consolidated Interim Financial Statements
1. Basis of preparation and significant accounting policies
Focusrite plc (the 'Company') is a company incorporated in the UK. The
condensed consolidated interim financial statements ('interim financial
statements') as at and for the six months ended 28 February 2023 comprised the
Company and its subsidiaries (together referred to as the 'Group').
The Group is a business engaged in the development, manufacture and marketing
of professional audio and electronic music products.
Statement of compliance
The condensed set of financial statements are for the six months ended 28
February 2023 and are presented in Pounds ('GBP' thousands; £'000). This is
the functional currency of the Group.
The condensed set of financial statements has been prepared in accordance with
the recognition and measurement requirements of UK-adopted international
accounting standards and the AIM rules.
The annual financial statements of the Group for the year ending 31 August
2023 will be prepared in accordance with UK-adopted international accounting
standards. The condensed set of financial statements has been prepared
applying the accounting policies and presentation that were applied in the
preparation of the company's published consolidated financial statements for
the year ended 31 August 2022 which were prepared in accordance with
UK-adopted international accounting standards in conformity with the
requirements of the Companies Act 2006, with the exception of the presentation
of intangible assets which has been updated to separately disclose technology,
products and patents in development not yet subject to amortisation (see note
8).
AIM listed companies are not required to comply with IAS 34 'Interim Financial
Reporting' and accordingly the Company has taken advantage of this exemption.
The condensed financial statements do not include all the information required
for a complete set of IFRS financial statements. However, selected explanatory
notes are included to explain events and transactions that are significant to
an understanding of the changes in the Group's financial position and
performance since the last annual consolidated financial statements as at and
for the year ended 31 August 2022.
These interim financial statements were authorised for issue by the Company's
Board of Directors on 24 April 2023.
The comparative figures for the financial year ended 31 August 2022 are the
Company's statutory accounts for that financial year. Those accounts have been
reported on by the Company's auditor and delivered to the registrar of
companies. The report of the auditor was (i) unqualified, (ii) did not include
a reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
Significant accounting policies
The condensed set of consolidated interim financial statements has been
prepared applying the accounting policies and presentation that were applied
in the preparation of the company's published consolidated financial
statements for the year ended 31 August 2022 which were prepared in accordance
with UK-adopted International Accounting Standards (IAS) in conformity with
the requirements of the Companies Act 2006, with the exception of the
presentation of intangible assets which has been updated to separately
disclose technology, products and patents in development not yet subject to
amortisation (see note 8).
1.1 Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and subsidiaries controlled by the Company drawn up to 28 February
2023.
1.2 Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the
Group has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities. In assessing control, the
Group takes into consideration potential voting rights that are currently
exercisable. The acquisition date is the date on which control is transferred
to the acquirer. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until
the date control ceases.
1.3 Going concern
The Board of Directors have 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 16 months from the
date of approval of these interim financial statements ("the going concern
period"). Accordingly, the interim 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 period
ending 16 months from the date of their approval of these financial
statements. These forecasts include a severe but plausible downside scenarios,
including the impact of a recession, loss of a major distributor and
significant decline in a major product category.
The base case covers the period to August 2024 and includes demanding but
achievable forecast growth. The forecast has been extracted from the Group's
FY23 forecast and three-year plan. Key assumptions include:
· Future growth assumptions consistent with those recently achieved by
the relevant divisions business and adjusted for the annualisation of recent
acquisitions' results.
· Continued investments in research and development in all areas of the
Group.
· No further acquisitions
· Dividends consistent with the Group's dividend policy.
Throughout the period the forecast cash flow information indicates that the
Group will have sufficient cash reserves and comply with the leverage and
interest cover covenants contained within the facility.
The Directors' view is that a severe yet plausible downside assumption is a
combined scenario of a recession, together with loss of a distributor and a
significant decline in a major product line. Compared to their base case
forecasts this is estimated to be a revenue shortfall of 30% on the base case
for a 12-month period commencing April 2023 with a 10% decline per month
thereafter. This model assumes that purchases of inventory would, in time,
reduce to reflect reduced sales, if they occurred, and the Group would respond
to a revenue shortfall by taking reasonable steps to reduce overheads within
its control. As an additional measure, the Directors could also cancel the
dividend. Even at that level, 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 1.1x compared to the maximum of
2.5x. The Group's net debt position under this severe plausible downside
scenario would still be expected to improve at the end of the 16-month period
to August 2024.
Although revenue in this period has shown a decline, this is believed to be
due to short term market factors, which are expected to reverse. The Group
is still experiencing levels of consumer registrations and customer demand
significantly higher than pre-pandemic and is expected to be cash generative
in the second half. The Group's net debt position was approximately £15.3
million at 20 April 2022. Consequently, the Directors are confident that the
Group will have sufficient funds to continue to meet their liabilities as they
fall due for at least 16 months from the date of approval of the financial
statements and therefore have prepared the financial statements on a going
concern basis.
1.4 Earnings per share
The Group presents basic and diluted earnings per share ('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.
1.5 Accounting estimates and judgements
In application of the Group's accounting policies, the Directors are required
to make judgements, estimates and assumptions about the carrying amounts of
assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and
other factors that are considered to be relevant. Actual results may differ
from these estimates.
In preparing these condensed consolidated interim financial statements, the
significant judgements made by the Directors in applying the Group's
accounting policies and key sources of estimation uncertainty were the same as
those applied to the Group's financial statements for the year ended 31 August
2022.
1.6 Foreign currencies
The individual financial statements of each subsidiary are presented in the
currency of the primary economic environment in which it operates (its
functional currency). Sterling is the predominant functional currency of the
Group and presentation currency for the consolidated financial information.
In preparing the financial statements of the individual companies,
transactions in currencies other than the entity's functional currency
(foreign currencies) are recognised at the rates of exchange prevailing on the
dates of the transactions. At each balance sheet date, monetary assets and
liabilities that are denominated in foreign currencies are retranslated at the
rates prevailing at that date. Non-monetary items carried at fair value that
are denominated in foreign currencies are translated at the rates prevailing
at the date when the fair value was determined. Non-monetary items that are
measured in terms of historical cost in a foreign currency are not
retranslated.
Exchange differences are recognised in profit or loss in the period in which
they arise. Exchange differences on revenue are recognised within revenue.
Exceptions to this are as follows:
· Exchange differences on transactions entered into to hedge certain
foreign currency risks (see below under cash flow hedges/financial
instruments); and
· For the purpose of presenting consolidated financial information,
exchange differences on monetary items receivable from or payable to a foreign
operation for which settlement is neither planned nor likely to occur
(therefore forming part of the net investment in the foreign operation), which
are recognised initially in other comprehensive income and reclassified from
equity to profit or loss on disposal or partial disposal of the net
investment.
For the purpose of presenting consolidated financial information, the assets
and liabilities of the Group's foreign operations are translated at exchange
rates prevailing on the balance sheet date. Income and expense items are
translated at the average exchange rates for the period, unless exchange rates
fluctuate significantly during that period, in which case the exchange rates
at the date of the transactions are used. Exchange differences arising, if
any, are recognised in the income statement.
1.7 Hedge accounting
The Group has adopted hedge accounting for qualifying transactions.
Derivatives are initially recognised at fair value at the date a derivative
contract is entered into and are subsequently remeasured to their fair value
at each balance sheet date. The resulting gain or loss is recognised in profit
or loss immediately unless the derivative is designated and effective as a
hedging instrument, in which event the timing of the recognition in profit or
loss depends on the nature of the hedge relationship. The Group designates
certain derivatives as either hedges of the fair value of recognised assets or
liabilities of firm commitments (fair value hedges), hedges of highly probable
forecast transactions or hedges of foreign currency risk of firm commitments
(cash flow hedges), or hedges of net investments in foreign operations.
Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, or a highly
probable forecast transaction, the effective part of any gain or loss on the
derivative financial instrument is recognised directly in the hedging
reserve. Any ineffective portion of the hedge is recognised immediately in
the income statement.
When the forecast transaction subsequently results in the recognition of a
non-financial item, the associated cumulative gain or loss is removed from the
hedging reserve and is included in the initial carrying amount of the
non-financial asset or liability.
For all other hedged forecast transactions, the associated cumulative gain or
loss is removed from equity and recognised in the income statement in the same
period during which the hedged expected future cash flows affects profit or
loss.
When the hedging instrument is sold, expires, is terminated or exercised, or
the entity revokes designation of the hedge relationship but the hedged
forecast transaction is still expected to occur, the cumulative gain or loss
at that point remains in equity and is recognised in accordance with the above
policy when the transaction occurs. If the hedged transaction is no longer
expected to take place, the cumulative unrealised gain or loss recognised in
equity is recognised in the income statement immediately.
1.8 Alternative Performance Measures (APMs) and Adjusting items
The Group has disclosed certain alternative performance measures ('APMs')
within these interim 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
considers that the term 'Adjusted' together with an adjusting items category,
provides a helpful view of the ongoing trading performance of the Group.
Adjusted results will therefore exclude certain significant costs such as
amortisation on acquired intangibles, together with some non-recurring costs
and benefits and so should not be regarded as a complete picture of the
Group's financial performance.
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, sale of trademark (only in HY22) and restructuring
costs, together with amortisation of acquired intangible assets.
The following APMs have been used in these financial results:
· Organic constant currency growth - this is calculated by comparing
current period revenue to prior period revenue adjusted for current period
exchange rates and the impact of acquisitions, shown within the Financial
Review.
· Adjusted EBITDA - comprising earnings (operating profit) 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 increase/(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. See
reconciliation below
During the period, the directors have reconsidered the presentation of the
deferred tax credit arising on the amortisation of acquired intangible assets.
This has previously not been regarded as an adjusting item. In order to be
consistent with the treatment of the amortisation of the relevant assets, we
now consider that the relevant deferred tax credits should be included within
the adjusting items for a better understanding of the impact of the
amortisation of the acquired assets. Accordingly, comparative amounts for the
affected disclosures have been restated. The impact of this change was to
increase the tax credit on adjusting items by £0.3 million in the six months
to 28 February 2022 and by £1.2 million in the year to 31 August 2022.
Adjusted basic EPS and adjusted diluted EPS reduced by 0.9p for the six months
to February 2022 and by 2.0p for the year to 31 August 2022.
Reconciliation of Alternative Performance Measures to Statutory Reported
Measures
Six months to Six months to
28 February 2023
28 February 2022
Adjusted EBITDA Adjusted Operating Profit Adjusted Diluted EPS Adjusted EBITDA Adjusted Operating Profit RestatedAdjusted Diluted EPS 1 (#_ftn1)
£'000 £'000 £'000 £'000 £'000 £'000
Reported Operating Profit 11,461 11,461 16,283 16,283
Reported Profit after tax 8,449 13,453
Add back (deduct):
Underlying depreciation and amortisation 3,858 - - 3,146 - -
Amortisation on acquired intangibles 1,504 1,504 1,504 2,236 2,236 2,236
Acquisition costs 328 328 328 300 300 300
Gain on sale of trademark - - - (830) (830) (830)
Earnout in relation to acquisition 523 523 523 1,087 1,087 1,087
Restructuring 379 379 379 - - -
Tax on adjusting items - - (565) - - (831)
Adjusted 18,053 14,195 10,618 22,222 19,076 15,415
Weighted average number of total ordinary shares including dilutive impact 58,936 58,910
Adjusted diluted EPS (p) 18.0 26.2
Year to
31 August 2022
Adjusted Adjusted Restated
EBITDA Operating Profit Adjusted
£'000 £'000 Diluted EPS1
£'000
Reported Operating Profit 28,661 28,661 -
Reported 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 adjusting items - - (1,376)
Adjusted 41,663 34,672 29,411
Weighted average number of total ordinary shares including dilutive impact 58,917
Adjusted diluted EPS (p) 49.9
Six months to Six months to Year to
28 February 2023
28 February 2022
31 August 2022
Free cash flow Adjusted free cash flow Free cash flow Adjusted free cash flow Free cash flow Adjusted free cash flow
£'000 £'000 £'000 £'000 £'000 £'000
Net increase/(decrease) in cash and cash equivalents during the year 635 635 493 493 (5,312) (5,312)
Add back: dividends paid 2,428 2,428 2,154 2,154 3,234 3,234
Add back: cash outflow in relation to acquisition of business 7,153 7,153 - - 10,923 10,923
Change in bank loan (13,706) (13,706) - - (13,228) (13,228)
Add back: adjusting items - 1,230 - 557 - 895
Free cashflow/Adjusted Free cashflow (3,490) (2,260) 2,647 3,204 (4,383) (3,488)
Definition of net debt 28 February 2023 28 February 2022 31 August 2022
Net (debt)/cash Net (debt)/cash Net (debt)/cash
Cash and cash equivalents 13,527 17,813 12,758
Bank loan (26,897) - (13,228)
RCF arrangement fee 137 211 174
Net debt (13,233) 18,024 (296)
1 Restated to include the deferred tax credit arising on the amortisation of
acquired intangibles, which was not previously included. See note 1.8 to the
interim financial statements.
2. Revenue
An analysis of the Group's revenue is as follows:
Six months to 28 February 2023 Six months to 28 February 2022
North America EMEA Rest of World Total North America EMEA Rest of World Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Focusrite 20,669 14,309 5,106 40,084 26,852 19,046 9,016 54,914
Novation 2,838 4,060 1,343 8,241 4,525 4,280 1,706 10,511
ADAM Audio 3,194 6,087 880 10,161 2,381 4,702 1,337 8,420
Sequential 4,295 3,638 746 8,679 2,964 2,999 626 6,589
Sonnox 116 130 60 306 - - - -
Content Creation 31,112 28,224 8,135 67,471 36,722 31,027 12,685 80,434
Audio Reproduction - Martin Audio 5,197 8,420 5,155 18,772 3,041 4,397 5,021 12,459
Total 36,309 36,644 13,290 86,243 39,763 35,424 17,706 92,893
Year to 31 August 2022
North America EMEA Rest of World Total
£'000 £'000 £'000 £'000
Focusrite 47,558 30,936 18,692 97,186
Novation 8,603 8,088 3,892 20,583
ADAM Audio 3,964 9,036 4,797 17,797
Sequential 6,300 7,874 2,075 16,249
Content Creation 66,425 55,934 29,456 151,815
Martin Audio 8,084 14,176 9,658 31,918
Total 74,509 70,110 39,114 183,733
3. Operating segments
Products and services from which reportable segments derive their revenue
Information reported to the Group's Chief Executive Officer (who has been
determined to be the Group's Chief Operating Decision Maker) for the purposes
of resource allocation and assessment of segment performance is focused on the
main product groups which the Group sells. While the results of Novation and
Ampify are reported separately to the Board, they meet the aggregation
criteria set out in IFRS 8 'Operating Segments'. 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 and Ampify branded products
ADAM
Audio
- Sale of ADAM Audio products
Martin
Audio
- Sale of Martin Audio, Optimal Audio and Linea
Research (acquired 10 March 2022) products.
Sequential
- Sale of Sequential products.
Sonnox
- Sale of Sonnox software plug ins (acquired 19
December 2022)
The revenue and profit generated by each of the Group's operating segments are
summarised as follows:
Six months to Six months to Year to
28 February 2023
28 February
31 August
2022 2022
£'000 £'000 £'000
Revenue from external customers
Focusrite 40,084 54,914 97,186
Novation 8,241 10,511 20,583
ADAM Audio 10,161 8,420 17,797
Sequential 8,679 6,589 16,249
Sonnox 306 - -
Martin Audio 18,772 12,459 31,918
Total revenue from external customers 86,243 92,893 183,733
Segment profit
Focusrite 19,148 25,944 45,108
Novation 4,485 4,464 8,132
ADAM Audio 4,738 4,081 8,941
Sequential 3,779 2,779 6,819
Sonnox 290 - -
Martin Audio 8,184 5,995 14,280
Total segment profit 40,624 43,263 83,280
Central sales and administrative expenses (27,933) (26,423) (53,724)
Other income - 830 830
Adjusting items (1,230) (1,387) (1,725)
Operating profit 11,461 16,283 28,661
Finance income 712 351 2,286
Finance costs (1,290) (106) (398)
Profit before tax 10,883 16,528 30,549
Tax (2,434) (3,075) (5,773)
Profit after tax 8,449 13,453 24,776
Segment profit represents the profit earned by each segment without allocation
of the share of central administration costs, other income, finance income and
finance costs, and income tax expense. This is the measure reported to the
Group's Chief Executive Officer 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 a credit relating to the share option scheme of
£341,000 for the six-month period to 28 February 2023 (six months to 28
February 2022: charge of £515,000; year to 31 August 2022: charge of
£1,313,000).
Segment net assets and other segment information
Management does not make use of segmental data relating to net assets and
other balance sheet information for the purposes of monitoring segment
performance and allocating resources between segments. Accordingly, other
than the analysis of the Group's non-current assets by region shown below,
this information is not available for disclosure in the condensed consolidated
financial information.
The Group's non-current assets, analysed by region, were as follows:
28 February 28 February 31 August
2023 2022 2022
£'000 £'000 £'000
Non-current assets
North America 9,423 16,033 21,311
Europe, Middle East and Africa 85,615 49,339 66,189
Rest of World 113 788 -
Total non-current assets 95,151 66,160 87,500
UK 69,560 54,025 63,543
4. Adjusting items
The following adjusting items have been charged/(credited) to the income
statement in the period
Six months to Six months to Year to
28 February 28 February 31 August
2023 2022 2022
Restated(1) Restated(1)
£'000 £'000 £'000
Adjusting income
Gain on sale of trademark - (830) (830)
Adjusting costs
Acquisition and due diligence costs 328 300 565
Earnout accrual in relation to acquisitions 523 1,087 1,160
Restructuring 379 - -
Total adjusting items for adjusted EBITDA 1,230 557 895
Amortisation of acquired intangible assets 1,504 2,236 5,116
Total adjusting items for adjusted operating profit 2,734 2,793 6,011
Tax on adjusting items(1) (565) (831) (1,376)
Total adjusting items for adjusted profit after tax 2,169 1,962 4,635
(1 ) Restated to include the deferred tax credit arising on the amortisation
of acquired intangibles, which was not previously included. See note 1.8 to
the interim financial statements.
Acquisition and due diligence costs in the six months to 28 February 2023
related to fees accrued for due diligence work associated with the acquisition
of Sonnox Limited. The earnout accrual relates to that part of the US$4
million consideration that was classed as employee remuneration rather than
contingent consideration as part of the Sequential acquisition in April 2021
and an amount due relating to the acquisition of Linea Research of £0.3
million. The Sequential earn out has now completed and was paid in the half
year. The earn out relating to Linea Research will complete in May 2023.
5. Taxation
The tax charge for the six months to 28 February 2023 is based on the
estimated tax rate for the full year in each jurisdiction.
6. Dividends
The following equity dividends have been declared:
Six months to Six months to Year to
28 February 2023
28 February 2022
31 August 2022
Dividend per qualifying ordinary share 2.1p 1.85p 6.0p
During the period, the Company paid a final dividend in respect of the year
ended 31 August 2022 of 4.15 pence per share. The Board has approved an
interim dividend of 2.1 pence per ordinary share (HY22: 1.85 pence).
This will be payable on 10 June 2023 to ordinary shareholders on the register
on 13 May 2022. The ex-dividend date will be 12 May 2023.
7. Earnings per share
Reported EPS
The calculation of the basic and diluted EPS is based on the following data: Six months to Six months to Year to
28 February
28 February 2022(1)
31 August
2023 2022
Restated(1) Restated(1)
Earnings £'000 £'000 £'000
Earnings for the purposes of basic and diluted EPS being net profit for the 13,453 24,776
period
8,449
Adjusting items (see note 4) 2,734 2,793 6,011
Tax on adjusting items(1) (565) (831) (1,376)
Total adjusted profit for adjusted EPS calculation 10,618 15,415 29,411
Number of shares Six months to Year to
28 February
31 August
Six months to
2022 2022
28 February
2023
Weighted average number of ordinary shares for the purposes of basic EPS 58,494,265 58,215,504
calculation
58,294,306
Effect of dilutive potential ordinary shares:
Employee and Director share option plans 441,359 694,238 623,138
Weighted average number of ordinary shares for the purposes of diluted EPS 58,935,624 58,909,742 58,917,444
calculation
EPS Pence Pence Pence
Basic EPS 14.4 23.1 42.5
Diluted EPS 14.3 22.8 42.1
Adjusted basic EPS(1) 18.2 26.5 50.5
Adjusted diluted EPS(1) 18.0 26.2 49.9
( )
(1 ) Restated in HY22 and FY22 to include the deferred tax credit arising on
the amortisation of acquired intangibles, which was not previously included.
See note 1.8 to the interim financial statements.
At 28 February 2023, the total number of ordinary shares issued and fully paid
was 59,211,639. This included shares held by the Employee Benefit Trust
('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 less the weighted average number of shares held by the EBT. 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.
8. Other intangible assets
Intellectual property, Licences and Trademarks Internally generated technology and patents costs Acquired technology and patents costs Technology and patents under Development Computer software Brands Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Cost
At 1 September 2021 1,658 21,413 23,694 6,535 1,585 20,020 74,905
Additions - acquired separately 1,684 - - - 44 4,535 6,263
Additions - products developed during the period 406 2,387 - 5,464 - - 8,257
Additions through business combination - - 4,050 1,600 - 850 6,500
Foreign exchange - - 1,032 - - 913 1,945
Transfer (21) 3,908 1,402 (5,289) - - -
Disposals (1) - - - (245) - (246)
At 1 September 2022 3,726 27,708 30,178 8,310 1,384 26,318 97,624
Additions - acquired separately 780 22 - - 277 - 1,079
Additions - products developed during the period - 1,140 - 3,156 - - 4,296
Additions through business combination - - 4,700 450 3 400 5,553
Foreign exchange (1) (25) (188) (31) - (334) (579)
Transfer - 3,492 - (3,352) (140) - -
Disposals (28) - - - (1) - (29)
At 28 February 2023 4,477 32,337 34,690 8,533 1,523 26,384 107,944
Intellectual property, Licences and Trademarks Internally generated technology and patents costs Acquired technology and patents costs Technology and patents under Development Computer software Brands Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Amortisation
At 1 September 2021 1,321 16,607 4,123 728 833 2,227 25,839
Charge for the year 362 3,938 3,215 242 467 1,659 9,883
Foreign exchange - 17 39 23 79
Eliminated on disposal - - - - (141) - (141)
At 1 September 2022 1,683 20,562 7,377 970 1,159 3,909 35,660
Charge for the period 221 2,286 1,695 - 224 933 5,359
Foreign exchange (2) 9 (10) - (11) (14)
Transfer - 239 - - (239) - -
Reversal of amortisation - - - (970) - - (970)
At 28 February 2023 1,902 23,096 9,062 - 1,144 4,831 40,035
Carrying amount
At 28 February 2023 2,575 9,241 25,628 8,533 379 21,553 67,909
At 31 August 2022 2,043 7,146 22,801 7,340 225 22,409 61,964
In previous accounting periods, the amortisation of acquired technology and
patents under development has been incorrectly calculated. The accounting
policy requires that they should be amortised from the date when the assets
are available for use. In error it had been commenced from the earlier date
of the acquisition of the related businesses. The cumulative amortisation
provided in error totals £1.0 million. As, in the opinion of the directors,
the amount of the error is not material, cumulatively or in any given
financial year, the correction of this error has been reflected by a reversal
of £1.0 million of amortisation in the current period. In order to enhance
transparency the other intangible assets note has been represented to separate
those assets which are currently in development from those which are in use.
9. Financial instruments
The fair value of the Group's derivative financial instruments is calculated
using the quoted prices. Where such prices are not available, a discounted
cash flow analysis is performed using the applicable yield curve for the
duration of the instruments for non-optional derivatives, and an option
pricing model for optional derivatives. Foreign currency forward contracts are
measured using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contract.
IFRS 13 'Fair Value Measurements' requires the Group's derivative financial
instruments to be disclosed at fair value and categorised in three levels
according to the inputs used in the calculation of their fair value.
Financial instruments carried at fair value should be measured with reference
to the following levels:
· Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
· Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or
liability, either directly (i.e., as prices) or indirectly (i.e., derived from
prices); and
· Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The financial instruments held by the Group that are measured at fair value
all related to financial assets/(liabilities) measured using a Level 2
valuation method.
The fair value of financial assets and liabilities held by the Group are:
28 February 2023 28 February 2022 31 August 2022
£'000 £'000 £'000
Financial assets
Fair value
Cash and cash equivalents 13,527 17,813 12,758
Trade and other receivables 23,130 18,641 26,887
Designated cash flow hedge relationships
Derivative financial assets designated and effective as cash flow hedging - 572 -
instruments
36,657 37,026 39,645
Financial liabilities
Fair value
Trade and other payables 12,246 19,381 22,809
Bank loan and arrangement fee 26,760 (211) 13,054
Amounts payable in relation to staged acquisition payments 3,486 - 3,573
Designated cash flow hedge relationships
Derivative financial liabilities designated and effective as cash flow hedging 99 - 293
instruments
42,591 19,170 39,729
10. Acquisition of a subsidiary
On 19 December 2022, the Group completed the acquisition of 100% of the share
capital of Sonnox Limited ("Sonnox"). The total gross cash consideration was
£9.1 million paid in full on completion. The acquisition was funded by a
drawdown of £9.2 million on the existing revolving credit facility of £40
million with HSBC and Natwest. Sonnox had £1.9 million of cash at the
acquisition date such that the net cash consideration was £7.2 million.
Sonnox is a well-established and acclaimed brand in the audio industry. Its
range of innovative and award-winning plugins are used in a wide range of
audio applications including mixing, mastering, live sound, broadcast, TV and
film, and even scientific and forensics projects..
For the period between the acquisition date and 28 February 2023, Sonnox
contributed revenue of £0.3 million and a profit before tax of £0.1 million
to the Group. If the acquisition had occurred on 1 September 2022, management
estimates that Sonnox's revenue would have been £1.2 million and profit
before tax for the period would have been £0.6 million.
Acquisition-related costs
The Group incurred acquisition-related costs of £287,000 on legal fees and
due diligence costs relating to the acquisition of Sonnox. These have been
included in adjusting item costs to give investors a better understanding of
the costs related to the acquisition of Sonnox. 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 4,700
Technology and patents in development 450
Brand 400
Software/website 3
Intangible assets 5,553
Property, plant and equipment 36
Cash 1,942
Working capital 265
Acquired deferred tax liability (11)
Deferred tax liability (1,373)
Net identifiable assets and liabilities at fair value 6,412
Goodwill recognised on acquisition 2,683
Consideration paid 9,095
The acquired 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
Developed technology Income approach (multi-period excess earnings method "MEEM")
The key assumption used is the forecast revenues attributable to the
existing asset.
Technology and patents in development Replacement cost approach
The key assumption is the estimated completion percentage
Brand Income approach (relief from royalty method)
The key assumption used is the forecast revenues attributable to the existing
asset.
Fair values measured on a provisional basis
Sonnox was acquired two 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. Such adjustments may relate to our understanding of the
growth assumptions made at the time of the acquisition.
Goodwill
The goodwill recognised is attributable to:
· the skills and technical talent of the Sonnox 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.
As a result of the strong strategic fit, we expect revenue and cost synergies
to result for Focusrite brands as a result of this transaction and therefore a
proportion of the goodwill and technology and patents in development
recognised in this transaction will be attributed to the Focusrite Cash
Generating Unit (CGU) rather than the Sonnox CGU.
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 4,700 482 (482)
Brand 400 43 (43)
Total 5,100 525 (525)
In 2022 the Group purchased Linea Research for £12,277,000, resulting in
acquired intangible assets additions of £6,500,000 and goodwill of
£3,387,000 arising due to this business combination.
Independent Review Report to Focusrite plc
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly report for the six months ended 28 February 2023
which comprises the Condensed Consolidated Income Statement, Condensed
Consolidated Statement of Other Comprehensive Income, Condensed Consolidated
Statement of Financial Position, Condensed Consolidated Statements of Changes
in Equity, Consolidated Statement of Cash Flow and the related explanatory
notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
report for the six months ended 28 February 2023 is not prepared, in all
material respects, in accordance with the recognition and measurement
requirements of UK-adopted international accounting standards and the AIM
Rules.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the
UK. A review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. We read the other
information contained in the half-yearly report and consider whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an
audit opinion.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the group to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the group will continue in operation.
Directors' responsibilities
The half-yearly report is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the half-yearly
report in accordance with the AIM Rules.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with UK-adopted international accounting standards.
The directors are responsible for preparing the condensed set of financial
statements included in the half-yearly report in accordance with the
recognition and measurement requirements of UK-adopted international
accounting standards.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the group or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly report based on our review.
Our conclusion, including our conclusions relating to going concern, are based
on procedures that are less extensive than audit procedures, as described in
the Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
James Tracey
for and on behalf of KPMG LLP
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
24 April 2023
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