REG - IG Design Group PLC - Interim Results
RNS Number : 2479GIG Design Group PLC24 November 2020EMBARGOED UNTIL 7.00 AM, 24 NOVEMBER 2020
IG Design Group PLC
(the "Company", the "Group" or "Design Group")
Results for the six months ended 30 September 2020
STRONGER THAN EXPECTED H1 PERFORMANCE- FULL YEAR OUTLOOK AHEAD OF MARKET EXPECTATIONS
IG Design Group plc, one of the world's leading designers, innovators and manufacturers of Gift Packaging, Celebrations, Craft & creative play, Stationery, Gifting and related product categories announces its results for the six months ended 30 September 2020.
As previously announced the Group's reporting currency has moved to US dollars following the acquisition of CSS Industries, Inc. ('CSS') in March 2020 which increased the US dollar revenues to over 70% of the Group.
Financial Highlights
H1 2021
H1 2020
Revenue
$434.6m
$309.2m
Adjusted*
- Profit Before Tax
$30.2m
$26.1m
- Diluted Earnings per Share
22.0c
24.2c
Reported
- Profit Before Tax
$17.1m
$20.5m
- Diluted Earnings per Share
11.4c
19.0c
Net debt as at the period end
$23.2m
$106.1m
Average Leverage
0.2x
1.1x
Interim Dividend
3.0p (3.9c)
3.0p (3.7c)
*Adjusted results are stated before Adjusting items - for further detail see Alternative Performance Measures reconciliation within the Detailed Financial Review
· A stronger than expected start to the 2021 financial year (against revised Covid-19 forecasts)
- First half revenue up 41% year-on-year with Adjusted profit before tax up 16%
- Growth driven by the CSS acquisition, with Covid-19 negatively impacting trading across the Group, particularly during the first quarter
- Adjusted diluted Earnings per share at 22.0 cents is down on prior year reflecting increased shares in issue following CSS equity raise
· A strong first half cash management performance, underpinning interim dividend
- Net debt improved $82.9 million on the prior year with Average leverage at 0.2 times
- Interim dividend of 3.0 pence (3.9 cents) at the same level as last year, despite the uncertainty caused by Covid-19, reflecting the stronger than expected first half performance of the Group
Operational Highlights
· Covid-19 plans successfully implemented; we have remained open, continued to serve customers and have delivered a stronger than expected financial performance
· Orderbook is currently in excess of 80% of full year revenue forecasts; a higher level than this time in the prior year, with everyday volumes continuing to be strong across the business
· Continue to focus on revenue growth initiatives including building on cross-selling opportunities in the US, expanding our range of sustainable products and developing an increased e-commerce offering and capability
· Capital investment spend is lower than in previous years but we continue to benefit from prior year investments
· CSS has delivered a strong first half performance with revenues** broadly flat year-on-year despite Covid-19 and acquisition synergies are already delivering ahead of schedule.
Outlook
Notwithstanding our caution in relation to the outlook for the balance of the year as the challenges of Covid-19 continue to impact the world, the Board are confident that the full year performance will be ahead of market expectations.
Paul Fineman, CEO, commented:
"In what has been an unprecedented period, what has shone through is the resilience and agility of our teams and our businesses. Together, we have managed to overcome numerous challenges in order to continue the delivery of quality products to our customers. Their skills and hard work have secured a strong performance and we take this opportunity to again thank them.
Though it has become more difficult for many to gather together it is pleasing to see that people's desire to celebrate life's special occasions has not waned despite the current circumstances. We've also seen countless families embracing at-home activities such as sewing or crafting. Similarly, Christmas in 2020 is being enthusiastically anticipated with customers reporting strong sell-through of decorations, gift packaging and crackers.
The outlook is encouraging, although we remain aware of continued global and regional challenges. Thanks to the strength of our performance in this half, together with our strong future pipeline, we are now tracking to deliver a full year performance ahead of market expectations."
Presentations and Overview video
IG Design Group is hosting a webinar for analysts at 0900 hrs GMT today. If you would like to register please contact designgroup@almapr.co.uk
The Company is also hosting a webinar for retail investors tomorrow, Wednesday, 25 November at 1430 hrs GMT. If you would like to attend please register here: http://bit.ly/IG_DesignGroup_H1_piworld_investor_webinar
A video overview of the results from the CEO, Paul Fineman, and CFO, Giles Willits, is available to watch here: https://www.thedesigngroup.com/half-year-results-video-2020/
** Included the this report are certain prior year figures related to CSS Industries, Inc. taken from previously published financial statements.
For further information:
IG Design Group plc
01525 887310
Paul Fineman, Chief Executive
Giles Willits, Chief Financial Officer
Canaccord Genuity Limited
020 7523 8000
Bobbie Hilliam, NOMAD
Alex Aylen, Sales
Alma PR
Rebecca Sanders-Hewett
020 3405 0205
Susie Hudson
Sam Modlin
OVERVIEW & OUTLOOK
The first half results follow the exciting year to 31 March 2020, which included significant operational and strategic progress and great momentum. The six months to 30 September 2020 has of course been impacted by the Covid-19 pandemic, and our focus has been not only on ensuring the business successfully manages the challenges presented by the pandemic but also to continue to capitalise on the growth opportunities available to the Group while delivering the CSS integration and forecasted synergies.
It is undoubtedly times like these that demonstrate the strength of our teams, our processes and especially our ability to deliver, and our teams have done just that. The Board continues to be grateful for the attitude and determination of every individual in the Design Group teams around the world to ensure the business remains in good shape. We continue to work closely with both our suppliers and customers to maintain our high levels of service whilst working to adapt to new requirements and ensuring an efficient supply chain.
The Board is extremely pleased to be able to report that all of our businesses are performing better than initial Covid-19 forecasts and despite the additional challenges around the world as the pandemic continues to impact trading, we remain fully operational, benefitting from the swift implementation of our response plans at the outset of the crisis.
The first half can be very much split into two. The first three months were a challenging time for our teams when they were focused on working with customers and suppliers to finalise Covid-19 impacted seasonal orders all while maintaining operational effectiveness and customer service on Everyday products. Not surprisingly sales dropped significantly in the first quarter as many retailers were forced to close. However, certain categories such as Craft and creative play and Gifting performed strongly, catering well to the demand of consumers looking for family-friendly entertainment whilst under various restrictions.
The second quarter saw a return to more normal trends with the business focused on delivering seasonal orders while continuing to optimise revenues through Everyday channels. The acquisition of CSS benefitted the business throughout the period, helping the Group increase its proportion of Everyday non seasonal revenues while also introducing the new 'Craft' category to our product portfolio. Its integration continues to proceed well and is ahead of schedule in relation to the delivery of synergies, benefitting from the early and successful unification of the management leadership team in the Americas from the date of acquisition.
Thanks to the strength of our performance in this half and our strong future pipeline, notwithstanding our caution in relation to the outlook for the balance of the year as the challenges of Covid-19 continue to impact the world, the Board are confident that the full year performance will be ahead of expectations. Our trading as we approach Christmas continues to be strong and customers are reporting good sell-through to date on seasonal as well as Everyday product lines. Our cash management continues to deliver seasonal debt levels significantly below the prior year and as a result the Board expects average leverage to be below 0.5x for the year to 31 March 2021. The Group is well placed to deliver continued growth in FY22 and beyond.
COVID-19
Covid-19 continues to have a significant impact on the world, our trading partners and the Group. As announced at the previous financial year end (March 2020), we took swift action to ensure the teams were safe and the business remained financially robust and ready to benefit in the future for when trading returned to more normal levels. The business responded well to this challenge and delivered a performance ahead of our revised projections. It has maintained safe operations in all territories whilst continuing to serve our customers successfully. Furthermore, we continue to focus on developing growth initiatives and delivering synergies following the CSS acquisition in March 2020.
The impact of Covid-19 on the business in the first half of the financial year has been significant with trading down across the Group year-on-year as a result of the pandemic. It is difficult to calculate the exact extent of Covid-19 on the results, however, the following movements on revenue have been seen;
- In the first quarter of the current financial year revenues were down year-on-year across the Group (excluding CSS) by 27.8%. CSS quarter one sales** were down 11.7%. This reflected the significant reduction in orders for Everyday products as many retailers were closed and those retailers which remained open focused their activities on essential product lines.
- In the second quarter, which is financially a much more significant trading period for the Group, the business saw revenues recover strongly with CSS up 2.4% year-on-year in the quarter and Group revenues (excluding CSS) down just 2.8% on the prior period. Our orderbook remains ahead of our initial Covid-19 expectations but down like-for-like in absolute ($) terms against the prior year as our customers have taken a more cautious outlook to ensure high sell-through over the Christmas period. Everyday sales have recovered well, particularly in some key areas such as Craft and creative play.
The reduced volumes going through the business impacted on the gross margin percentage as a result of product mix and lower absorption of overheads into inventory in manufacturing. Furthermore, despite the Group taking quick action to control costs and maximise early synergies from the CSS acquisition the fixed overhead cost base, which is required to support the higher activity of the Group post the pandemic, increased as a percentage of revenues. Overall, the Group has delivered a robust adjusted operating margin at 7.5% (H1 2020: 9.3%), ahead of expectations.
Where appropriate, the Group has separately identified direct incremental costs associated with Covid-19 which total $2.0 million in the first half and have been included in Adjusting items. In addition, the business has incurred other costs resulting from Covid-19 and these, alongside Government assistance received totalling $3.6 million (the majority of which was received into our business in Australia) have not been included in Adjusting items.
SUMMARY 2021 INTERIM RESULTS
The Group's results are reported in US dollars for the first time following the CSS acquisition which increased the US dollar revenues to over 70% of the Group.
In the first half Revenue increased by 41% to $434.6 million (H1 2020: $309.2 million) including the effect of $149.1 million sales from CSS, with Adjusted profit before tax up 16.0% year-on-year at $30.2 million (H1 2020: $26.1 million). Excluding CSS, Revenue is down 8% reflecting the impact of Covid-19.
Adjusted diluted earnings per share was 22.0 cents (H1 2020: 24.2 cents) which reduced, despite increased profit levels, because of the higher shares in issue following the equity raise to support the CSS acquisition in the final quarter of the 2020 financial year.
The Group ended the half year delivering a significant year-on-year reduction in net debt at $23.2 million (H1 2020: $106.1 million) with Average leverage improving to 0.2 times (H1 2020: 1.1 times). This very strong performance primarily reflects effective cash management actions, including strong management of working capital and a reduction to our capital investment programme.
Profit before tax at the half year was $17.1 million (H1 2020: $20.5 million). This reduction reflects the impact of the increase year-on-year in Adjusting items to $13.1 million (H1 2020: $5.6 million) which primarily result from the CSS integration costs and direct incremental Covid-19 associated expenditure. Diluted earnings per share therefore reduced to 11.4 cents (H1 2020: 19.0 cents).
The Board is pleased to declare an interim dividend, at the same level as last year, of 3.0 pence (3.9 cents) in respect of the period to 30 September 2020, reflecting the stronger than expected first half performance of the Group. The final dividend of 5.75 pence in relation to the year ended 31 March 2020 was paid in November 2020, later than the prior year reflecting the impact of Covid-19 and the later than usual Annual General Meeting.
REGIONAL HIGHLIGHTS
Overall, the Group has seen growth in both Revenue and Adjusted operating profit which increased to $32.4 million (H1 2020: $28.7 million) primarily as a result of the addition of CSS to the Group. Following the CSS acquisition the reporting structure of the Group has been reviewed and Group results are now presented as two reporting segments - DG Americas (DG Americas and CSS) and DG International (comprising UK and associated Asian operations, Europe, and Australia).
Segmental Revenue
Adjusted Operating Profit
Adjusted Operating Margin
% Group revenue
H1 2021
H1 2020
% growth
H1 2021
H1 2020
% growth
H1 2021
H1 2020
74%
DG Americas
$m
321.6
183.8
75%
19.5
17.7
11%
6.1%
9.6%
27%
DG International
$m
115.5
128.4
(10%)
15.1
13.2
15%
13.1%
10.3%
(1%)
Elims / Central costs
$m
(2.5)
(3.0)
(2.2)
(2.2)
100%
Total
$m
434.6
309.2
41%
32.4
28.7
13%
7.5%
9.3%
Design Group Americas
The CSS acquisition has transformed the scale of our business in the US, which now accounts for nearly three quarters of the Group's revenue. Following the acquisition in March 2020 the US team focused on the rapid integration of the two businesses under the unified senior leadership team comprising both CSS and Design Group executives. This integration is ahead of plan and is forecast to deliver synergies, identified at the time of the acquisition, ahead of expectations. These synergies include workforce rationalisation, cost savings associated with no longer running CSS as a listed business, site closure savings, scale-based purchasing upside and the early benefit from commercial opportunities resulting from combining the two businesses.
Revenue has grown significantly in the first half of this year, up 75% on the prior year at $321.6 million (H1 2020: $183.8 million) with the additional revenues from CSS of $149.1 million contributing to the scale of the business. Due to the nature of the CSS integration in the US it is not possible to accurately provide a like-for-like year-on-year profit performance split between the two US businesses. Adjusted operating profit at $19.5 million was ahead of last year (H1 2020: $17.7 million), with CSS contributing to profits for the first time. Adjusted operating margin declined to 6.1% from 9.6% as at 30 September 2020 reflecting the impact of Covid-19, which has reduced volumes.
The impact of Covid-19 on our Americas business has seen some facilities closed for periods of time at the height of the pandemic from March through to July. The US government assistance provided support to the workforce focused on payments direct to the individual rather than through the employer and as such no government assistance has been received directly by the Americas business during the period. Furthermore, an unintended impact of the US government assistance direct to the individual is that additional costs have been incurred to encourage employees to return to work rather than remain at home receiving the government assistance. This, alongside incremental cleaning and PPE expenditure has added significant cost to the running of the US manufacturing facilities in the first half of the year, of which $1.4 million has been treated as an Adjusting item.
The area where the US government's Covid-19 package provided benefit to the businesses was an extension of the time period in which operating losses could be carried back for tax purposes, generating a substantial tax refund for the group of c.$17 million. As at 30 September we have received the first of three payments with a second instalment received in October. We expect to have received the entire tax refund by the end of the financial year.
Since the end of the half year our business in the US has experienced an IT incident that has impacted operations resulting in some shipping delays. We expect that these delayed shipments will be mostly caught up, but that there could be some missed sales and additional costs of operating. As a result, there will be some costs in the second half (which will be treated as Adjusting items), against which we anticipate receiving insurance recoveries in FY22. The financial impact of the IT incident is not anticipated to be material to the overall financial performance of the Group during the period.
Despite the challenges in the period, the business continues to move forward, with the focus at half year being the execution of our Christmas product offerings and this is in full swing as we approach the Christmas season. Our new state-of-the-art printing press in Memphis which came online in March 2020 has had its first full six months of manufacturing and as a result of this capital investment, the team in Memphis are able to print higher volumes, more efficiently.
Furthermore, during the first half the Americas has seen growth through the successful development of our seasonal gifting and décor product ranges under the X&O brand. In addition, following the CSS acquisition, the business has benefitted from the increased scale of the e-tailer and online platforms of bricks and mortar retailers and is now focused on building on the CSS e-commerce experience to re-launch and develop a refreshed and expanded offering across the Americas Group.
In addition, areas of focus for the second half include cross-selling opportunities amongst the enlarged Americas Group including geographical expansion into Canada and Latin America, as well as between the Americas and International.
Design Group International
The combination of our UK, European and Australian businesses under the Design Group International umbrella allows the Group to benefit from an integrated management and operational structure as well as to position us for future growth across this segment. Our International businesses account for over a quarter of the Group's revenues, and as anticipated due to the impact of Covid-19 on our business, Revenues for the DG International business were down 10% on the prior year at $115.5 million (H1 2020: $128.4 million). However, Adjusted operating profit was up 14.5% at $15.1 million (H1 2020: $13.2 million), reflecting variations in product mix alongside a focus on overhead expenditure and in part as a result of government assistance received in certain territories.
Despite the impact of Covid-19, the UK had a robust first half revenue and margin performance, with good seasonal orders delivered on schedule. It has continued to extend its focus on sustainability with the expansion of its 'eco-nature' brand and has further built its online offering through Amazon. It also undertook a significant restructuring of the organisation, the costs of which have been treated as Adjusting items. Europe has performed well, supported by the stronger than expected performance of its major customers who have also traded robustly, after the initial lockdowns in Europe. Operationally, it has also been supported by the commissioning of the new 'Robowrap' investment which has helped drive improved productivity. Australia has performed ahead of expectations and was able to maintain good margins in the circumstances. It also took early action following the Covid-19 lockdown to reorganise some of its operations to manage costs.
The impact of Covid-19 operationally has varied across the businesses within the DG International group. Across all manufacturing sites, we have seen lower volume throughput which has reduced overhead absorption into inventory and caused efficiency levels to drop as further rigor and process is required to ensure the safety of all of our employees on the manufacturing floor. This includes shorter shifts to allow for clean down and sanitising all equipment and areas before the subsequent shift moves in. Of this expenditure incremental costs directly associated with Covid-19 of $0.5 million have been included as an Adjusting item.
Our warehouse in Australia is situated in Melbourne, Victoria which had further lockdown restrictions imposed as the number of cases rose. Although this impacted productivity as the warehouse was not able to operate at full capacity, the team in Australia has managed to mitigate the impact of this using extra shifts to ensure volume throughput was not lost.
Parts of the DG International group have received government assistance where available to mitigate as much as possible the need to reduce the workforce around the Group. In total the International division received $3.6 million of government assistance in the period, which has helped offset the additional costs incurred across the Group.
OUR PRODUCTS AND BRANDS
Pivotal to the Group's 'working with the winners' strategy is the continuous refreshing of our well-diversified, yet complementary product portfolio. This keeps us at the forefront of our customers' minds and makes us an attractive 'supplier of choice' for our retail partners. The first half split of revenue highlights how the Group has transformed its mix of revenue toward everyday based categories including Craft & creative play and Gifting.
Revenue by product category
H1 2021
H1 2020
Celebrations
59%
$256.8m
76%
$235.2m
Craft & creative play
21%
$90.0m
5%
$14.1m
Stationery
4%
$15.6m
7%
$20.9m
Gifting
14%
$64.3m
9%
$29.1m
'Not-for-resale' consumables
2%
$7.9m
3%
$9.9m
Total
$434.6m
$309.2m
Our product offering was further enhanced at the end of the last financial year as a result of the acquisition of CSS, and we introduced a new Craft product category throughout the Group. The benefits and the growth to the Group in this category, which includes creative play, has meant increased sales in these areas during the last six months as many households were in lockdown and turned to creative play products to entertain children whilst schools were closed as well as reigniting or taking up new hobbies in the crafting arena. 'Not-for-resale' consumables had a challenging first half with our retail customers in this category closed for much of the first quarter, resulting in lower year-on-year orders.
Revenues associated with seasonal products, whilst increasing, have reduced as a percentage of the total product portfolio helping drive forward one of our key strategic performance indicators, being diversifying seasonality within the business.
DETAILED FINANCIAL REVIEW
The Group's results are reported in US dollars for the first time following the CSS acquisition and the subsequent increased concentration of the Group revenues and earnings in US dollars. Prior year comparatives throughout this report have been presented in US dollars. Note 14 in this report contains the relevant comparatives for financial year 2020 in both US dollar and sterling denomination.
The Group has delivered ahead of our Covid-19 expectations in the first half of the year.
H1 2021
H1 2020
Reported
Adjusting Items
Adjusted
Reported
Adjusting Items
Adjusted
$m
$m
$m
$m
$m
$m
Revenue
434.6
-
434.6
309.2
-
309.2
Gross profit
83.7
0.9
84.6
63.0
0.6
63.6
Overheads
(64.4)
12.2
(52.2)
(39.9)
5.0
(34.9)
Operating profit
19.3
13.1
32.4
23.1
5.6
28.7
Finance charge
(2.2)
-
(2.2)
(2.6)
-
(2.6)
Profit before tax
17.1
13.1
30.2
20.5
5.6
26.1
Tax
(4.8)
(2.9)
(7.7)
(4.6)
(1.3)
(5.9)
Profit after tax
12.3
10.2
22.5
15.9
4.3
20.2
Group Revenue for the period of $434.6 million grew 41% year-on-year reflecting the contribution of CSS, acquired on 3 March 2020. Excluding CSS, organic Revenue declined by 8% as a result of the impact of Covid-19. Adjusted operating profit for the Group increased by 13.3% to $32.4 million (H1 2020: $28.7 million) with Adjusted operating margin down year-on-year at 7.5% (H1 2020: 9.3%). Gross margin fell in the half year, largely as a result of customer/product mix, and lower overhead absorption into inventory, to 19.3% (H1 2020: 20.4%). Adjusted overheads as a percentage of revenue increased to 12.0% (H1 2020: 11.3%). Overall Adjusted profit before tax increased 16.0% to $30.2 million (H1 2020: $26.1 million) largely due to increased profits from the CSS acquisition although offset by the impact of Covid-19 on the Group. Half year Profit before tax was $17.1 million (H1 2020: $20.5 million) primarily reflecting the impact of the increase year-on-year in Adjusting items to $13.1 million (H1 2020: $5.6 million).
Finance expenses
Finance costs of $2.2 million are lower compared to the prior year of $2.6 million. This primarily reflects the lower level of debt held in the year, offset by an increased impact of IFRS 16 charges associated with CSS leases.
Adjusting items
Adjusting items are material items of unusual or non-recurring nature which represent gains or losses which are separately presented by virtue of their nature, size and/or incidence. The Group has incurred Adjusting items in the period to 30 September 2020 totalling $13.1 million (H1 2020: $5.6 million). These items are as follows:
Adjusting Items
H1 2021
H1 2020
Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses
$0.9m
$0.7m
Acquisition integration and restructuring costs
$5.5m
$1.2m
Impairment of assets
$0.1m
-
Incremental Covid-19 costs
$2.0m
-
Amortisation of acquired intangibles
$2.2m
$1.8m
LTIP charges
$2.4m
$1.9m
Total
$13.1m
$5.6m
Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses - $0.9 million (H1 2020: $0.7 million)
In the period, costs of $0.1 million associated with the acquisition of CSS were incurred relating to advisor fees. In addition, $0.5 million of acquisition related employee payments from the Impact Innovations Inc. transaction in 2019 which lock in and incentivise legacy talent. Finally, an additional $0.3 million of transaction costs associated with the disposal of Zhejiang Shaoxing Royal Arts and Crafts Co. Ltd were incurred.
Acquisition integration and restructuring costs - $5.5 million (H1 2020: $1.2 million)
The main costs relate to the integration of CSS into the enlarged DG Americas as new team structures have been put in place. There have also been associated temporary staff costs and recruitment costs as roles are being filled.
The CSS business includes a large portfolio of owned and leased sites, and part of the integration project includes the consolidation of these locations resulting in the impairment of lease assets and the ongoing costs associated with the closure of sites as well as the lease liability interest costs.
The UK undertook a reorganisation in light of Covid-19 for which the costs have been treated as Adjusting items. In addition, in Australia a similar reorganisation was made in the first half of the financial year.
Impairment of assets - $0.1 million (H1 2020: $nil)
In light of the impact of Covid-19 on the business, a review of inventory, trade receivables and fixed assets was undertaken at 31 March 2020. Inventories were assessed for the net realisable value and an impairment of $7.4 million was taken. Similarly trade receivables were assessed for their expected credit loss in line with IFRS 9 and an impairment of $3.8 million was taken. As at 30 September 2020, this assessment continues, and for trade receivables any impairment taken at the year end that was not required has been reversed ($3.1 million) alongside any additional debtors as at the reporting date who are now considered higher risk for which an impairment has been taken ($3.9 million). Inventories continue to be assessed for net realisable value, with sell-through of provided inventory of $1.8 million being offset against further inventory risk of $1.2 million recognised. Given the seasonality of our business and the high proportion of Christmas related sales, further assessment will be undertaken by the end of the financial year.
Incremental Covid-19 costs - $2.0 million (H1 2020: $nil)
The Covid-19 outbreak has developed rapidly in 2020, with measures taken around the world to contain the virus affecting economic activity. The Group has been affected in every territory in which we operate and the impact on the general economic environment and the reduced demand of goods from our customers as well as the closures of our businesses has had a significant impact. Certain costs relating to incremental direct labour have been identified that have impacted the financial results of the business during the year to date, equal to $2.0 million. The most significant element of these costs totalled $1.3 million relating to additional labour costs across our manufacturing facilities in the USA, Mexico and India.
Management have taken a judgement not to include government assistance received in the period as an Adjusting item, as whilst the amounts received were incremental, the underlying employee expenditure would likely not have been incurred if the government assistance was not received.
Amortisation of acquired intangibles - $2.2 million (H1 2020: $1.8 million)
Under IFRS, as part of the acquisition of a company, it is necessary to identify intangible assets such as customer relationships and brands which form part of the intangible value of the acquired business but are not part of the acquired balance sheet. These intangible assets are then amortised to the income statement over an appropriately judged period. These are not operational costs relating to the running of the acquired business and are directly related to the accounting for the acquisition. These include tradenames and brands acquired as part of the acquisition of Impact Innovations Inc. and CSS Industries Inc. in the USA and Biscay Pty Greetings Ltd in Australia. As such we include these as Adjusting items.
In addition, in accordance with IFRS 3, on acquisition, businesses need to be fair valued, which can result in an uplift to stock on hand relating to sales orders already attached to the acquired stock. This uplift will distort the margins associated with the stock, and typically unwinds quickly as stock is sold soon after acquisition. The unwind of the stock uplift ($0.6 million) associated with the CSS acquisition is included as an Adjusting item, consistent with the treatment adopted with the Impact acquisition. This has fully unwound as at 30 September 2020.
LTIP charges - $2.4 million (H1 2020: $1.9 million)
As part of our senior management remuneration, the Group operates a Long Term Incentive Plan ('LTIP') in the form of options for ordinary shares of the Group. In accordance with accounting principles, despite this plan not being a cash cost to the business, a share‑based payments charge or credit is taken to the income statement. We consider that these charges do not form part of the underlying operational costs and therefore include these as Adjusting items.
The LTIP charge for the period was $2.4 million which consists of a principal IFRS 2 charge of $2.2 million and an employer's social security charge of $0.2 million.
Taxation
The taxation charge for the half year was $4.8 million (H1 2020: $4.6 million) with the effective tax charge on Adjusted profit before tax at 25.4% (H1 2020: 22.5%). The rate is higher than the weighted blend of statutory rates in the countries in which we operate as a result of estimated permanent disallowable deductions for tax purposes. The effective rate on Profit before tax is 28.1% (H1 2020: 22.2%).
Earnings per share
Adjusted earnings per share at 22.0 cents were down 9% on the prior year (H1 2020: 24.2 cents) primarily as a result of a higher diluted share number following the share raise in early 2020. Diluted earnings per share are 11.4 cents (H1 2020: 19.0 cents). The reconciliation between Reported and Adjusted earnings per share can be seen below:
Earnings per share
H1 2021
H1 2020
Earnings attributable to equity holders of the Company
$11.2m
$15.3m
Adjustments
Adjusting items (net of non-controlling interest effect)
$13.2m
$5.5m
Tax charge/(relief) on adjustments (net of non-controlling interest effect)
($2.9m)
($1.3m)
Adjusted earnings
$21.5m
$19.5m
Weighted average number of shares
Basic weighted average number of shares outstanding
97.7m
80.0m
Dilutive effect of employee share option plans
0.3m
0.4m
Diluted weighted average ordinary shares
98.0m
80.4m
Basic earnings per share
11.5c
19.1c
Impact of Adjusting items
10.5c
5.3c
Basic adjusted earnings per share
22.0c
24.4c
Diluted earnings per share
11.4c
19.0c
Diluted adjusted earnings per share
22.0c
24.2c
Cash flow and net debt
As at 30 September 2020 net debt (excluding IFRS 16 lease liabilities) was $23.2 million, significantly better than the prior year of $106.1 million. Average leverage as at the half year was 0.2 times from 1.1 times for the comparative prior period reflecting an improved Adjusted EBITDA alongside the year-on-year reduction in average debt.
Cashflow
H1 2021
H1 2020
Adjusted EBITDA
$49.7m
$37.2m
Movements in working capital
($104.9m)
($139.8m)
Adjusted cash used by operations
($55.2m)
($102.6m)
Adjusting items
($10.4m)
($1.9m)
Cash used by operations
($65.6m)
($104.5m)
Capital expenditure (net of disposals of property, plant and equipment)
($3.4m)
($5.1m)
Tax received/(paid)
$2.9m
($3.0m)
Interest paid
($1.9m)
($2.1m)
Payments of lease liabilities
($7.2m)
($3.9m)
Dividends paid (including those paid to non-controlling interests)
-
($5.9m)
FX and other
($0.4m)
($3.8m)
Movement in net debt
($75.6m)
($128.3m)
Opening net cash
$52.4m
$22.2m
Closing net debt
($23.2m)
($106.1m)
Working capital
The Group's working capital movement this half year was impacted by the acquisition of CSS. The net working capital outflow in the half year was $104.9 million (H1 2020: $139.8 million). Stripping out the effect of CSS on working capital movements there was an underlying outflow of $74.4 million in the first half of 2021. This lower working capital movement reflects the reduced year-on-year seasonal working capital build as a result of the impact of Covid-19 alongside the stronger cash management disciplines across the Group.
In the current Covid-19 environment the Group continues to actively track debtors and credit risk profiles of all of our customers to ensure we try to mitigate as far as possible any additional exposure to credit risk.
Adjusting items
During the first half of the year there was $10.4 million (H1 2020: $1.9 million) net cash outflow in relation to Adjusting items of which $4.5 million related to cash outflow for costs accrued at the year end. The significant majority of the total outflow related to the restructuring and synergy realisation costs associated with the CSS acquisition.
Capital expenditure
During the first half of the year the Group invested $3.4 million (H1 2020: $5.1 million). The majority of this spend was in DG Americas on the fit out of the newly leased site in Mississippi, Tennessee.
Cash tax
During the first half of the year the Group benefited from a net cash inflow of tax as a result of US tax repayments following claims made by CSS under the CARES Act. The total cash amounts received at 30 September 2020 was $3.2 million. The Group made tax payments of $0.3 million which compares to a tax payment of $3.0 million in the prior year. The reduced cash tax payments are directly as a result of lower earnings driven by Covid-19.
Dividend payments
As part of the Covid-19 cash actions taken by the Group the timing of the final dividend payment in relation to the year ended 31 March 2020 was moved from September 2020 to November 2020. As such no payment was made in the first half of the financial year compared to a $5.9 million outflow in the prior year.
Financial position and going concern basis
The Group has a banking facility (refinanced in January 2020) which runs to May 2022 and includes a revolving credit facility ('RCF') of $95 million, a further flexible RCF of up to £130 million, flexible to meet working capital requirements during peak manufacturing, and a maximum limit of $18 million invoice financing arrangement in Hong Kong. The Group also has access to supplier financing arrangements which we utilise at certain times of the year.
The Group has been fully compliant with all banking covenants associated with these facilities and has not required, nor requested, any covenant waivers associated with the impact of Covid-19 on the Group results.
In light of the ongoing Covid-19 pandemic, as with the financial statements for 31 March 2020, the Directors have paid particularly close attention to their assessment of going concern in preparation of these financial statements.
The Group is currently trading ahead of forecasts used to consider the going concern assessment. These forecasts which have been reviewed in detail by the Board, and take into account the significant seasonal working capital cycle of the business, have been sensitised to reflect potential adverse downturns in the current assumptions including the second wave of the pandemic. Management has also produced a maximum stress forecast which has been deliberately engineered to challenge the Group's liquidity position and covenant performance during the forecast period. These forecasts and additional analysis demonstrated that there is sufficient excess headroom for the Group to meet its obligations as they fall due for a forecast period of more than twelve months beyond the date of these accounts. As such, the Directors do not see any practical, regulatory or legal restrictions which would limit their ability to fund the different regions of the business as required.
Accordingly, the Directors have continued to adopt the going concern basis of accounting in preparing the financial statements.
Principal risks and uncertainties
Risk is an inherent part of business, especially as Design Group aim to continue to deliver growth around the world. The Group actively monitors the risk related to its business and the environment in which it operates, as our continued success is influenced by how well we manage our risks. As at 30 September 2020, the Group's principal risks and uncertainties, as detailed in the Group's financial statements for the year ended 31 March 2020 are still active risks and there have been no material movements in these risks during the first half of this financial year. These will be reviewed again at year end, however, the Group do not expect there to be any significant change in the principal risks and uncertainties by the end of the year.
Statement of Directors' responsibilities
The Directors confirm to the best of their knowledge that:
· The condensed interim set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;
· The interim report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
· The interim report includes a fair review of the information required by DTR 4.2.8R (disclosures of related parties transactions and any changes therein).
Alternative performance measures
This review includes alternative performance measures ('APMs') that are presented in addition to the standard IFRS metrics. The Directors believe that these APMs provide important additional information regarding the adjusted performance of the business including trends, performance and position of the Group. APMs are used to enhance the comparability of information between reporting periods and segmental business units by adjusting for exceptional or uncontrollable factors which affect IFRS measures, to aid the understanding of the Group's performance. Consequently, APMs are used by the Directors and management for strategic and performance analysis, planning, reporting and reward setting. APMs reflect the results of the business excluding Adjusting items, which are items that are material and of an unusual or non-recurring nature.
The APMs and the definitions used are listed below:
· Adjusted EBITDA - EBITDA before Adjusting items
· Adjusted operating profit - Profit before finance charges, tax and Adjusting items
· Adjusted profit before tax - Profit before tax and Adjusting items
· Adjusted profit after tax - Profit after tax before Adjusting items and associated tax effect
· Adjusted earnings per share - Fully diluted earnings per share before Adjusting items and associated tax effect
In addition, the Group uses APMs in order to calculate other key performance metrics including:
· Average leverage - Rolling twelve month average bank debt (being average debt measured before lease liabilities) divided by rolling twelve month Adjusted EBITDA reduced for lease payments
· Adjusted operating margin - Adjusted operating profit divided by revenue
Adjusting items
Further details of the items categorised as Adjusting items are disclosed in more detail in note 3.
A full reconciliation between our adjusted and reported results is provided below:
APM Reconciliation
H1 2021
H1 2020
Adjusted EBITDA
$49.7m
$37.2m
Adjusting items
($10.0m)
($3.8m)
EBITDA
$39.7m
$33.4m
Adjusted operating profit
$32.4m
$28.7m
Adjusting items
($13.1m)
($5.6m)
Reported operating profit
$19.3m
$23.2m
Adjusted profit before tax
$30.2m
$26.1m
Adjusting items
($13.1m)
($5.6m)
Reported profit before tax
$17.1m
$20.5m
Adjusted profit after tax
$22.2m
$20.2m
Adjusting items
($10.2m)
($4.3m)
Reported profit after tax
$12.3m
$15.9m
Adjusted earnings per share
22.0c
24.2c
Adjusting items
(10.6c)
(5.2c)
Reported diluted earnings per share
11.4c
19.0c
** Included in this report are certain prior year figures related to CSS Industries, Inc. taken from previously published financial statements.
CONDENSED CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED 30 SEPTEMBER 2020
Unaudited six months ended 30 Sep 2020
Unaudited restated(a) six months ended 30 Sep 2019
Twelve months restated(a) ended 31 Mar 2020
Note
$000
$000
$000
Revenue
2
434,635
309,220
624,340
Cost of sales
(350,937)
(246,186)
(530,109)
Gross profit
83,698
63,034
94,231
Selling expenses
(21,584)
(13,374)
(33,766)
Administration expenses
(46,480)
(27,089)
(58,868)
Other operating income
4
3,909
503
927
Profit on disposal of property, plant and equipment
10
-
246
(Loss)/profit on disposal of subsidiary
(208)
-
1,836
Operating profit
3
19,345
23,074
4,606
Finance expenses
(2,265)
(2,616)
(5,479)
Profit/(loss) before tax
17,080
20,458
(873)
Income tax (charge)/credit
5
(4,801)
(4,535)
18,276
Profit for the period
12,279
15,923
17,403
Attributable to:
Owners of the Parent Company
11,222
15,297
16,461
Non-controlling interests
1,057
626
942
Earnings per ordinary share
Note
Unaudited six months ended 30 Sept 2020
Unaudited restated(a) six months ended 30 Sep 2019
Twelve months restated(a) ended 31 Mar 2020
Basic
8
11.5c
19.1c
19.9c
Diluted
8
11.4c
19.0c
19.8c
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS ENDED 30 SEPTEMBER 2020
Unaudited six months ended 30 Sep 2020
Unaudited restated(a)
six months ended 30 Sep 2019
Twelve months restated(a) ended 31
Mar 2020
$000
$000
$000
Profit for the period
12,279
15,923
17,403
Other comprehensive income:
Exchange difference on translation of foreign operations (net of tax)
(4,144)
(4,031)
3,112
Recycling translation reserves on disposal of subsidiary
-
-
42
Transfer to profit and loss on maturing cash flow hedges (net of tax)
127
(490)
(490)
Net unrealised (loss)/gain on cash flow hedges (net of tax)
(391)
(64)
657
Other comprehensive (expense)/income for the period, net of tax items which may be reclassified to profit and loss in subsequent periods
(4,408)
(4,585)
3,321
Total comprehensive income for the period, net of tax
7,871
11,338
20,724
Attributable to:
Owners of the Parent Company
6,143
10,860
20,372
Non-controlling interests
1,728
478
352
7,871
11,338
20,724
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
SIX MONTHS ENDED 30 SEPTEMBER 2020
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
$000
$000
$000
$000
$000
$000
$000
$000
$000
At 1 April 2020 (restated(a))
5,974
215,417
40,175
320
(4,389)
113,703
371,200
4,643
375,843
Profit for the period
-
-
-
-
-
11,222
11,222
1,057
12,279
Other comprehensive (expense)/ income
-
-
-
(264)
(4,815)
-
(5,079)
671
(4,408)
Total comprehensive income for the period
-
-
-
(264)
(4,815)
11,222
6,143
1,728
7,871
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
2,309
2,309
-
2,309
Tax on equity-settled share-based payments
-
-
-
-
-
(266)
(266)
-
(266)
Recognition of non-controlling interests
-
-
-
-
-
-
-
276
276
Options exercised
14
-
-
-
-
(14)
-
-
-
Exchange differences on opening balances
268
9,647
1,799
-
-
-
11,714
-
11,714
At 30 September 2020
6,256
225,064
41,974
56
(9,204)
126,954
391,100
6,647
397,747
SIX MONTHS ENDED 30 SEPTEMBER 2019
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
$000
$000
$000
$000
$000
$000
$000
$000
$000
At 31 March 2019 (restated(a))
5,093
74,962
42,119
153
(8,133)
108,763
222,957
5,266
228,223
Impact of adopting IFRS 16
-
-
-
-
-
(2,427)
(2,427)
(572)
(2,999)
Restated equity at 1 April 2019
5,093
74,962
42,119
153
(8,133)
106,336
220,530
4,694
225,224
Profit for the period
-
-
-
-
-
15,297
15,297
626
15,923
Other comprehensive expense
-
-
-
(554)
(3,883)
-
(4,437)
(148)
(4,585)
Total comprehensive income for the period
-
-
-
(554)
(3,883)
15,297
10,860
478
11,338
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
1,491
1,491
-
1,491
Tax on equity-settled share-based payments
-
-
-
-
-
314
314
-
314
Recognition of non-controlling interests
-
-
-
-
-
-
-
121
121
Options exercised
44
-
-
-
-
(44)
-
-
-
Equity dividends paid
-
-
-
-
-
(5,868)
(5,868)
-
(5,868)
Exchange differences on opening balances
(274)
(4,037)
(2,268)
-
-
-
(6,579)
-
(6,579)
At 30 September 2019 (restated(a))
4,863
70,925
39,851
(401)
(12,016)
117,526
220,748
5,293
226,041
YEAR ENDED 31 MARCH 2020
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
$000
$000
$000
$000
$000
$000
$000
$000
$000
At 31 March 2019 (restated(a))
5,093
74,962
42,119
153
(8,133)
108,763
222,957
5,266
228,223
Impact of adopting IFRS 16
-
-
-
-
-
(2,427)
(2,427)
(572)
(2,999)
Restated equity at 1 April 2019
5,093
74,962
42,119
153
(8,133)
106,336
220,530
4,694
225,224
Profit for the year
-
-
-
-
-
16,461
16,461
942
17,403
Other comprehensive income/(expense)
-
-
-
167
3,744
-
3,911
(590)
3,321
Total comprehensive income for the year
-
-
-
167
3,744
16,461
20,372
352
20,724
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
(287)
(287)
-
(287)
Tax on equity-settled share-based payments
-
-
-
-
-
213
213
-
213
Derecognition of non-controlling interests
-
-
-
-
-
-
-
(403)
(403)
Shares issued
1,117
150,145
-
-
-
-
151,262
-
151,262
Options exercised
45
-
-
-
-
(45)
-
-
-
Equity dividends paid
-
-
-
-
-
(8,975)
(8,975)
-
(8,975)
Exchange differences on opening balances
(281)
(9,690)
(1,944)
-
-
-
(11,915)
-
(11,915)
At 31 March 2020 (restated(a))
5,974
215,417
40,175
320
(4,389)
113,703
371,200
4,643
375,843
CONDENSED CONSOLIDATED BALANCE SHEET
AS AT 30 SEPTEMBER 2020
Unaudited
as at 30
Sep 2020
Unaudited restated(a)
as at 30
Sep 2019
Restated(a)
as at 31
Mar 2020
Restated(a)
as at 31
Mar 2019
Note
$000
$000
$000
$000
Non-current assets
Property, plant and equipment
90,383
50,769
92,622
51,786
Intangible assets
140,315
106,482
140,504
110,503
Right-of-use assets
105,882
43,771
82,742
-
Long-term assets
6,308
-
6,223
-
Deferred tax assets
22,351
5,126
18,135
4,693
Total non-current assets
365,239
206,148
340,226
166,982
Current assets
Inventory
187,717
157,703
141,911
90,442
Trade and other receivables
281,556
200,664
110,047
64,641
Income tax receivable
15,138
-
18,377
-
Derivative financial assets
9
556
511
412
168
Cash and cash equivalents
6
76,770
145,117
83,200
110,910
Total current assets
561,737
503,995
353,947
266,161
Total assets
2
926,976
710,143
694,173
433,143
Equity
Share capital
6,256
4,863
5,974
5,093
Share premium
223,327
69,277
213,755
73,220
Capital redemption reserve
1,737
1,648
1,662
1,742
Merger reserve
41,974
39,851
40,175
42,119
Hedging reserve
56
(401)
320
153
Translation reserve
(9,204)
(12,016)
(4,389)
(8,133)
Retained earnings
126,954
117,526
113,703
108,763
Equity attributable to owners of the Parent Company
391,100
220,748
371,200
222,957
Non-controlling interests
6,647
5,293
4,643
5,266
Total equity
397,747
226,041
375,843
228,223
Non-current liabilities
Loans and borrowings
7
(389)
899
(219)
1,847
Lease liabilities
99,946
42,097
78,418
-
Deferred income
586
678
561
976
Provisions
5,422
3,094
5,161
3,472
Other financial liabilities
9,354
868
6,784
2,362
Deferred tax liabilities
1,572
906
1,314
900
Total non-current liabilities
116,491
48,542
92,019
9,557
Current liabilities
Bank overdraft
6
45,180
125,522
31,003
85,614
Loans and borrowings
7
55,219
124,755
(3)
1,239
Lease liabilities
19,799
7,531
16,995
-
Deferred income
496
437
162
129
Provisions
1,150
1,149
2,717
1,417
Income tax payable
13,522
7,417
5,482
6,202
Trade and other payables
230,494
147,732
121,962
76,135
Other financial liabilities
46,878
21,017
47,993
24,627
Total current liabilities
412,738
435,560
226,311
195,363
Total liabilities
2
529,229
484,102
318,330
204,920
Total equity and liabilities
926,976
710,143
694,173
433,143
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
SIX MONTHS ENDED 30 SEPTEMBER 2020
Unaudited six months ended 30 Sep 2020
Unaudited restated(a)
six months ended 30 Sep 2019
Twelve
months restated(a)
ended 31
Mar 2020
Note
$000
$000
$000
Cash flows from operating activities
Profit for the period
12,279
15,923
17,403
Adjustments for:
Depreciation and impairment of property, plant and equipment
6,678
3,845
8,880
Depreciation of right-of-use assets
9,370
4,043
8,911
Amortisation of intangible assets
4,258
2,444
4,816
Finance expenses
2,265
2,616
5,479
Income tax charge/(credit)
4,801
4,535
(18,276)
Loss/(profit) on disposal of a business
208
-
(1,836)
(Profit)/loss on sales of property, plant and equipment
(10)
9
(246)
Loss on disposal of intangible fixed assets
1
-
1
Equity-settled share-based payments
2,477
1,908
(252)
Operating profit after adjustments for non-cash items
42,327
35,323
24,880
Change in trade and other receivables
(169,524)
(143,430)
9,841
Change in inventory
(42,133)
(71,244)
1,532
Change in trade and other payables, provisions and deferred income
105,217
74,861
1,592
Cash (used by)/generated from operations
(64,113)
(104,490)
37,845
Tax received/(paid)
2,857
(2,984)
(5,993)
Interest and similar charges paid
(1,927)
(2,092)
(5,090)
Net cash (outflow)/inflow from operating activities
(63,183)
(109,566)
26,762
Cash flow from investing activities
Proceeds from sale of property, plant and equipment
30
25
767
Acquisition of businesses (net of cash acquired)
-
-
(112,251)
Acquisition of intangible assets
(737)
(1,126)
(3,738)
Acquisition of property, plant and equipment
(2,729)
(4,041)
(10,463)
Net cash outflow from investing activities
(3,436)
(5,142)
(125,685)
Cash flows from financing activities
Proceeds from issue of share capital
-
-
152,535
Repayment of secured borrowings
(1,025)
(627)
(1,917)
Net movement in previous credit facilities
-
48,230
48,230
Repayment of previous credit facilities
-
(48,230)
(48,230)
Net movement in new credit facilities
55,730
123,903
-
Payment of lease liabilities
(8,772)
(3,868)
(8,430)
Loan arrangement fees
-
(737)
(1,571)
Equity dividends paid
-
(5,868)
(8,975)
Net cash inflow from financing activities
45,933
112,803
131,642
Net (decrease)/increase in cash and cash equivalents
(20,686)
(1,905)
32,719
Cash and cash equivalents at beginning of the period
52,197
25,296
25,296
Effect of exchange rate fluctuations on cash held
79
(3,796)
(5,818)
Cash and cash equivalents at end of the period
6
31,590
19,595
52,197
(a)the Group's reporting currency has moved to US Dollars following the acquisition of CSS in March 2020 which increased the US dollar revenues to over 70% of the Group and therefore primary statements have been restated from sterling to US dollar. See note 14 to this interim report for the comparative primary statements from the prior year as previously presented in sterling. In addition, all prior year comparative notes to the accounts have been restated throughout this report.
NOTES TO THE INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED 30 SEPTEMBER 2020
1 Accounting policies
Basis of Preparation
The financial information contained in this interim report does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006 and is unaudited.
The Group interim report has been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRS'). The financial information for the year ended 31 March 2020 is extracted from the statutory accounts of the Group for that financial year and has been restated into US dollar. See the Presentation Currency section below for further detail. The auditor's report was (i) unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under Section 498 (2) of the Companies Act 2006. The interim report does not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 March 2020. The audited annual accounts have been delivered to the Registrar of Companies.
The preparation of financial statements that conform with adopted IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and future periods if relevant.
For the purposes of these financial statements 'Design Group' or 'the Group' means IG Design Group plc ('the Company') and its subsidiaries. The Company's ordinary shares are listed on the Alternative Investment Market ('AIM').
Seasonality of the Business
The business of the Group is seasonal and although revenues accrue relatively evenly in both halves of the year, working capital requirements including inventory levels increase steadily in the first half from July and peaks in October as manufacturing and distribution of Christmas products builds ahead of shipping. The second half of the year sees the borrowing of the Group decline and move to typically a cash positive position as we collect our debtors through January to March.
Presentation Currency
The Company has changed the presentation currency of the Group from pound sterling to US dollar effective 1 April 2020. Following the acquisition of CSS Industries Inc., a significant majority of the Group earnings is now denominated in US dollars. Management believes that the presentation currency change will give investors and other stakeholders a clearer understanding of the Group's financial performance over time. In addition, the change will reduce the volatility of the Group's earnings due to foreign exchange movements, in relation to the translation of foreign currency balances.
The currency translation reserve was set to zero at 1 April 2006 on transition to IFRS and has been restated as if the Group had reported in US dollars since that date. Share capital, share premium, capital redemptions reserve, merger reserve and hedging reserve are translated into US dollars at the rates of exchange at the balance sheet date and the resulting exchange differences are included in other reserves.
The functional currency of the parent company remains as sterling as it is located in the United Kingdom and substantially all of its cash flows, assets and liabilities are denominated in sterling, as well as its share capital. As such, the Parent Company's functional currency differs to that of the Group's reporting currency.
Since the change in reporting currency has been applied retrospectively all comparative numbers in these consolidated interim accounts have been restated into US dollar. Note 14 sets out the key primary statements with both sterling and US dollar comparatives for the six months ended 30 September 2019 and year ended 31 March 2020.
Going Concern
Cash balances and borrowings are detailed in notes 6 and 7.
On 5 June 2019, to meet the funding requirements of the Group, the business refinanced with a banking group comprising HSBC, NatWest, BNP Paribas, Sun Trust and PNC Bank as part of a three year deal. This facility was then subsequently amended and extended on 17 January 2020 with the same banking group to accommodate the acquisition of CSS Industries Inc. The facilities run to May 2022 and comprise of a revolving credit facility ('RCF') of $95.0 million, a further flexible RCF of up to £130.0 million flexible to meet the Group's working capital requirements during peak manufacturing, and a maximum limit of $18.0 million invoice financing arrangement in Hong Kong. We also have access to supplier financing arrangements from certain customers which we utilise at certain times of the year. These arrangements are subject to the continuing support of the customers banking partners and therefore could be withdrawn at short notice.
The Directors have prepared detailed plans and forecasts for a period of at least twelve months from the date of signing these financial statements. The plans reflect the seasonal operating cycle of the business and assume continuity of supply chain. They also benefit from the diverse geographic spread of the Group and the high proportion of revenues generated from retailers who have remained open during the Covid-19 crisis. The base case forecasts broadly assume a recovery over the remainder of this financial year but to a generally recessionary environment. The Group is currently trading ahead of forecasts used to consider the going concern assessment. The forecasts show the Group has more than sufficient liquidity. In light of the ongoing Covid-19 pandemic, these forecasts have been sensitised to reflect severe but plausible adverse downturns in the current assumptions including the impact of the second wave of the pandemic and associated lockdown in the UK and Europe as well as the cyber incident in the US. Management has also produced a maximum stress forecast which has been deliberately engineered to challenge the Group's liquidity and leverage covenant positions during the forecast period. Further analysis has been prepared in relation to the mitigating actions open to the Group in the event of a scenario which is worse than the sensitivities already modelled. These mitigating actions include short term sales action, cutting discretionary spend further, headcount reductions and reduction in investment such as capex.
These forecasts and additional analysis including mitigating actions demonstrated that the Group has sufficient excess headroom for the Group to meet its obligations as they fall due for a forecast period of more than twelve months beyond the date of signing these accounts.
Based on these models, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, and accordingly have adopted the going concern basis in preparing the consolidated financial statements. This disclosure has been prepared in accordance with the Financial Reporting Council's UK Corporate Governance Code.
Significant accounting policies
The accounting policies adopted in the preparation of the interim report are consistent with those followed in preparation of the Group's annual financial statements for the year ended 31 March 2020.
2 Segmental information
The Group has one material business activity being the design, manufacture and distribution of Celebration, Craft & creative play, Stationery, Gifting and 'Not-for-resale' consumable products.
Following the acquisition of CSS, the business has been restructured with the consolidation of the UK, European and Australian businesses under one operating segment: International. As such the Board has re-evaluated the reporting segments for the Group and for management purposes the Group is now organised into two geographic reporting segments. These are the segments as reported to, and evaluated by, the Chief Operating Decision Makers for the Group.
The acquisition of CSS Industries Inc. has seen additional entities in various locations around the world including Asia, Australia, UK, India and Mexico. Management review the results for CSS as one consolidated unit and this forms part of the Americas segment for the purpose of segmental reporting.
Inter‑segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Financial performance of each segment is measured on adjusted operating profit before management recharges. Interest and tax are managed on a Group basis and not split between reportable segments. However, the related financial liability and cash has been allocated out into the reportable segments as this is how they are managed by the Group.
Segment assets are all non-current and current assets, excluding deferred tax and income tax, which are shown in the eliminations column. Inter-segment receivables and payables are not included within segmental assets and liabilities as they eliminate on consolidation.
Central &
Americas(a)
International
eliminations
Group
$000
$000
$000
$000
Six months ended 30 September 2020
Revenue
- external
321,572
113,063
-
434,635
- inter segment
-
2,443
(2,443)
-
Total segment revenue
321,572
115,506
(2,443)
434,635
Segment result before adjusting items and management recharges
19,550
15,140
(2,224)
32,466
Adjusting items (note 3)
(13,121)
Operating profit
19,345
Finance expenses
(2,265)
Income tax
(4,801)
Profit for six months ended 30 September 2020
12,279
Balances at 30 September 2020
Segment assets
563,866
282,583
80,527
926,976
Segment liabilities
(316,758)
(148,970)
(63,501)
(529,229)
Capital expenditure additions
- property, plant and equipment
1,519
1,210
-
2,729
- intangible assets
700
37
-
737
- right-of-use assets
29,639
679
-
30,318
Depreciation - property, plant and equipment
3,917
2,760
1
6,678
Amortisation - intangible assets
3,988
270
-
4,258
Depreciation - right-of-use assets
6,756
2,579
35
9,370
Central &
Americas(a)
International
eliminations
Group
$000
$000
$000
$000
Six months ended 30 September 2019
Revenue
- external
183,837
125,383
-
309,220
- inter segment
-
2,999
(2,999)
-
Total segment revenue
183,837
128,382
(2,999)
309,220
Segment result before adjusting items and management recharges
17,600
13,222
(2,167)
28,655
Adjusting items (note 3)
(5,581)
Operating profit
23,074
Finance expenses
(2,616)
Income tax
(4,535)
Profit for the six months ended 30 September 2019
15,923
Balances at 30 September 2019
Segment assets
293,067
282,311
134,765
710,143
Segment liabilities
(195,082)
(164,295)
(124,725)
(484,102)
Capital expenditure additions
- property, plant and equipment
1,021
3,016
4
4,041
- intangible assets
894
146
86
1,126
- right-of-use assets
640
2,663
33
3,336
Depreciation - property, plant and equipment
1,243
2,599
3
3,845
Amortisation - intangible assets
2,120
324
-
2,444
Depreciation - right-of-use assets
1,787
2,223
33
4,043
Central &
Americas(a)
International
eliminations
Group
$000
$000
$000
$000
Year ended 31 March 2020
Revenue
- external
355,917
268,423
-
624,340
- inter segment
-
7,071
(7,071)
-
Total segment revenue
355,917
275,494
(7,071)
624,340
Segment result before adjusting items and management recharge
20,064
24,877
(4,017)
40,924
Adjusting items (note 3)
(36,318)
Operating profit
4,606
Finance expenses
(5,479)
Income tax
18,276
Profit for the year ended 31 March 2020
17,403
Balances at 31 March 2020
Segment assets
423,642
210,380
60,151
694,173
Segment liabilities
(199,584)
(95,410)
(23,336)
(318,330)
Capital expenditure additions
- property, plant and equipment
3,372
7,087
4
10,463
- property, plant and equipment on acquisition of business
40,570
-
-
40,570
- intangible assets
3,419
236
83
3,738
- intangible assets on acquisition of business
5,960
-
-
5,960
- right-of-use assets
790
6,515
33
7,338
- right-of-use assets on acquisition of business
40,650
-
-
40,650
Depreciation - property, plant and equipment
3,034
5,411
3
8,448
Impairment
-
432
-
432
Amortisation - intangible assets
4,341
475
-
4,816
Depreciation - right-of-use assets
4,222
4,619
70
8,911
(a) Including overseas entities for the Americas operating segment
3 Operating profit and adjusting items
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
$000
$000
$000
Operating profit analysed as:
Adjusted operating profit
32,466
28,655
40,924
Adjusting items
(13,121)
(5,581)
(36,318)
Operating profit
19,345
23,074
4,606
Adjusting items
Six months ended 30 September 2020
Cost of sales
Selling expenses
Admin expenses
Loss on sale of subsidiary
Other finance expenses
Total
$000
$000
$000
$000
$000
$000
Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses1
-
-
674
208
-
882
Acquisition integration and restructuring costs2
33
-
5,478
-
-
5,511
Impairment of assets3
-
52
-
-
-
52
Incremental Covid-19 costs4
926
-
1,048
-
-
1,974
Amortisation of acquired intangibles5
-
-
2,225
-
-
2,225
LTIP charge6
-
-
2,477
-
-
2,477
Adjusting items
959
52
11,902
208
-
13,121
Six months ended 30 September 2019
Cost
of sales
Selling expenses
Admin expenses
Loss
on sale of subsidiary
Other
finance expenses
Total
$000
$000
$000
$000
$000
$000
Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses1
-
-
685
-
-
685
Acquisition integration and restructuring costs2
563
-
642
-
-
1,205
Amortisation of acquired intangibles 5
-
-
1,783
-
-
1,783
LTIP charge6
-
-
1,908
-
-
1,908
Adjusting items
563
-
5,018
-
-
5,581
Year ended 31 March 2020
Cost
of sales
Selling expenses
Admin expenses
Profit
on sale of subsidiary
Other
finance expenses
Total
$000
$000
$000
$000
$000
$000
Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses1
32
-
5,918
(1,836)
-
4,114
Acquisition integration and restructuring costs2
7,066
-
4,960
-
-
12,026
Impairment of assets3
8,021
3,789
-
-
-
11,810
Incremental Covid-19 costs4
327
-
292
-
-
619
Amortisation of acquired intangibles 5
-
-
3,573
-
-
3,573
LTIP credits6
-
-
(252)
-
-
(252)
US tariffs7
4,428
-
-
-
-
4,428
Adjusting items
19,874
3,789
14,491
(1,836)
-
36,318
Adjusting items are separately presented by virtue of their nature, size and/or incidence (per each operating segment). These items are material items of an unusual or non-recurring nature which represent gains or losses and are presented to allow for the review of the performance of the business in a consistent manner and in line with how the business is managed and measured on a day-to-day basis and allow the reader to obtain a clearer understanding of the underlying results of the ongoing Group's operations. They are typically gains or costs associated with events that are not considered to form part of the core operations, or are considered to be a 'non-recurring' event (although they may span several accounting periods).
These costs/(gains) relating to the period ended 30 September 2020 are broken down as follows;
1Losses/(gains) and transaction costs relating to acquisitions and disposals of businesses
Costs directly associated with acquisitions, including legal and advisory fees on deals, form part of our reported results on an IFRS basis. These costs however, in the Board's view, form part of the capital transaction, and as they are not attributed to investment value under IFRS 3, they are included as an adjusting item. Similarly, where acquisitions have employee related payments (exclusive of LTIPs) which lock in and incentivise legacy talent, we also include these costs as Adjusting items. Furthermore, gains or losses on the disposal of businesses, including any transaction costs associated with the disposal are treated as Adjusting items.
In the period, costs of $133,000 associated with the acquisition of CSS were incurred relating to advisor fees. In addition, $542,000 of acquisition related employee payments from the Impact Innovations Inc. transaction in 2019 which lock in and incentivise legacy talent. Finally, an additional $207,000 of transaction costs associated with the disposal of Zhejiang Shaoxing Royal Arts and Crafts Co. Ltd ('Shaoxing') were incurred.
As at 30 September 2019, the Group incurred $685,000 of transaction costs primarily relating to acquisition related employee payments from the Impact Innovations Inc. transaction in 2019 which lock in and incentivise legacy talent as well as other M&A related costs. As at 31 March 2020 the total net cost incurred by the Group was $4.1 million, including costs associated with the acquisition of CSS Industries Inc. along with the profit on disposal of Shaoxing.
2Acquisition integration and restructuring costs
In order to realise synergies from acquisitions, integration projects are undertaken that aim to deliver future savings and efficiencies for the Group. These are projects outside of the normal operations of the business and typically incur one-time costs to ensure successful implementation. As such the Board considers it is appropriate that costs associated with projects of this nature be included as Adjusting items.
The main costs relate to the integration of CSS into the enlarged DG Americas as new team structures have been put in place. There have also been associated temporary staff costs and recruitment costs as roles are being filled. These costs amounted to $3.4 million in the period.
The CSS business includes a large portfolio of owned and leased sites, and part of the integration project includes the consolidation of these locations resulting in the impairment of lease assets and the ongoing costs associated with the closure of sites as well as the lease liability interest costs. In the period, the site in Nashville, Tennessee was closed and the associated impairment of the lease asset and ongoing costs associated with the mothballing of the site as well as the lease liability interest costs have been treated as Adjusting items amounting to $1.4 million in the period. This is consistent with the treatment adopted when other sites have been closed.
The UK undertook a reorganisation in light of Covid-19 for which the costs have been treated as Adjusting items. In addition, in Australia a similar reorganisation was made in the first half of the financial year. The total costs associated with the reorganisations in the period was $798,000.
As at 30 September 2019, the Group had incurred $1.2 million of acquisition integration costs, and by 31 March 2020 $12.0 million of costs relating to the integration of manufacturing facilities in Memphis, transition and retention costs as well as costs relating to the CSS integration.
3Impairment of assets
In light of the impact of Covid-19 on the business, a review of inventory, trade receivables and fixed assets was undertaken at the year end. Inventories were assessed at 31 March 2020 for the net realisable value and an impairment of $7.4 million was taken in relation to aged and obsolete inventory. Similarly trade receivables were assessed for their expected credit loss in line with IFRS 9 and an impairment of $3.8 million was taken. In addition, an impairment of $667,000 was taken as at 31 March 2020 in relation to inventory related assets and certain fixed assets.
As at 30 September 2020, this assessment continues, and for trade receivables any impairment taken at the year end that was not required has been reversed ($3.1 million) alongside any additional debtors as at the reporting date who are now considered higher risk for which an impairment has been taken ($3.9 million). Inventories continue to be assessed for net realisable value, with sell- through of provided inventory of $1.8 million being netted against further inventory risk of $1.2 million recognised. Given the seasonality of our business and the high proportion of Christmas related sales, further assessment will be undertaken by the end of the financial year.
4Incremental Covid-19 costs
The Covid-19 outbreak has developed rapidly in 2020, with measures taken around the world to contain the virus affecting economic activity. The Group has been affected in every territory in which we operate and the impact on the general economic environment and the reduced demand of goods from our customers as well as the closures of our businesses has had a significant impact. Certain costs relating to incremental direct labour have been identified that have impacted the financial results of the business during the year to date, equal to $2.0 million. The most significant element of these costs totalled $1.3 million relating to additional labour costs across our manufacturing facilities in the USA, Mexico and India. The US government assistance provided support to the workforce focused on payments direct to the individual rather than through the employer and as such no government assistance has been received directly by the Americas business during the period. Furthermore, an unintended impact of the US government assistance direct to the individual is that additional costs have been incurred to encourage employees to return to work rather than remain at home receiving the government assistance. Similarly in Mexico and India, government mandates has meant that no workforce reductions have been allowed by law and labour costs, that otherwise would not have been, have been incurred as a result. Other incremental costs include $432,000 of costs associated with direct labour inefficiencies and shorter shifts in our manufacturing sites to allow for clean down and sanitising all equipment and areas before the subsequent shift move in as well as $228,000 of additional cleaning and PPE costs.
Management have taken a judgement not to include government assistance received in the period as an Adjusting item, as whilst the amounts received were incremental, the underlying employee expenditure would likely not have been incurred if the government assistance was not received.
In the year ended 31 March 2020, $619,000 of direct incremental costs associated with Covid-19 had been incurred by the Group.
5Amortisation of acquired intangibles
Under IFRS, as part of the acquisition of a company, it is necessary to identify intangible assets such as customer relationships and brands which form part of the intangible value of the acquired business but are not part of the acquired balance sheet. These intangible assets are then amortised to the income statement over an appropriately judged period. These are not operational costs relating to the running of the acquired business and are directly related to the accounting for the acquisition. These include tradenames and brands acquired as part of the acquisition of Impact Innovations Inc. and CSS Industries Inc. in the USA and Biscay Pty Greetings Ltd in Australia. As such we include these as Adjusting items. Note that the trade names acquired as part of the acquisition of The Lang Companies Inc. were fully amortised in the prior year.
In addition, in accordance with IFRS 3, on acquisition, businesses need to be fair valued, which can result in an uplift to stock on hand relating to sales orders already attached to the acquired stock. This uplift will distort the margins associated with the stock, and typically unwinds quickly as stock is sold soon after acquisition. The unwind of the stock uplift ($0.6 million) associated with the CSS acquisition is included as an Adjusting item, consistent with the treatment adopted with the Impact acquisition. This has fully unwound as at 30 September 2020.
6LTIP charges
As part of our senior management remuneration, the Group operate a Long Term Incentive Plan ('LTIP') in the form of options for ordinary shares of the Group. In accordance with accounting principles, despite this plan not being a cash cost to the business a share‑based payments charge or credit is taken to the income statement. We consider that these charges and the associated social security charges do not form part of the underlying operational costs and therefore include these as Adjusting items.
The LTIP charge for the period to 30 September 2020 is $2.4 million which consists of a principal IFRS 2 charge of $2.2 million and an employer's social security charge of $0.2 million.
As at 30 September 2019, $1.9 million of LTIP charges had been incurred and by the 31 March 2020, these charges had been reversed and instead a credit of ($0.3) million had been taken.
The cash flow effect on adjusting items
There was $10.4 million net outflow on the current period's cash flow (H1 2020: $1.9 million) which included $4.5 million (H1 2020: $591,000) of outflow deferred from last year.
4 Other operating income
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
$000
$000
$000
Grant income received
64
317
380
Sub-lease rentals credited to the income statement
178
177
358
Government assistance
3,578
-
-
Other
89
9
189
Total other operating income
3,909
503
927
5 Taxation
Recognised in the income statement
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
$000
$000
$000
Current tax (charge)/credit
Current income tax (charge)/credit
(8,625)
(4,533)
14,458
Deferred tax credit/(charge)
Relating to origination and reversal of temporary differences
3,824
(2)
3,818
Total tax in the income statement
(4,801)
(4,535)
18,276
Total tax (charge)/credit on adjusting items
Total tax on profit before adjusting items
(7,677)
(5,860)
(7,113)
Total tax on adjusting items
2,876
1,325
8,053
Adjusting item - tax credit (US tax loss carryback)
-
-
17,336
Total tax in income statement
(4,801)
(4,535)
18,276
6 Cash and cash equivalents/bank overdrafts
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 March 2020
$000
$000
$000
Cash and cash equivalents
76,770
145,117
83,200
Bank overdrafts
(45,180)
(125,522)
(31,003)
Cash and cash equivalents per cash flow statement
31,590
19,595
52,197
Net cash
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
$000
$000
$000
Cash and cash equivalents
31,590
19,595
52,197
Bank loans and overdrafts
(55,802)
(126,268)
(987)
Loan arrangement fees
972
614
1,209
Net (debt)/cash as used in the financial review
(23,240)
(106,059)
52,419
The bank loans and overdrafts are secured by a fixed charge on certain of the Group's land and buildings, a fixed charge on certain of the Group's book debts and a floating charge on certain of the Group's other assets. See note 7 for further details of the Group's loans and borrowings.
7 Loans and borrowings
This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings.
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
$000
$000
$000
Non-current liabilities
Secured bank loans
-
1,149
432
Loan arrangement fees
(389)
(250)
(651)
(389)
899
(219)
Current liabilities
Asset backed loan
10,451
11,248
-
Revolving credit facilities
45,279
112,655
-
Current portion of secured bank loans
72
1,216
555
Bank loans and borrowings
55,802
125,119
555
Loan arrangement fees
(583)
(364)
(558)
55,219
124,755
(3)
Secured bank loans
On 5 June 2019, the Group entered into a new three year Group facility with a club of five banks chosen to reflect and support the geographical spread of the Group. The banks within the club are HSBC, NatWest, BNP Paribas, Sun Trust and PNC.
On 17 January 2020 a facility increase was agreed to support the acquisition of CSS Industries Inc. on 3 March 2020 and to accommodate the enlarged Group.
The facilities, which run to May 2022, comprises of:
· a revolving credit facility ('RCF A') of $95.0 million;
· a further flexible revolving credit facility ('RCF B') with availability varying from month to month of up to £130.0 million. This RCF is flexed to meet our working capital requirements during those months when inventory is being built within our annual business cycle and is $nil when not required, minimising carry costs; and
· an invoice financing arrangement in Hong Kong maximum limit $18.0 million but dependent on level of eligible receivables
In total, the accessible facilities are approximately $276.7 million (maximum $281.4 million) and are more than sufficient to cover our peak requirements. Being partially denominated in US dollar they also provide a hedge against currency movements. The facilities, which do not amortise with time, include an additional uncommitted amount to finance potential acquisitions.
Invoice financing arrangements are secured over the trade receivables that they are drawn on. The RCF facilities are secured with a fixed and floating charge over all other assets of the Group. Revolving credit facilities are classified as current liabilities as the Group expects to settle these amounts within 12 months.
There are financial covenants, tested quarterly, attached to the existing facilities as follows:
· interest cover, being the ratio of adjusted earnings before interest, depreciation and amortisation (EBITDA), as defined by the banking facility, to interest on a rolling twelve‑month basis; and
· leverage, being the ratio of debt to adjusted EBITDA, as defined by the banking facility, on a rolling twelve-month basis.
Covenants are measured on pre IFRS16 accounting definitions.
There is a further covenant tested monthly in respect of the working capital RCF by which available asset cover must not fall below agreed levels relative to amounts drawn.
In January 2018, the Group's Australia business obtained a secured loan from Westpac of $6.5 million (AU$9.0 million). This is repayable monthly over a five year period. It is subject to a variable interest rate linked to the Australian base rate. $1.0 million was repaid during the period which, along with $110,000 exchange movement results in a balance at 30 September 2020 of $72,000 (AU$100,000). The Australia business also borrows from Westpac for financing working capital and the current facility level is AU$5.0 million from January to June and AU$10.0 million July to December.
Loan arrangement fees represent the unamortised costs in arranging the Group facilities. These fees are being amortised on a straight line basis over the terms of the facilities.
8 Earnings per share
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30
Sep 2019
Twelve
months ended 31 Mar 2020
$000
$000
$000
Earnings
Earnings attributable to equity holders of the Company
11,222
15,297
16,461
Adjustments
Adjusting items (net of non-controlling interest effect)
13,199
5,485
35,964
Tax charge/(relief) on adjustments (net of non-controlling interest effect)
(2,899)
(1,296)
(7,946)
Adjusting item - tax credit (US tax loss carryback)
-
-
(17,336)
Adjusted earnings
21,522
19,486
27,143
Weighted average number of shares
Basic weighted average number of shares outstanding
97,700
79,960
82,605
Dilutive effect of employee share option plans
327
441
476
Diluted weighted average ordinary shares
98,027
80,401
83,081
Earnings per share (cents)
Basic earnings per share
11.5
19.1
19.9
Adjustment
10.5
5.3
12.9
Basic adjusted earnings per share
22.0
24.4
32.8
Diluted earnings per share
11.4
19.0
19.8
Diluted adjusted earnings per share
22.0
24.2
32.7
Adjusted earnings per share is provided to reflect the underlying earnings performance of the Group.
In thousands of shares
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
Issued ordinary shares at 1 April
96,367
78,366
78,366
Shares held by Employee Benefit Trust
-
-
-
Shares relating to share options
1,333
1,594
1,594
Shares issued in respect of share placing
-
-
2,645
Weighted average number of shares at the end of the period
97,700
79,960
82,605
Diluted earnings per share
The diluted earnings per share is calculated taking into account LTIP awards whose specified conditions were satisfied at the end of the reporting period of 327,000 (H1 2020: 441,000) share options. At 30 September 2020 the diluted number of shares was 98.0 million (H1 2020: 80.4 million).
9 Financial instruments
Derivative financial instruments
The fair value of forward exchange contracts is assessed using valuation models taking into account market inputs such as foreign exchange spot and forward rates, yield curves and forward interest rates.
Fair value hierarchy
Financial instruments which are recognised at fair value subsequent to initial recognition are grouped into Levels 1 to 3 based on the degree to which the fair value is observable. The three levels are defined as follows:
· Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
· Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
· Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
All other financial assets and liabilities are measured at amortised cost.
The Group held the following financial instruments at fair value at 30 September 2020:
Unaudited six months ended 30 Sep 2020
Unaudited six months ended 30 Sep 2019
Twelve months ended 31 Mar 2020
Forward exchange contracts carrying amount
$000
$000
$000
Derivative financial assets
556
511
412
Derivative financial liabilities
(538)
(814)
(9)
10 Capital commitments
At 30 September 2020, the Group had outstanding authorised capital commitments to purchase plant and equipment for $1.1 million (H1 2020: $4.6 million).
11 Related parties
As at 30 September 2020, there are no changes to the related parties or types of transactions as disclosed at 31 March 2020.
12 Acquisitions and disposals of subsidiaries
Acquisitions in the prior year
On 3 March 2020, the Group acquired 100% of the equity of CSS Industries, Inc. ("CSS"), a creative consumer products company, focused on the craft, gift and seasonal categories predominately within the US.
As disclosed in the financial statements as at 31 March 2020, the provisional effect of acquisition of CSS is as follows:
Provisional
fair values
recognised
on acquisition
$000
Property, plant and equipment
40,570
Right-of-use assets
40,650
Intangible assets
5,960
Inventories
56,630
Trade and other receivables
65,296
Doubtful debt provision
(2,231)
Cash
10,538
Trade and payables
(75,186)
Provisions
(5,167)
Income taxes
(3,828)
Deferred tax
8,797
Lease liabilities
(47,344)
Net identifiable assets and liabilities
94,685
Consideration paid in shares
-
Consideration paid in cash
122,789
Total consideration
122,789
Goodwill
28,104
Contingent liabilities of £3.6 million were recognised as part of the business combination relating to reinstatement costs of
leased buildings, potential change of control penalties, potential environmental claims and potential litigation. The liabilities
have the potential to unwind over one to five years and contain estimates. There has been no material movement in these liabilities as at 30 September 2020.
In addition, as at 30 September 2020, no measurement period adjustment has been made. A review of the provisional acquisition accounting as stated in the financial statements to 31 March 2020 is ongoing, with particular focus on inventory as the business sells through any acquired inventory. As this assessment needs to be ongoing throughout the year, if appropriate, any measurement period adjustments will be made in the second half of the year.
13 Non-adjusting post balance sheet events
After the end of the reporting period, and prior to the authorisation of this interim report on 24 November 2020, the Group has declared an interim dividend of 3.0 pence (3.9 cents) per share (H1 2020: 3.0 pence (3.7 cents)).
14 Presentation currency
The Company has changed the presentation currency of the Group from pound sterling to US dollars effective 1 April 2020. Following the acquisition of CSS Industries Inc., a significant majority of the Group earnings is now denominated in US dollars. Management believes that the presentation currency change will give investors and other stakeholders a clearer understanding of the Design Group's financial performance over time. In addition, the change will reduce the volatility of the Group's earnings due to foreign exchange movements, in relation to the translation of foreign currency balances.
Detailed below are the key primary statements with both pound sterling and US dollar comparatives for both six months ended 30 September 2019 and the year ended 31 March 2020.
CONSOLIDATED INCOME STATEMENT
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve
months ended
31 Mar 2020
Twelve months
ended
31 Mar 2020
$000
£000
$000
£000
Revenue
309,220
248,371
624,340
494,234
Cost of sales
(246,186)
(197,597)
(530,109)
(419,131)
Gross profit
63,034
50,774
94,231
75,103
Selling expenses
(13,374)
(10,658)
(33,766)
(26,523)
Administration expenses
(27,089)
(21,336)
(58,868)
(46,409)
Other operating income
503
398
927
735
Profit on disposal of property, plant and equipment
-
-
246
188
Profit on disposal of subsidiary
-
-
1,836
1,486
Operating profit
23,074
19,178
4,606
4,580
Finance expenses
(2,616)
(2,083)
(5,479)
(4,317)
Profit /(loss) before tax
20,458
17,095
(873)
263
Income tax (charge)/credit
(4,535)
(3,792)
18,276
14,547
Profit for the period
15,923
13,303
17,403
14,810
Attributable to:
Owners of the Parent Company
15,297
12,799
16,461
14,060
Non-controlling interests
626
504
942
750
Earnings per ordinary share
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
Basic
19.1c
16.0p
19.9c
17.0p
Diluted
19.0c
16.0p
19.8c
16.9p
Adjusted Earnings per ordinary share
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
Basic
24.4c
20.2p
32.8c
27.0p
Diluted
24.2c
20.1p
32.7c
26.9p
EXECUTIVE REVIEW INCOME STATEMENT
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
$m
£m
$m
£m
Revenue
309.2
248.4
624.3
494.2
Gross profit
63.6
51.3
114.1
90.9
Overheads
(34.9)
(27.7)
(73.2)
(57.5)
Adjusted operating profit
28.7
23.6
40.9
33.4
Finance expenses
(2.6)
(2.1)
(5.5)
(4.3)
Adjusted profit /(loss) before tax
26.1
21.5
35.4
29.1
Adjusting items
(5.6)
(4.4)
(36.3)
(28.8)
Profit /(loss) before tax
20.5
17.1
(0.9)
0.3
Income tax credit/(charge)
(4.6)
(3.8)
18.3
14.5
Profit for the period
15.9
13.3
17.4
14.8
CONSOLIDATED BALANCE SHEET
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
$000
£000
$000
£000
Non-current assets
Property, plant and equipment
50,769
41,276
92,622
74,695
Intangible assets
106,482
86,570
140,504
113,309
Right-of-use assets
43,771
35,586
82,742
66,728
Long-term assets
-
-
6,223
5,019
Deferred tax assets
5,126
4,167
18,135
14,624
Total non-current assets
206,148
167,599
340,226
274,375
Current assets
Inventory
157,703
128,213
141,911
114,445
Trade and other receivables
200,664
163,143
110,047
88,748
Income tax receivable
-
-
18,377
14,820
Derivative financial assets
511
415
412
332
Cash and cash equivalents
145,117
117,982
83,200
67,098
Total current assets
503,995
409,753
353,947
285,443
Total assets
710,143
577,352
694,173
559,818
Equity
Share capital
4,863
3,954
5,974
4,818
Share premium
69,277
56,323
213,755
172,383
Capital redemption reserve
1,648
1,340
1,662
1,340
Merger reserve
39,851
32,399
40,175
32,399
Hedging reserve
(401)
(326)
320
258
Translation reserve
(12,016)
2,375
(4,389)
7,383
Retained earnings
117,526
83,400
113,703
80,794
Equity attributable to owners of the Parent Company
220,748
179,465
371,200
299,375
Non-controlling interests
5,293
4,305
4,643
3,744
Total equity
226,041
183,770
375,843
303,119
Non-current liabilities
Loans and borrowings
899
731
(219)
(177)
Lease liabilities
42,097
34,225
78,418
63,241
Deferred income
678
552
561
452
Provisions
3,094
2,516
5,161
4,163
Other financial liabilities
868
706
6,784
5,471
Deferred tax liabilities
906
736
1,314
1,059
Total non-current liabilities
48,542
39,466
92,019
74,209
Current liabilities
Bank overdraft
125,522
102,051
31,003
25,004
Loans and borrowings
124,755
101,427
(3)
(2)
Lease liabilities
7,531
6,123
16,995
13,705
Deferred income
437
355
162
131
Provisions
1,149
934
2,717
2,191
Income tax payable
7,417
6,030
5,482
4,399
Trade and other payables
147,732
120,109
121,962
98,357
Other financial liabilities
21,017
17,087
47,993
38,705
Total current liabilities
435,560
354,116
226,311
182,490
Total liabilities
484,102
393,582
318,330
256,699
Total equity and liabilities
710,143
577,352
694,173
559,818
CONSOLIDATED CASH FLOW STATEMENT
Unaudited
six months
ended
30 Sep 2019
Unaudited
six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
$000
£000
$000
£000
Cash flows from operating activities
Profit for the year
15,923
13,303
17,403
14,810
Adjustments for:
Depreciation and impairment
3,845
3,041
8,880
6,994
Depreciation of right-of-use assets
4,043
3,208
8,911
7,014
Amortisation of intangible assets
2,444
1,944
4,816
3,796
Finance expenses
2,616
2,083
5,479
4,317
Income tax charge/(credit)
4,535
3,792
(18,276)
(14,547)
Profit on disposal of subsidiary
-
-
(1,836)
(1,486)
Loss/(profit) on disposal of property, plant and equipment
9
7
(246)
(188)
Loss on disposal of intangible fixed assets
-
-
1
1
Equity-settled share-based payments
1,908
1,513
(252)
(202)
Operating profit after adjustments for non-cash items
35,323
28,891
24,880
20,509
Change in trade and other receivables
(143,430)
(116,210)
9,841
629
Change in inventory
(71,244)
(56,065)
1,532
705
Change in trade and other payables, provisions and deferred income
74,861
61,502
1,592
5,913
Cash (used by)/generated from operations
(104,490)
(81,882)
37,845
27,756
Tax paid
(2,984)
(2,297)
(5,993)
(4,749)
Interest and similar charges paid
(2,092)
(1,672)
(5,090)
(3,996)
Net cash (outflow)/inflow from operating activities
(109,566)
(85,851)
26,762
19,011
Cash flow from investing activities
Proceeds from sale of property, plant and equipment
25
21
767
595
Acquisition of businesses (net of cash acquired)
-
-
(112,251)
(87,696)
Acquisition of intangible assets
(1,126)
(908)
(3,738)
(2,997)
Acquisition of property, plant and equipment
(4,041)
(3,171)
(10,463)
(8,133)
Net cash outflow from investing activities
(5,142)
(4,058)
(125,685)
(98,231)
Cash flows from financing activities
Proceeds from issue of share capital
-
-
152,535
116,924
Repayment of secured borrowings
(627)
(497)
(1,917)
(1,505)
Net movement in previous credit facilities
48,230
37,976
48,230
37,976
Repayment of previous credit facilities
(48,230)
(37,976)
(48,230)
(37,976)
Net movement in new credit facilities
123,903
100,734
-
--
Payment of lease liabilities
(3,868)
(3,055)
(8,430)
(6,622)
Loan arrangement fees
(737)
(598)
(1,571)
(1,234)
Equity dividends paid
(5,868)
(4,732)
(8,975)
(7,104)
Net cash inflow from financing activities
112,803
91,852
131,642
100,459
Net (decrease)/increase in cash and cash equivalents
(1,905)
1,943
32,719
21,239
Cash and cash equivalents at beginning of the period
25,296
19,458
25,296
19,458
Effect of exchange rate fluctuations on cash held
(3,796)
(5,470)
(5,818)
1,397
Cash and cash equivalents at end of the period
19,595
15,931
52,197
42,094
ADJUSTED CONSOLIDATED CASH FLOW STATEMENT
Unaudited six months
ended
30 Sep 2019
Unaudited six months
ended
30 Sep 2019
Twelve months ended
31 Mar 2020
Twelve months ended
31 Mar 2020
$m
£m
$m
£m
Adjusted EBITDA
37.2
30.4
59.5
48.1
Movements in working capital
(139.8)
(110.7)
(5.3)
(7.5)
Adjusted cash (used by)/generated from operations
(102.6)
(80.3)
54.2
40.6
Adjusting items
(1.9)
(1.6 )
(16.6)
(13.1)
Cash (used by)/generated from operations
(104.5)
(81.9)
37.6
27.5
Capital expenditure (net of disposals of property, plant and equipment)
(5.1)
(4.1)
(13.7)
(10.7)
Business acquired (including cash on acquisition)
-
-
(112.3)
(87.7)
Tax paid
(3.0)
(2.3)
(6.0)
(4.7)
Interest paid
(2.1)
(1.7)
(5.1)
(4.0)
Payments of lease liabilities
(3.9)
(3.1)
(8.4)
(6.6)
Dividends paid (including those paid to non controlling interests)
(5.9)
(4.7)
(9.0)
(7.1)
Proceeds from issue of share capital
-
-
152.5
116.9
FX and other
(3.8)
(5.5)
(5.4)
1.6
Movement in net (debt)/cash
(128.3)
(103.3)
30.2
25.2
Opening net cash
22.2
17.1
22.2
17.1
Closing net (debt)/cash
(106.1)
(86.2)
52.4
42.3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited six months
ended
30 Sep 2019
Unaudited six months
ended
30 Sep 2019
Twelve
months
ended
31 Mar 2020
Twelve months ended
31 Mar 2020
$000
£000
$000
£000
Profit for the period
15,923
13,303
17,403
14,810
Other comprehensive income:
Exchange difference on translation of foreign operations (net of tax)
(4,031)
860
3,112
5,450
Recycling translation reserves on disposal of subsidiary
-
-
42
34
Transfer to profit and loss on maturing cash flow hedges (net of tax)
(490)
(377)
(490)
(377)
Net unrealised (loss)/gain on cash flow hedges (net of tax)
(64)
(67)
657
517
Other comprehensive income for the period, net of tax items which may be reclassified to profit and loss in subsequent periods
(4,585)
416
3,321
5,624
Total comprehensive income for the year, net of tax
11,338
13,719
20,724
20,434
Attributable to:
Owners of the Parent Company
10,860
13,123
20,372
19,976
Non-controlling interests
478
596
352
458
11,338
13,719
20,724
20,434
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
SIX MONTHS ENDED 30 SEPTEMBER 2019 - US dollar
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
$000
$000
$000
$000
$000
$000
$000
$000
$000
At 31 March 2019
5,093
74,962
42,119
153
(8,133)
108,763
222,957
5,266
228,223
Impact of adopting IFRS 16
-
-
-
-
-
(2,427)
(2,427)
(572)
(2,999)
Restated equity at 31 March 2019
5,093
74,962
42,119
153
(8,133)
106,336
220,530
4,694
225,224
Profit for the year
-
-
-
-
-
15,297
15,297
626
15,923
Other comprehensive income
-
-
-
(554)
(3,883)
-
(4,437)
(148)
(4,585)
Total comprehensive income for the year
-
-
-
(554)
(3,883)
15,297
10,860
478
11,338
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
1,491
1,491
-
1,491
Tax on equity-settled share-based payments
-
-
-
-
-
314
314
-
314
Recognition of non-controlling interests
-
-
-
-
-
-
-
121
121
Options exercised
44
-
-
-
-
(44)
-
-
-
Equity dividends paid
-
-
-
-
-
(5,868)
(5,868)
-
(5,868)
Exchange differences on opening balances
(274)
(4,037)
(2,268)
-
-
-
(6,579)
-
(6,579)
At 30 September 2019
4,863
70,925
39,851
(401)
(12,016)
117,526
220,748
5,293
226,041
SIX MONTHS ENDED 30 SEPTEMBER 2019 - Sterling
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained.
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
£000
£000
£000
£000
£000
£000
£000
£000
£000
At 31 March 2019
3,918
57,663
32,399
118
1,607
75,801
171,506
4,051
175,557
Impact of adopting IFRS 16
-
-
-
-
-
(1,867)
(1,867)
(440)
(2,307)
Restated equity at 31 March 2019
3,918
57,663
32,399
118
1,607
73,934
169,639
3,611
173,250
Profit for the year
-
-
-
-
-
12,799
12,799
504
13,303
Other comprehensive income
-
-
-
(444)
768
-
324
92
416
Total comprehensive income for the year
-
-
-
(444)
768
12,799
13,123
596
13,719
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
1,180
1,180
-
1,180
Tax on equity-settled share-based payments
-
-
-
-
-
255
255
-
255
Recognition of non-controlling interests
-
-
-
-
-
-
-
98
98
Options exercised
36
-
-
-
-
(36)
-
-
-
Equity dividends paid
-
-
-
-
-
(4,732)
(4,732)
-
(4,732)
At 30 September 2019
3,954
57,663
32,399
(326)
2,375
83,400
179,465
4,305
183,770
YEAR ENDED 31 MARCH 2020 - US dollar
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
$000
$000
$000
$000
$000
$000
$000
$000
$000
At 31 March 2019
5,093
74,962
42,119
153
(8,133)
108,763
222,957
5,266
228,223
Impact of adopting IFRS 16
-
-
-
-
-
(2,427)
(2,427)
(572)
(2,999)
Restated equity at 1 April 2019
5,093
74,962
42,119
153
(8,133)
106,336
220,530
4,694
225,224
Profit for the year
-
-
-
-
-
16,461
16,461
942
17,403
Other comprehensive income
-
-
-
167
3,744
-
3,911
(590)
3,321
Total comprehensive income for the year
-
-
-
167
3,744
16,461
20,372
352
20,724
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
(287)
(287)
-
(287)
Tax on equity-settled share-based payments
-
-
-
-
-
213
213
-
213
Derecognition of non-controlling interests
-
-
-
-
-
-
-
(403)
(403)
Shares issued
1,117
150,145
-
-
-
-
151,262
-
151,262
Options exercised
45
-
-
-
-
(45)
-
-
-
Equity dividends paid
-
-
-
-
-
(8,975)
(8,975)
-
(8,975)
Exchange differences on opening balances
(281)
(9,690)
(1,944)
-
-
-
(11,915)
-
(11,915)
At 31 March 2020
5,974
215,417
40,175
320
(4,389)
113,703
371,200
4,643
375,843
YEAR ENDED 31 MARCH 2020 - Sterling
Attributable to the owners of the Parent Company
Share
premium
and capital
Non-
Share
redemption
Merger
Hedging
Translation
Retained
Shareholders'
controlling
capital
reserve
reserve
reserve
reserve
earnings
equity
interests
Total
£000
£000
£000
£000
£000
£000
£000
£000
£000
At 31 March 2019
3,918
57,663
32,399
118
1,607
75,801
171,506
4,051
175,557
Impact of adopting IFRS 16
-
-
-
-
-
(1,867)
(1,867)
(440)
(2,307)
Restated equity at 1 April 2019
3,918
57,663
32,399
118
1,607
73,934
169,639
3,611
173,250
Profit for the year
-
-
-
-
-
14,060
14,060
750
14,810
Other comprehensive income
-
-
-
140
5,776
-
5,916
(292)
5,624
Total comprehensive income for the year
-
-
-
140
5,776
14,060
19,976
458
20,434
Transactions with owners in their capacity as owners
Equity-settled share-based payments
-
-
-
-
-
(231)
(231)
-
(231)
Tax on equity-settled share-based payments
-
-
-
-
-
171
171
-
171
Derecognition of non-controlling interests
-
-
-
-
-
-
-
(325)
(325)
Shares issued
864
116,060
-
-
-
-
116,924
-
116,924
Options exercised
36
-
-
-
-
(36)
-
-
-
Equity dividends paid
-
-
-
-
-
(7,104)
(7,104)
-
(7,104)
At 31 March 2020
4,818
173,723
32,399
258
7,383
80,794
299,375
3,744
303,119
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