REG - Solid State PLC - Final Results, Analyst Briefing & Investor Pres
04/07/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230704:nRSD8338Ea&default-theme=true
RNS Number : 8338E Solid State PLC 04 July 2023
Solid State plc
("Solid State", the "Group" or the "Company")
Final Results for the 12 months ended 31 March 2023
Analyst Briefing & Investor Presentation
Solid State plc (AIM: SOLI), the specialist value added component supplier and
design-in manufacturer of computing, power, and communications products,
announces its audited final results for the 12 months ended 31 March 2023.
Financial overview:
Set out below are the financial key performance indicators for the year:
KPI 2023 2022 Change
Reported revenue £126.5 £85.0m 48%
Reported operating profit margin 7.4% 4.4% 300bps
Adjusted operating profit margin* 9.2% 8.7% 50bps
Reported profit before taxation £8.4m £3.5m 140%
Adjusted profit before taxation* £10.8m £7.2m 50%
Reported EPS 64.5p 29.5p 119%
Adjusted fully diluted EPS 80.7p 70.6p 14%
Adjusted cash flow from operations £9.4m £6.0m 57%
Net cash/(net debt)** (£8.1m) (£5.2m) 56%
Dividend 20.0p 19.5p 3%
Open order book @ 31 May £116.2m £89.7m 30%
* Adjusted performance metrics are reconciled in note 30, the adjustments
relate to IFRS 3 acquisition amortisation, share based payments charges, and
non-recurring charges in respect of redundancies and acquisition costs and
fair value adjustments.
** Net cash / debt includes net cash with banks of £12.2m (2022: £2.9m),
bank borrowings of £14.7m (2022: £1.5m), deferred consideration of £5.7m
(2022: £6.6m) and excludes the right of use lease liabilities of £2.0m
(2022: £2.1m).
The Group has delivered:
· Record year of financial performance, with demonstrable strategic
and operational progress, achieved against a backdrop of component shortages,
inflationary pressures, and volatile exchange rates.
· Acquisition of Custom Power LLC, a strategically aligned,
profitable and, cash generative battery pack manufacturer located in Southern
California USA for a total consideration of up to $45.0m in August 2022.
· Awarded contract to help deliver a new One Person Operation CCTV
system for Transport for London, as part of the Piccadilly Line Upgrade on the
London Underground Network.
· Announced contracts worth £17.1m with NATO Support and
Procurement Agency (NSPA) to supply communications equipment to a defence
customer through the Group's Systems division.
· Development of the own brand Durakool components range.
· Formation of eTech Developments enhances Group engineering
capabilities.
Strategic Achievements in 2022/23:
Notable achievements to advance the Group's strategy include:
· Established new 2030 ambition and strategy to maintain compound
annual growth in total shareholder return in excess of 20%.
· Focus on structural growth markets - industrial, security and
defence, medical, transport, and energy.
· Investment in talent and development of Group leadership team as
key differentiator and driver for future growth.
· Further internationalisation of the Group through the acquisition
of Custom Power.
· Systems division targeting 'through-life' support opportunities,
providing "annuity" revenues and enhanced customer value.
Post period events:
· $10.7m follow-on order for radio frequency components from
existing customer, CyanConnode, through the Group's Components division.
Current trading:
The Group has seen strong trading in Q1 supported by the recent NATO contract
and has a robust order book for the year ahead, balanced with the investments
made and planned. This, leads Board to expect revenue for the 12 months ending
31 March 2024 to be ahead of current consensus(1), reflecting year on year
growth in excess of 15%, and adjusted profit before tax to be marginally ahead
of current consensus reflecting circa 10% year on year growth.
Commenting on the results and prospects, Gary Marsh, Chief Executive said:
"Solid State has had a really productive year, building on the pillars of our
long-term growth strategy. The acquisition of Custom Power deepens sector
specialism, broadens product offering and extends international reach to an
increasingly global client base.
"By targeting structurally growing end markets and having a specialist
technology-led workforce, the Board is optimistic for the continued success of
the business. The Group remains ambitious to meet the new 2030 targets for
the benefit of all stakeholders."
(1) Before announcement of these results analysts from brokers Cenkos
Securities plc, WH Ireland plc, and finnCap Limited, provide equity research
on Solid State, and the Company considers the average of their research
forecasts to represent market expectations for Solid State's FY2023/24
financial year, being revenue of £133m, and adjusted profit before tax* of
£11.3m.
* The adjustments relate to IFRS 3 acquisition amortisation, share-based
payments charges, and non-recurring charges in respect of redundancies and
acquisition costs and fair value adjustments.
Analyst Briefing: 9.30 a.m. on Tuesday 4 July 2023
An online briefing for Analysts will be hosted by Gary Marsh, Chief Executive,
Peter James, Group Finance Director, and John Macmichael, Managing Director
Components Division, at 9.30 a.m. today, Tuesday 4 July 2023 to review the
results and prospects. Analysts wishing to attend should contact Walbrook PR
on solidstate@walbrookpr.com or on 020 7933 8780.
Investor Presentation: 2.00 p.m. on Wednesday 5 July 2023
Gary Marsh, Chief Executive, Peter James, Group Finance Director, and John
Macmichael, Managing Director Components Division, will hold a presentation to
cover the results and prospects at 2.00 p.m. on Wednesday 5 July 2023. The
presentation will be hosted through the digital platform Investor Meet
Company. Investors can sign up to Investor Meet Company for free and add to
meet Solid State plc via the following
link https://www.investormeetcompany.com/solid-state-plc/register-investor
(https://urldefense.proofpoint.com/v2/url?u=https-3A__www.investormeetcompany.com_solid-2Dstate-2Dplc_register-2Dinvestor&d=DwMGaQ&c=euGZstcaTDllvimEN8b7jXrwqOf-v5A_CdpgnVfiiMM&r=05PHl3GHdShYuaCii2fBRpoqaNr9B1d97X09daeosu0&m=J_w1tceU9zzYJ7XKVb7cI6vB50Ub0EkseNW3jQMJXh0&s=3vECInbFqFci5nlddgAz6BmJ10o04LjoiJjqEFyNUW0&e=)
. Investors who have already registered and added to meet the Company will
automatically be invited.
Questions can be submitted pre-event to solidstate@walbrookpr.com, or in
real time during the presentation via the "Ask a Question" function.
Investor Site Visits to Head Office in Redditch
Solid State holds site visits to its head office in Redditch where operations
from both the Systems and Components divisions can be seen. Interested
investors should contact solidstate@walbrookpr.com
(mailto:solidstate@walbrookpr.com) .
This announcement contains inside information for the purposes of Article 7 of
the UK version of Regulation (EU) No 596/2014 which is part of UK law by
virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon
the publication of this announcement via a Regulatory Information Service,
this inside information is now considered to be in the public domain.
For further information please contact:
Solid State plc Via Walbrook
Gary Marsh - Chief Executive
Peter James - Group Finance Director
Cenkos Securities plc (Nominated Adviser & Joint Broker) 020 73978900
Adrian Hadden / Callum Davidson (Corporate Finance)
Alex Pollen / Jasper Berry (Sales)
finnCap (Joint Broker) 020 7220 0500
Ed Frisby (Corporate Finance)
Rhys Williams / Tim Redfern (Sales / ECM)
Walbrook PR (Financial PR) 020 7933 8780
Tom Cooper / Nick Rome / Joe Walker 0797 122 1972
solidstate@walbrookpr.com (mailto:solidstate@walbrookpr.com)
Analyst Research Reports: For further analyst information and research see the
Solid State plc website: https://solidstateplc.com/research/
(https://urldefense.proofpoint.com/v2/url?u=https-3A__solidstateplc.com_research_&d=DwMFAg&c=euGZstcaTDllvimEN8b7jXrwqOf-v5A_CdpgnVfiiMM&r=05PHl3GHdShYuaCii2fBRpoqaNr9B1d97X09daeosu0&m=JmX-gQVke87P3UDBxQzNglNm9FfzH5yZtIa_SmElSS4&s=ib8r3ul2tCaEvJ39SnR1LT7nCa7gAcRQzgO-kNoyZoM&e=)
Notes to Editors:
Solid State plc (SOLI) is a value added electronics group supplying
commercial, industrial and defence markets with durable components,
assemblies, manufactured units and power units for use in specialist and harsh
environments. The Group's mantra is - 'Trusted technology for demanding
environments'. To see an introductory video on the Group
- https://bit.ly/3kzddx7 (https://bit.ly/3kzddx7)
Operating through two main divisions: Systems (Steatite, Active Silicon &
Custom Power) and Components (Solid State Supplies, Pacer, Willow Technologies
& AEC); the Group specialises in complex engineering challenges often
requiring design-in support and component sourcing for computing, power,
communications, electronic, electro-mechanical and opto-electronic products.
Headquartered in Redditch, UK, Solid State employs approximately 400 staff
across the UK and US, serving specialist markets with high barriers to entry
in industrial, defence and security, transportation, medical and energy.
Solid State was established in 1971 and admitted to AIM in June 1996. The
Group has grown organically and by acquisition - having made three
acquisitions in the last three years.
chairman's statement
I am delighted to announce the Group has delivered another year of record
growth across both our divisions, with a solid demand for our products in the
market as reflected with our strong orderbook of £120.1m. Total shareholder
return over the five years to 2023 has been circa 29% and the Board is
committed to maintaining a level in excess of 20% going forward.
Performance
We successfully acquired Custom Power, the battery systems and energy
solutions provider based in Southern California in the United States in August
2022, and I am pleased that the business is performing in line with our
Board's expectations. This acquisition, alongside previously acquired Willow
Technologies & Active Silicon, has strengthened our performance in the
medical and transport sectors.
The geo-political environment continues to drive government spending in
security and defence, with Group revenue in these sectors approaching 20%.
Solid State has been successful in building on its relationships with Tier 1
customers to the security and defence sector. Additionally, the Systems
division won a notable contract with NATO to supply communications equipment
to a client in the defence sector and provide a foundation for long term
recurring revenue in this market as the Group targets 'through-life' support
opportunities.
The macro-economic environment continues to be challenging with higher
inflation, higher interest rates and the on-going supply chain challenges
still present, albeit there has been some stability in the component supply
chain. The Group is continuing to pro-actively engage customers to manage the
supply chains. The order book visibility (which extends approximately 18
months) is critical as we continue to work with our customers to manage our
investment in inventory to support order fulfilment and supply chain risk.
Environmental, Social and Governance (ESG)
ESG is at the core of Solid State's strategy and we continue to focus on
developing a governance framework that remains appropriate for our developing
business, creating a long-term sustainable business which minimises our
adverse impact on the environment and maximising the value for our
stakeholders.
We have established an ESG committee which meets regularly and is focused on
developing the ESG strategy to deliver on our goals, including achieving
Net-Zero in Scope 1 and Scope 2 emissions by 2050. This committee is working
hard on how we enhance the communication of our approach to ESG to our
stakeholders both internally and externally.
Our technology, products and systems are designed and engineered to be high
quality, often upgradable with long life which inherently means we are
starting from a strong position. These characteristics help to differentiate
us from our competitors and enable us to be ambitious in how we do business,
to maintain our position where we believe we are a business leading on ESG in
our sector.
Our employees
On behalf of the Board, I would like to thank all our employees for their
commitment to the business. Our business has grown to over 400 employees and
the investment in our people is essential in successfully delivering on our
strategy and underpinning our long-term performance.
We are seeing the benefit of our investment in HR last year with key
initiatives & activities being incorporated into the Group's people and
talent development plans.
The energy crisis and increased cost of living has made it a challenging year
for our employees. The Board has taken steps to supporting our employees
including paying a one-off energy bonus and awarding an interim pay increase.
The Board & Governance
The Board strives to maintain the highest standards of corporate governance in
line with principles of the Quoted Companies Alliance code on corporate
governance. As a result of a Board evaluation, the Board is at an advanced
stage in its recruitment of an additional independent non-executive Director
in the UK. Subject to agreeing contractual terms and completing the AIM
compliance we expect to be able announce the new appointment during the
Summer, well ahead of our AGM.
This addition to the Board will provide an equal balance of executive and non
executive directors with the Chair having a casting vote.
The 2022 ISS report has concluded that Peter Haining is not independent, and
Nigel Rogers is overboarded. The Board has considered these conclusions fully.
We agree Peter does not meet the definition of an independent non-executive,
however we consider he acts with independence and integrity in fulfilling his
non-executive director responsibilities. The Board considers that the
recruitment of the additional independent director establishes an appropriate
level of independent governance while enabling Peter to continue adding value
to the Board with his experience.
The Board has evaluated my capacity to fulfil my role as Chair. This
evaluation was led by the senior independent director and concluded that I
have sufficient time to fulfil all the roles to the high standard required,
even in the event of unforeseen circumstances which may require a significant
increase in time commitment. In any event, it has subsequently been announced
that I will be stepping down from one of the other roles towards the end of
2023.
Dividend
The Board is proposing a final dividend of 13.5 pence (2022: 13.25 pence)
resulting in full year dividends of 20.0 pence (2022: 19.50 pence) which is
covered 4.0 times by adjusted earnings (2022: 3.6 times). The Directors
believe this policy allows a suitable balance between investment for growth
and investor return.
Subject to approval of the final dividend by shareholders at the AGM on 6
September 2023, the final dividend will be paid on 29 September 2023 to
shareholders on the register at the close of business on 8 September 2023,
and the shares will be marked ex-dividend on 7 September 2023.
Outlook
The Board is confident it will continue to deliver further sustainable growth
for shareholders as the Group expands its international presence, broadens its
product and service offering, and continues to target complementary
acquisitions.
Our 2030 ambition and strategy highlights our ambition to maintain compound
annual growth in total shareholder return to be in excess of 20%. We are
confident we are well placed to deliver on this ambition and are committed to
making strategic investments both organic and M&A to ensure we have a
sustainable and scalable business which will drive the mid and long term
growth in value for all our stakeholders.
Nigel Rogers
Non-Executive Chairman
Chief Executive Officer's Review
I am pleased to report that despite the challenges in the macro-economic
environment the Group has delivered significant progress in the execution of
its growth strategy and resulting record financial results for the period,
which continues to build on the strong performance we have seen over the last
5 years.
The acquisition of Custom Power reflects an important strategic step forward,
enhancing our capabilities to service our international customers' demands for
our battery pack technology adding USA production and engineering
capabilities.
Our commitment to customer service and long-standing relationships, and a
pro-active approach to managing the semiconductor supply chain challenges,
enabled us to invest in inventory in partnership with our customers. This has
been the key factor in enabling us to secure product and business over the
last year which has been the cornerstone of our 18% organic revenue growth.
The last two years have highlighted the huge value of having two distinct
divisions, with the Components division supporting the delivery in the Systems
division, and the Systems division aligning itself to be in a position to
deliver on significantly larger scale projects. It is the diversity of our
business that reduces risk and sets us apart in the industry.
Strong Business Performance
The Group has delivered another record year of financial, strategic and
operational performance which was achieved against a backdrop of component
shortages, inflationary pressures, and volatile exchange rates.
I am very pleased to report 14% growth in adjusted diluted earnings per share
over the prior year's record result and a significant step change in revenue
year on year at £126.5m (2022: £85.0m), with second half revenues of £67.1m
outperforming a strong H1.
Group adjusted operating margins are a key metric. We saw adjusted operating
margins increase by 0.5% to 9.2% during the year. Operating margins this year
have benefited from a strong mix in sales across both divisions and lower
overheads as a result of the challenging labour market driven by recruitment
taking longer.
During the year the Group raised £27m, placing 2.7m shares to assist in
funding the acquisition of Custom Power. Group AEPS increased 14% to 80.7p
(2022: 70.6p). During the first half, the Group invested a significant
proportion of its operating cash generation into working capital. Pleasingly,
in the second half we saw adjusted operating cash conversion increase to 145%
with full year cash conversion of 81% (2022: 81%).
Sector and Divisional review
The Components division delivered revenue of £70.0m (2022: £52.5m), a 33%
increase on the prior year. This growth has been built upon the design work
which commenced during 2020 when the shortages first started to arise,
combined with work with customers to secure order schedules and inventory to
ensure we could deliver product.
Our Systems division revenue increased by 77% to £57.5m (2022: £32.5m). This
reflects a £16.7m benefit in the current financial year from the acquisition
of Custom Power in August 2022.
In November 2022, the Systems division reported notable contract wins to
supply communications equipment to a client in the defence sector through
NATO. None of the revenue associated with Nato contracts which were announced
in Q3 shipped in the current financial year, positioning the division to have
a very strong first half to the FY2023/24.
While these contracts are likely to dilute the margin mix within the Systems
business in the year ahead, they will contribute positively to the attainment
of expectations for FY23/24 and provide a foundation for long term recurring
revenue in this sector as the Group targets 'through-life' support
opportunities.
Key leadership
Pleasingly, in the second half of the year and into the new financial year, we
have seen several internal promotions as well as continued investment in new
talent in addition to the talent which has joined our senior team from the
acquisition of Custom Power during the year. We are continuing to invest in
our people and developing our Group leadership team as this is a key
differentiator and driver for future growth as we strive to replicate recent
successes.
Acquisitions
Custom Power, the battery systems and energy solutions provider based in
Southern California in the United States, acquired in August 2022 and
integrated into the Power business unit, continues to perform in-line with
management's expectations. Positive co-operation with the Group sales and
marketing teams and exposure to an existing customer base is generating new
international opportunities in target markets. In the year ahead we plan to
invest in and develop the technical sales team to complement and support the
established representative sales network which Custom Power leverages to drive
organic growth.
The Board continues to actively explore attractive acquisition opportunities
across its target markets both overseas and in the UK.
As we reported in the trading update, the Custom Power open order book was up
11% on the prior year at $18.6m (31 March 2022: $16.8m), giving the Board
confidence in the growth prospects in the year ahead. Albeit due to the
continued impact of supply chain challenges for both Custom Power and its
customers, the higher, stretch earn out hurdle is not expected to be exceeded
and as such the Group's obligations payable to the vendors will be reduced.
Strategy
Solid State's Strategy remains broadly consistent with prior years, combining
an acquisitive and organic growth strategy to actively target strategic
customers in growth sectors with high barriers to entry that require
accreditations, long standing credibility, and specialist skills and
experience where our technology adds tangible value. The Group's key target
markets include industrial, security and defence, medical, transport, and
energy.
We are continuing the implementation of our mid-term strategy where we have
set goals to 2030 aligned with the adoption of key technology and geopolitical
/ environmental agendas.
Our four strategic pillars to drive growth remain:
• Internationalisation of the Group;
• Talent development embedding our ESG values;
• Broadening our complementary product and technology portfolio;
• Development of our "own brand" components and systems offering
securing recurring revenue.
The following key milestones represent critical steps in delivery of our
strategy and are cornerstones which our 2030 plans and ambitions will continue
to build on:
• The acquisition of Custom Power;
• The development of the own brand Durakool components range;
• Additional talent at Active Silicon to increase our technologies
and engineering capabilities; and
• Formation of eTech Developments enhances engineering capabilities.
The team and the strategic foundation which the Group has put in place over
recent years underpins the ambition to maintain in excess of 20% annual
compound growth in total shareholder return ("TSR") over the next phase of the
Solid State's development to 2030, maintaining the record performance which
has been delivered over the last 5 years.
Our markets and business development
One of the Group's strategic strengths is the resilience that arises from
servicing a broad range of growth markets with high barriers to entry where
customers value the high performance, long life sustainably engineered
components and systems that the Group provides. In the current year the
geo-political environment continues to drive government spending in security
and defence, where the Group revenue in this sector has seen strong organic
growth and is now circa 18% (2022: circa 14%).
Solid State has been successful in building relationships with Tier 1
suppliers to the medical and the security and defence sectors, such as BAE,
NATO and Siemens healthcare. This has been augmented by the acquisition of
Custom Power who have strong customer relationships with Tier 1 defence and
medical customers in the USA such as Flextronics International, iRhythem
Technologies and General Atomics. The Group continues to see further growth
opportunities within its strategic Tier 1 customers in its target growth
sectors.
Our strategy has positioned the Group to take advantage of new opportunities
and allowing us to enter 2023 with a strong pipeline and an order book of
£120.1m at 31 March 2023 (31 March 2022: £85.5m). Our order book combined
with our inventory management plan positions Solid State to proactively manage
the well-publicised on-going electronics supply chain issues with our customer
and gives us confidence for the year ahead.
Sustainability and development
Our ESG strategy has developed significantly during the year. ESG is an
intrinsic part of our overall purpose and strategy. During the year we have
established an ESG committee which is working to challenge ourselves and as
far as possible influence our stakeholders to "do the right thing".
The initial findings of the ESG committee were that the business' established
principles, values, and behaviours by which Solid State has operated for many
years are fully aligned with good practice ESG principles, as a result we
believe we are leading in this area in our sector.
However, we recognise that we have significant work to do to ensure we measure
and communicate what we do both internally and externally. We recognise that
capturing the right data practically, and communicating it, is becoming of
increasing commercial importance. This is critical to ensuring that we can
deliver on our ambition to differentiate.
Furthermore, as the Group continues to grow, to ensure we maintain the
culture where the best practice principles, values and behaviours of ESG,
continue to be embedded into what we do and how we do it.
Outlook
We are confident that the strategic progress and the associated growth from
new bespoke strong project demand and recurring business will more than offset
the potential short term macro-economic and electronics sector headwinds which
may arise from foreign currency and the potential for some level of destocking
driven by improving component lead times and customers looking to normalise
working capital levels.
The supply chain shortages meant our open orderbook visibility was extended
throughout the year. Post year end higher interest rates have increased
customer focus on working capital. For some components, lead times are
starting to improve, which is resulting in customers looking to reduce order
schedules back to more normal levels.
Current trading has been very strong with the benefit of Custom Power combined
with significant shipments of product under the NATO contract announced in
November 2022 resulting in record Q1 revenues which were significantly up over
the prior year. We do anticipate that this is a short-term spike with revenues
and profits being particularly strong in the first half compared to
traditional norms.
With strong Q1 shipments combined with customers looking to normalise order
cover, our open orderbook at 31 May 2023 was slightly down at £116.2m (31 May
2022: reported £89.7m, like for like £104.5m) albeit it was up on the prior
year both on a reported and like for like basis.
The Group's plans to drive its organic growth strategy and secure the delivery
of the strong order book is continuing to progress. While recruitment of
talent continues to be challenging, we have seen good progress and plan to add
further talent in the remainder of H1 and into H2 to drive mid-term organic
growth.
The very strong Q1 and the strength of the order book, balanced with the
investments made and planned, means pleasingly we expect revenue in FY2023/24
to be ahead of current consensus, reflecting year on year growth in excess of
15%, and adjusted profit before tax to be slightly ahead of current consensus
reflecting circa 10% year on year growth.
Gary Marsh
Chief Executive Officer
Chief Financial Officer's Review
To provide a fuller understanding of the Group's ongoing performance, several
adjusted profit measures as supplementary information are included on a
consistent basis with that reported by the financial analysts that review our
business. As detailed in note 30, the adjusted measures eliminate the impact
of certain non-cash charges and non-recurring items together with the
associated tax impact.
Revenues
Group revenues of £126.5m (2022: £85.0m) reflect the benefit of a
significant foreign exchange tailwind (circa £9.3m due to the average US
dollar rate moving from circa 1.37 in FY22 to 1.20 during FY23) and the
revenue from the acquisition of Custom Power in August 2022. As previously
reported, post-acquisition the performance of Custom Power has been in-line
with management expectations. Organic constant currency revenue growth
(calculated by applying the FY22 exchange rate to FY23 legacy Group figures)
was approximately 18%.
The Components division achieved revenues of £69.0m (2022: £52.5m)
reflecting very strong organic growth. This is an excellent result and
reflects the benefits of the hard work over the last 18 months to leverage the
increased component portfolio and secure additional design-ins, supported by
our ability to source and invest in inventory to fulfil customer demand.
The Systems division reported revenue of £57.5m (2022: £32.5m), with Custom
Power contributing £16.6m, meaning like-for-like revenue up £8.4m (25.8%)
against a challenging macro-economic backdrop. Supply chain pressures,
including component availability, and the requirement for board and system
redesigns as a result, have caused some project delays.
Gross profit
Reported gross profit of £39.7m (2022: £27.5m) are up 44.4%, £12.2m year on
year. There was an adverse impact of acquisition accounting charges in both
years which have been excluded in the adjusted gross profit (see note 30).
In managing foreign exchange risk, we look to mitigate exposure by quoting in
the currency of main supply when possible. The reduction in the gross margin
percentage is driven by the dollar exchange rate movement as a result of the
Group benefiting from being largely naturally hedged against foreign exchange
movements at a gross margin level. In the current year the revenue tail wind
results in an estimated margin percentage headwind of circa 2.5%. Excluding
the impact of foreign exchange, the underlying margins in both divisions
reflect improvements benefiting from the richer sales mix with higher
engineering value added sales.
Adjusted gross profit for the year is up £12.1m to £39.8m (2022: £27.7m),
albeit because of the currency movements the Group's adjusted gross margin
percentage has decreased to 31.4% (2022: 32.6%).
Components contributed adjusted gross profit of £17.5m (2022: £14.0m) and
Systems contributed £22.2m (2022: £13.7m).
Sales, general and administration expenses
Reported Sales, general and administration ("SG&A") expenses increased to
£30.3m (2022: £23.8m). Within SG&A, there were acquisition related and
share based payments charges totalling £2.1m (2022: £3.5m). These items have
been added back in reporting our adjusted performance (see Note 30) and are
made up as follows:
• £0.3m credit (2022: £1.7m debit) from the Active Silicon
earn-out provision true up;
• £0.3m (2022: £0.5m) in relation to acquisition costs;
• £1.6m (2022: £1.0m) amortisation of IFRS3 acquisition
intangibles,
• £0.6m (2022: £0.3m) share-based payments charge; and
• £0.1m (2022: £nil) Imputed interest charges.
Adjusted SG&A expenses on an underlying basis increased by £7.8m to
£28.1m (2022: £20.3m) reflecting the acquisition of Custom Power (adding
approximately £5.5m to overheads in the period), the impact of inflation, and
our planned investment to attract new, and retain our existing, talent, as we
look to enhance our technical expertise and drive continued growth.
Operating profit
Adjusted operating margins increased to 9.2% (2022: 8.7%) with adjusted
operating profit up to £11.6m (2022: £7.4m) reflecting the £1.4m
contribution of Custom Power and stronger margins across the Group. Reported
operating profit was up 154% to £9.4m (2022: £3.7m), additionally benefiting
from the decrease in acquisition related accounting charges. The adjustments
to operating profit are set out in further detail in note 30.
Based on the R&D criteria, the Group is now a large company in terms of
the classifications for UK R&D tax benefits. Under the large company
scheme, we have recognised £0.29m (2022: £0.01m) within operating profit in
respect of research and development expenditure credit ("RDEC"). These
development programmes are a cornerstone of the Group's future high value add
revenue streams.
Profit before tax
Adjusted profit before tax was up 50.0% to £10.8m (2022: £7.2m). Reported
profit before tax was up 140% to £8.4m (2022: £3.5m). This is reported after
adjusting items totalling £2.4m (2022: £3.7m) of which £0.1m (2022: £0.2m)
is charged to cost of sales and the balance is within SG&A and interest
set out above.
Profit after tax
The Group's underlying effective tax rate for the year is 21% (2022: 14%)
compared to the standard rate of 19% (2022: 19%) in the UK.
The effective tax rate has increased primarily because of three factors:
increased profits generated in the USA where the effective corporate tax rate
is higher at circa 29%, increased profitability, diluting the benefit of
R&D tax credits, and the fact the Group no longer qualifies for the more
generous SME scheme.
Adjusted profit after tax was up 38.7% to £8.6m (2022: £6.2m). Reported
profit after tax was up 168% to £6.7m (2022: £2.5m).
The corporation tax rate in FY23/24 is planned to increase to 25% from 19%
which is expected to result in an increase in our effective rate of tax,
albeit the increase has been reflected in the recognition of the deferred tax
positions on the balance sheet which will unwind in the years ahead.
EPS
Adjusted fully diluted earnings per share for the year ended 31 March 2023 is
up 14.3% to 80.7p (2022: 70.6p). Reported fully diluted earnings per share is
up 118% to 63.1p (2022: 28.9p).
Dividend
The Board is proposing a final dividend of 13.50p (2022: 13.25p) for approval
at the Annual General Meeting, giving a full year dividend of 20.00p (2022:
19.50p) as set out in the Chairman's statement.
Cash flow from operations
Having seen a significant working capital investment of £5.8m in the first
half, cash inflow from operations reduced to £0.6m. In the second half we saw
£1.5m of the H1 working capital investment unwind, delivering strong cash
inflow from operations of £8.8m in H2. This results in a full year cash
inflow from operations of £9.4m (2022: £6.0m).
The second half adjusted operating cash conversion percentage (cash generated
from operations/adjusted operating profit) was 145% and full year of 81%
(2022: 81%). The full year reported operating cash conversion percentage was
100% (2022: 161%).
The full year working capital cash outflow of £4.3m (2022: £2.5m) is driven
by a significant increase in inventories of £12.5m, offset in part by an
increase in payables of £6.4m and a decrease in receivables of £1.8m.
The increase in inventories and payables reflects a short-term increase in
inventory of circa £4.4m in relation to the NATO contract announced in
November 2022 which shipped post year end during Q1 23/24.
Post period end inventories have reduced, albeit as a result of our strategic
investment in product to support our significant increase in customer orders
our inventories remain inflated, but proportionate to the increase in
committed orderbook.
Investing activities
During the year, the Group invested £1.1m (2022: £1.1m) in property, plant
and equipment, and £1.2m (2022: £0.6m) in software and research &
development intangibles. The Group's capital expenditure programme saw
significant increase in the Systems R&D investment and an upgrade to our
UK Power facility, with the investment in the refurbishment of the office
space combined with the wire bonder and improved battery test equipment
delivering a step change in the working environment and technology
capabilities for the UK Power business unit.
In the Components division, there was continued investment to integrate the
Willow businesses including the recognition of a decommissioning asset and an
associated provision of £0.4m in relation to the planned decommissioning of
the legacy mercury product production equipment. Furthermore, across the Group
we have continued our programme to replace older vehicles with hybrid and
electric models.
There are capital commitments of £0.2m (2022: £0.3m) at the balance sheet
date, primarily relating to planned upgrades to existing IT systems and
properties.
During the period, payments in respect of the acquisitions of Custom Power
totalled £28.7m, and Active Silicon and Willow totalled £4.6m (2022:
£2.6m). Furthermore, at year end we have released £0.3m of the Active
Silicon deferred contingent consideration as a credit to profit and loss. A
reconciliation of deferred contingent considerations of £5.7m (2022: £6.6m)
is included in note 21.
Financing activities
The Group has entered or extended leases during the period which has resulted
in the recognition of £0.1m of additional right of use assets (excluding
those acquired with Custom Power) with a corresponding right of use liability,
in accordance with IFRS16. Cash payments were made in the period in respect of
lease liabilities of £1.1m (2022: £0.9m).
The financing activities reflect loans drawn down of £15.9m, which includes
the draw down of £13.0m of term loans and £2.9m of the revolving credit
facility (RCF), offset by loan repayments of £2.8m which includes the first
two quarterly repayments on the term loan of £0.65m.
Solid State continues to have a strong relationship with Lloyds Bank. Lloyds
has authorised a $10m additional working capital short term overdraft
subsequent to year end ensuring the Group has facility headroom should there
be any working capital delays arising from the NATO contracts previously
announced. Furthermore, Lloyds have extended the term of the £7.5m (2022:
£7.5m) Revolving Credit Facility (RCF) which is now committed until 30
November 2024. At 31 March 2023 £2.4m of the RCF was drawn (2022: £1.5m).
The Group paid out £2.2m (2022: £1.5m) in respect of dividends and £0.2m
(2022: £0.1m) for purchase of own shares.
Statement of financial position
During the year, the Group has continued to strengthen its balance sheet
position. The Group's net assets have increased to £58.0m (2022: £27.1m),
primarily reflecting the £27.0m equity raised for the Custom Power
acquisition, £6.6m income for the year, less £0.9m foreign exchange and
£2.2m dividends paid.
As a result of the unprecedented supply chain challenges combined with the
acquisition of Custom Power and the short term inventory built to fulfil the
Q1 demand (in part arising from the NATO contract) the Group inventory has
increased to £33.2m (2022: £17.6m).
As previously reported, the Group continues to pay suppliers on a proforma
basis where required to secure inventory in short supply, however the strength
of customer and supplier relationships has helped us to manage the cash
challenges of the working capital investment effectively.
We have worked in partnership with customers who have, in many cases, made
payments in advance to secure supply. The investment to secure product
continues to be critical to manage the shortages ensuring product is available
to fulfil customer demand. This approach has given us a competitive advantage,
strengthened customer relationships and helped to secured growth.
Excluding deferred contingent considerations and IFRS16 lease obligations, the
Group had a net debt position with banks of £2.4m at the year-end (2022: net
cash £1.4m) having paid £33.5m of consideration for the acquisitions of
Custom Power, Active Silicon and Willow. At 31 March 2023, the discounted fair
value of the Group's deferred consideration liabilities are £5.7m, with circa
£0.1m of discounting imputed interest to be charged to the P&L ahead of
payment.
The deferred consideration payable in August 23 in relation to the acquisition
of Custom Power is $5.0m for which the Group has cash on deposit. The Group
will utilise cash and the RCF facility to fund the final £1.7m deferred
consideration payment for Active Silicon which is expected to be paid during
Q2 23/24.
Peter James
Chief Financial Officer
Consolidated statement of comprehensive income
For the year ended 31 March 2023
Note 2023 2022
£'000 £'000
Revenue 3, 30 126,503 84,997
Cost of sales (86,829) (57,470)
Gross profit 39,674 27,527
Sales, general and administration expenses (30,266) (23,801)
Operating profit 4 9,408 3,726
Finance costs 6 (972) (226)
Profit before taxation 8,436 3,500
Tax expense 7 (1,746) (977)
Adjusted profit after taxation 8,553 6,158
Adjustments to profit 30 (1,863) (3,635)
Profit after taxation 6,690 2,523
Profit attributable to equity holders of the parent 6,693 2,523
(Loss)/profit attributable to non-controlling interests (3) -
Other comprehensive (loss)/income - FX on overseas operations (869) 261
Other comprehensive (loss)/income - taxation 7 (94) 261
Adjusted total comprehensive income 7,684 6,158
Adjustments to total comprehensive income 30 (1,957) (3,374)
Total comprehensive income for the year 5,727 2,784
Comprehensive income attributable to equity holders of the parent 5,730 2,784
Comprehensive loss attributable to non-controlling interests (3) -
Earnings per share 2023 2022
Basic EPS from profit for the year 8 64.5p 29.5p
Diluted EPS from profit for the year 8 63.1p 28.9p
Adjusted EPS measures are reported in Note 8 to the accounts.
All results presented for the current and comparative period are generated
from continuing operations.
Consolidated statement of changes in equity
For the year ended 31 March 2023
Share Share Foreign Capital Retained Shares Total Non-controlling interests Total
Capital Premium Exchange Redemption Earnings held in £'000 £'000 Equity
£'000 Reserve Reserve Reserve £'000 Treasury £'000
£'000 £'000 £'000 £'000
Balance at 31 March 2022 428 3,625 33 5 23,042 (57) 27,076 - 27,076
Issue of new shares 139 26,849 - - - - 26,988 - 26,988
Share-based payment credit - - - - 551 - 551 - 551
Transfer of treasury shares to AESP - - - - (152) 152 - - -
Dividends - - - - (2,235) - (2,235) - (2,235)
Transactions with non-controlling interests - - - - - - - 50 50
Transactions with owners in their capacity as owners 139 26,849 - - (1,836) 152 25,304 50 25,354
Result for the year - - - - 6,693 - 6,693 (3) 6,690
ended 31 March 2023
Other comprehensive - - (869) - (94) - (963) - (963)
income
Total comprehensive - - (869) - 6,599 - 5,730 (3) 5,727
income
Purchase of treasury shares - - - - - (203) (203) - (203)
Balance at 31 March 2023 567 30,474 (836) 5 27,805 (108) 57,907 47 57,954
For the year ended 31 March 2022
Share Share Foreign Capital Retained Shares Total Non-controlling interests Total
Capital Premium Exchange Redemption Earnings held in £'000 £'000 Equity
£'000 Reserve Reserve Reserve £'000 Treasury £'000
£'000 £'000 £'000 £'000
Balance at 31 March 2021 428 3,625 6 5 21,508 (70) 25,502 - 25,502
Share-based payment credit - - - - 295 - 295 - 295
Transfer of treasury shares to AESP - - - - (93) 93 - - -
Dividends - - - - (1,453) - (1,453) - (1,453)
Transactions with owners in their capacity as owners - - - - (1,251) 93 (1,158) - (1,158)
Result for the year - - - - 2,523 - 2,523 - 2,523
ended 31 March 2022
Other comprehensive income - - - - 261 - 261 - 261
Foreign exchange - - 27 - - - 27 - 27
Total comprehensive - - 27 - 2,784 - 2,811 - 2,811
income
Purchase of treasury shares - - - - - (80) (80) - (80)
Rounding - - - - 1 - 1 - 1
Balance at 31 March 2022 428 3,625 33 5 23,042 (57) 27,076 - 27,076
Consolidated statement of financial position
At 31 March 2023
Note 2023 2022
£'000 £'000
Assets
Non-current assets
Intangible assets 12 41,563 15,831
Property, plant and equipment 10 4,718 3,414
Right-of-use lease assets 11 1,981 1,983
Deferred tax asset 23 375 539
Total non-current assets 48,637 21,767
Current assets
Inventories 15 33,228 17,598
Trade and other receivables 16 19,699 17,978
Cash and cash equivalents - on deposit 22 4,032 -
Cash and cash equivalents - available on demand 22 8,192 4,983
Total current assets 65,151 40,559
TOTAL ASSETS 113,788 62,326
Liabilities £'000 £'000
Current liabilities
Trade and other payables 17 (23,735) (16,488)
Deferred and contingent consideration on acquisitions - current 17, 21, 22 (5,679) (4,625)
Current borrowings 19, 21, 22 (1,279) (2,059)
Contract liabilities 18 (5,380) (3,461)
Corporation tax liabilities (1,110) (531)
Right-of-use lease liabilities 20 (1,057) (758)
Provisions 24 (323) -
Total current liabilities (38,563) (27,922)
Non-current liabilities
Non-current borrowings 19, 21, 22 (13,383) (1,500)
Provisions 24 (715) (694)
Deferred tax liability 23 (2,187) (1,832)
Right-of-use lease liabilities 20 (986) (1,326)
Deferred and contingent consideration on acquisitions 21,22 - (1,976)
Total non-current liabilities (17,271) (7,328)
Total liabilities (55,834) (35,250)
Total net assets 57,954 27,076
Share capital 25 567 428
Share premium reserve 26 30,474 3,625
Capital redemption reserve 26 5 5
Foreign exchange reserve 26 (836) 33
Retained earnings 26 27,805 23,042
Shares held in treasury 26, 27 (108) (57)
Capital and reserves attributable to equity holders of the parent 57,907 27,076
Non-controlling interests 26 47 -
TOTAL EQUITY 57,954 27,076
The financial statements were approved by the Board of Directors and
authorised for issue on 4 July 2023 and were signed on its behalf by:
G S Marsh P O James
Director Director
Consolidated statement of cash flows
for the year ended 31 March 2023
Note 2023 2022
£'000 £'000 £'000 £'000
OPERATING ACTIVITIES
Profit before taxation 8,436 3,500
Adjustments for:
Property plant and equipment depreciation 1,159 729
Right-of-use asset depreciation 965 763
Amortisation 2,035 1,327
(Profit)/loss on disposal of property, plant and equipment (45) 3
Share-based payment expense 551 295
Finance costs 972 226
(Decrease)/increase in deferred contingent consideration (326) 1,651
Profit from operations before changes in working capital 13,747 8,494
and provisions
Increase in inventories (12,457) (6,922)
Decrease/(increase) in trade and other receivables 1,767 (3,679)
Increase in trade and other payables 6,380 8,140
Decrease in provisions - (47)
(4,310) (2,508)
Cash generated from operations 9,437 5,986
Income taxes paid (573) (941)
Income taxes recovered 184 -
Cash acquired (389) (941)
Net cash inflow from operating activities 9,048 5,045
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,145) (1,178)
Capitalised own costs and purchase of intangible assets (1,197) (601)
Proceeds of sales from property, plant and equipment 153 81
Settlement of deferred consideration in respect of prior (4,625) (2,572)
year acquisitions
Payments for acquisition of subsidiaries net of cash acquired 32 (28,662) -
Net cash outflow from investing activities (35,476) (4,270)
FINANCING ACTIVITIES
Proceeds from issue of ordinary shares 26,988 -
Repurchase of ordinary shares into treasury (203) (80)
Borrowings drawn 19 15,872 -
Borrowings repaid 19 (2,772) (2,250)
Principal payment obligations for right of use assets (1,093) (871)
Interest paid 6 (865) (127)
Transactions with non-controlling interests 50 -
Dividend paid to equity shareholders 9 (2,235) (1,453)
Net cash inflow/(outflow) from financing activities 35,742 (4,781)
Increase/(decrease) in cash and cash equivalents 22 9,314 (4,006)
2023 2022
£'000 £'000
Translational foreign exchange on opening cash (14) 16
Net increase/(decrease) in cash and cash equivalents 9,314 (4,006)
Cash available on demand at beginning of year 2,924 6,914
Cash and cash equivalents at end of year 12,224 2,924
There were no significant non-cash transactions. Cash and cash equivalents
comprise:
2023 2022
£'000 £'000
Cash available on demand 8,192 4,983
Overdraft facility - (2,059)
Cash on deposit 4,032 -
Net cash and cash equivalents 12,224 2,924
Notes to the financial statements
For the year ended 31 March 2023
1. Accounting policies
Solid State PLC ("the Company") is a public Company incorporated, domiciled
and registered in England and Wales in the United Kingdom. The registered
number is 00771335 and the registered address is: 2 Ravensbank Business Park,
Hedera Road, Redditch B98 9EY.
Basis of preparation
Whilst the financial information included in this Preliminary Announcement has
been prepared on the basis of UK-adopted International Accounting standards,
this announcement does not itself contain sufficient information to comply
with UK-adopted International Accounting Standards.
The Group expects to publish full Consolidated Financial Statements in July
2023. The financial information set out in this Preliminary Announcement does
not constitute the Group's Consolidated Financial Statements for the years
ended 31 March 2023 or 2022 but is derived from those Financial Statements
which were approved by the Board of Directors on 4 July 2023. The auditor, RSM
UK Audit LLP, has reported on the Group's Consolidated Financial Statements
and the report was unqualified and did not contain a statement under section
498 (2) or 498 (3) of the Companies Act 2006.
The statutory financial statements for the year ended 31 March 2023 have not
yet been delivered to the Registrar of Companies and will be delivered
following the Company's Annual General Meeting.
The Group financial statements have been prepared and approved by the
Directors in accordance with UK-adopted International Accounting Standards.
The Group's accounting policies are set out in the 2022 Annual Report and
Accounts and have been applied consistently in 2023.
The Group financial statements are presented in pounds sterling, which is the
functional and presentational currency of the Group, and all values are
rounded to the nearest thousand (£'000), except when otherwise indicated.
Going concern
In assessing the going concern position of the Group for the Consolidated
Financial Statements for the year ended 31 March 2023, the Directors have
considered the Group's cash flows, liquidity and business activities.
At 31 March 2023, the Group had net debt with banks of £2.4m and deferred
consideration liabilities of £5.7m, giving reported net debt (excluding
IFRS16) of £8.1m. Furthermore, the Group has a £7.5m revolving credit
facility, of which £5.1m was not drawn at the year end.
Based on the Group's forecasts, the Directors have adopted the going concern
basis in preparing the Financial Statements. The Directors have made this
assessment after consideration of the Group's cash flows and related
assumptions and in accordance with the Guidance published by the UK Financial
Reporting Council (Risk Management, Internal Control and Related Financial and
Business Reporting 2014, the April 2016 guidance on going concern basis of
accounting and reporting on solvency and liquidity risks, and the various
guidance issued in 2020). This guidance provides support to Directors and the
Board in making the assessment of going concern.
In preparing the going concern assessment, the Directors considered the
principal risks and uncertainties that the business faced. The Board concluded
that the three areas of risk that remained the most uncertain were the direct
and indirect supply chain disruption risks in addition to inflation. The
Directors have given careful consideration to the potential impact of ongoing
global electronic component shortages and rising inflation on the cashflows
and liquidity of the Group over the next 12-month period.
Customer demand has remained solid and, in the last financial year, we have
seen customers maintaining strong order cover to help to manage global
electronics supply chain issues. The most significant impact on the Group's
future performance is the potential for an unwinding of customer stock
holdings as the uncertainty arising from the extended electronic component
lead times improves and there is a need to manage working capital and cash
more tightly.
Management has taken all possible actions to minimise and mitigate the
potential impact of this unwind; however, there is potential for some
rescheduling of demand/de-stocking in the second half of 2023/24 and,
potentially, into 2024/25. While the actions do not mitigate the risk fully,
it still positions the Group to manage the impact as effectively as possible
(as demonstrated historically over the last two trading years).
The Directors have prepared revised "stressed" forecasts, taking account of
the results to date, current expected demand, and mitigating actions that
could be taken, together with an assessment of the liquidity headroom against
the cash and bank facilities. The bank facilities are subject to financial
covenants; therefore, in evaluating a stressed forecast, the Board only
included the RCF in the headroom to the extent it is available within the
covenants.
This financial modelling is based on applying various sensitivity scenarios to
a base case to 30 September 2023, which has been prepared based on an
extension of the budget for FY23/24.
In preparing a severe downside scenario, it assumes a shortfall in Group
revenue of ~20% over a 12-month period and a 3% margin erosion with limited
cost mitigation, resulting in EBITDA reducing by ~69% compared to the Board's
base case expectations. Even with this level of reduction to Group EBITDA,
when combined with the mitigating actions that are within the Group's control,
the Directors currently believe the Group would fully comply with covenants
and, thus, maintain sufficient liquidity to meet its liabilities as they fall
due.
In considering the assessment of the Group's going concern position, the
Directors have also identified that the Group could look to both the Group's
bankers and/or the equity markets if additional liquidity were required.
Albeit, none of the sensitivities indicate that the Group would require
additional sources of liquidity.
In the post balance sheet period, the rolling 12-month order intake remains
strong, maintaining a book-to-bill ratio of 1.09, and reflects strong order
cover. Furthermore, the Group has put in place a $10m approved short-term
working capital overdraft facility until the end of September to ensure that
there is funding, should it be needed, to manage any short-term spikes in
working capital as a result of the delivery of the significant NATO contracts
announced in the prior year. In addition, £1.6m of the short-term deferred
consideration on acquisitions was settled in Q1 and the remainder will be
settled in early August using the cash set aside on deposit for this purpose.
The Directors have concluded that the potential impact of the electronic
component shortages and higher inflation, as described above, does not
represent a material uncertainty over the Group and Company's ability to
continue as a going concern. Nevertheless, it is acknowledged that there are,
potentially, material variations in the forecast level of future financial
performance.
The Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the next 12 months;
therefore, it is appropriate to adopt a going concern basis for the
preparation of the financial statements. Accordingly, these financial
statements do not include any adjustments to the carrying amount or
classification of assets and liabilities that would result if the Group and
Company were unable to continue as a going concern.
Changes in accounting policy and disclosures
New standards, amendments and interpretations adopted in the year.
The following new standards, amendments and interpretations have been adopted
by the Group for the first time for the financial year beginning on 1 April
2022:
• Amendments to IAS 16 regarding deductions from the cost of
property, plant and equipment amounts received from selling items produced
while the Company is preparing the asset for its intended use, effective for
annual reporting periods beginning on or after 1 January 2022
• Amendments to IAS 37 regarding the costs to include when assessing
whether a contract is onerous, effective for annual reporting periods
beginning on or after 1 January 2022
The adoption of these standards and amendments has not had a material impact
on the financial statements.
New standards, amendments and interpretations to published standards issued,
but not yet effective and not early adopted
A number of new standards, amendments and interpretations to existing
standards have been published that will be mandatory for the Group's
accounting periods beginning on, or after, 1 April 2022 or later periods, and
which the Group has decided not to adopt early, are listed below. The Group
intends to adopt these standards considered relevant to the Group when they
become effective.
• Amendments to IAS 1 and IFRS Practice Statement 2, regarding the
classification of liabilities and disclosure of accounting policies, effective
for annual reporting periods beginning on, or after, 1 January 2024
• Amendments to IAS 8 regarding the definition of accounting
estimates, effective for annual reporting periods beginning on, or after, 1
January 2023
• Amendments to IAS 12 regarding deferred tax on leases and
decommissioning obligations, effective for annual reporting periods beginning
on, or after, 1 January 2023
• Amendments to references to the Conceptual framework in IFRS
Standards
The Directors anticipate that none of the new standards, amendments to
standards or interpretations will have a significant effect on the financial
statements of the Group.
Principle of consolidation
The consolidated financial statements incorporate the financial results and
position of the Parent and its subsidiaries.
Subsidiaries are all entities over which the Group has control. The Group
controls an entity when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power to direct the activities of the entity.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are deconsolidated from the date that control
ceases. The acquisition method of accounting is used to account for business
combinations by the Group.
Intercompany transactions, balances and unrealised gains on transactions
between Group companies are eliminated. Unrealised losses are also eliminated
unless the transaction provides evidence of an impairment of the transferred
asset. Accounting policies of subsidiaries have been changed, where necessary,
to ensure consistency with the policies adopted by the Group.
Business combinations
Non-controlling interests in the results and equity of subsidiaries are shown
separately in the Consolidated Statement of Comprehensive Income, the
Consolidated Statement of Changes in Equity and the Consolidated Statement of
Financial Position, respectively.
The purchase method of accounting is used to account for all business
combinations, regardless of whether equity instruments or other assets are
acquired. Acquisition-related costs are expensed as incurred.
The consideration transferred for the acquisition of a subsidiary comprises
the: fair values of the assets transferred; liabilities incurred to the former
owners of the acquired business; equity interests issued by the Group; fair
value of any asset or liability resulting from a contingent consideration
arrangement; and fair value of any pre-existing equity interest in the
subsidiary.
Identifiable assets acquired, and liabilities and contingent liabilities
assumed in a business combination are, with limited exceptions, measured,
initially, at their fair values at the acquisition date. The Group recognises
any non-controlling interest in the acquired entity on an
acquisition-by-acquisition basis, either at fair value or at the
non-controlling interest's proportionate share of the acquired entity's net
identifiable assets.
The excess of the consideration transferred, amount of any non-controlling
interest in the acquired entity, and acquisition date fair value of any
previous equity interest in the acquired entity, over the fair value of the
net identifiable assets acquired, is recorded as goodwill.
If those amounts are less than the fair value of the net identifiable assets
of the business acquired, the difference is recognised directly in profit or
loss as a bargain purchase. Where settlement of any part of cash consideration
is deferred, the amounts payable in the future are discounted to their present
value as at the date of exchange. The discount rate used is the entity's
incremental borrowing rate, being the rate at which a similar borrowing could
be obtained from an independent financier under comparable terms and
conditions.
Contingent consideration is classified either as equity or a financial
liability. Amounts classified as a financial liability are subsequently
remeasured to fair value with changes in fair value recognised in profit or
loss.
If the business combination is achieved in stages, the acquisition date
carrying value of the acquirer's previously held equity interest in the
acquiree is remeasured to fair value at the acquisition date. Any gains or
losses arising from such remeasurement are recognised in profit or loss.
Impairment of non-financial assets
Non-financial assets that have an indefinite useful life (e.g. goodwill) or
other intangible assets that are not ready to use and, therefore, not subject
to amortisation (e.g. ongoing incomplete R&D programmes) are reviewed at
least annually for impairment.
Impairment tests on goodwill are undertaken annually on 31 March, and on other
non-financial assets whenever events or changes in circumstances indicate that
their carrying value may not be reasonable. Where the carrying value of an
asset exceeds its recoverable amount (i.e. the higher of value in use and fair
value less costs to sell), the asset is written down accordingly.
Impairment charges are included in sales, general and administration expenses
in the consolidated statement of comprehensive income, except to the extent
that they reverse gains previously recognised in the consolidated statement of
recognised income and expense. An impairment loss recognised for goodwill is
not reversed.
Intangible assets
a) Goodwill
Goodwill arising on an acquisition is recognised as an asset and is,
initially, measured at cost, being the excess of the fair value of the
consideration over the fair value of the identifiable assets, liabilities and
contingent liabilities acquired. Goodwill is not amortised. However, it is
reviewed for potential impairment at least annually or more frequently if
events or circumstances indicate a potential impairment. For the purpose of
impairment testing, goodwill is allocated to each of the cash-generating units
to which it relates. Any impairment identified is charged directly to the
consolidated statement of comprehensive income. Subsequent reversals of
impairment losses for goodwill are not recognised.
b) Development costs
Expenditure incurred that is directly attributable to the development of new,
or substantially improved, products or processes is recognised as an
intangible asset when the following criteria are met:
• the product or process is intended for use or sale
• the development is technically feasible to complete
• there is an ability to use or sell the product or process
• it can be demonstrated how the product or process will generate
probable future economic benefits
• there are adequate technical, financial and other resources to
complete the development; and
• the development expenditure can be reliably measured
Directly attributable costs refers to the materials consumed; the directly
attributable labour; and the incremental overheads incurred in the development
activity. General operating costs, administration costs and selling costs do
not form part of directly attributable costs.
All research and other development costs are expensed as incurred.
Capitalised development costs are amortised on a straight-line basis over the
period, during which the economic benefits are expected to be received,
typically ranging between one and five years. Amortisation expense is included
within sales, general and administration expenses in the statement of
comprehensive income.
The estimated remaining useful lives of development costs are reviewed at
least on an annual basis. Amortisation commences once the project is completed
and revenues are being generated.
The carrying value of capitalised development costs is reviewed for potential
impairment at least annually, or more frequently if events or circumstances
indicate a potential impairment. Any impairment identified is immediately
charged to the consolidated statement of comprehensive income.
c) Software
Externally acquired software assets are, initially, recognised at cost and,
subsequently, amortised on a straight-line basis over their useful economic
lives. Cost includes all directly attributable costs of acquisition. In
addition, directly attributable costs incurred in the development of bespoke
software for the Group's own use are capitalised.
The useful economic life over which the software is being amortised has been
assessed to be three to five years.
The carrying value of capitalised software costs is reviewed for potential
impairment at least annually, or more frequently if events or circumstances
indicate a potential impairment. Any impairment identified is immediately
charged to the consolidated statement of comprehensive income.
The costs of maintaining internally developed software, and annual licence
fees to utilise third-party software, are expensed as incurred.
d) Other intangibles
Other intangible assets are those which arise on business combinations in
accordance with IFRS3 revised. These intangible assets form part of the
identifiable net assets of an acquired business and are recognised at their
fair value and amortised on a systematic basis over their useful economic life
which is, typically, five-to-ten years. This includes the open orderbook,
brand and customer relationships, the fair value of which are evaluated using
the multi-period excess earnings method "MEEM".
Capitalised acquisition intangibles are amortised on a straight-line basis
over the period, during which the economic benefits are expected to be
received, which, typically, range between five and ten years. Amortisation
expense is included within sales, general and administration expenses in the
statement of comprehensive income.
The carrying value of other intangible assets is reviewed for potential
impairment at least annually, or more frequently if events or circumstances
indicate a potential impairment. Any impairment identified is immediately
charged to the consolidated statement of comprehensive income.
Property, plant and equipment
Property, plant and equipment is stated at historical cost or deemed cost
where IFRS1 exemptions have been applied, less accumulated depreciation and
any recognised impairment losses.
Costs include the original purchase price of the asset and the costs
attributable to bringing the asset to its working condition for its intended
use including any qualifying finance expenses.
Depreciation is provided on all items of property, plant and equipment to
write off the carrying value of items over their expected useful economic
lives. It is applied at the following rates:
• Short leasehold property improvements - straight-line over minimum
life of lease
• Fittings and equipment - 25% per annum on a reducing balance basis
or a straight-line basis over three-to-five years with an appropriate residual
value as considered most appropriate
• Computers - between 20% and 33.3% per annum on a straight-line
basis
• Motor vehicles - 25% per annum on a reducing balance basis
The residual values and useful lives of the assets are reviewed, and adjusted
if appropriate, at each balance sheet date. An asset's carrying amount is
written down immediately to its recoverable amount if its carrying amount is
greater than its estimated net realisable value. Gains and losses on disposal
are determined by comparing proceeds with carrying amounts. These are included
in the consolidated statement of comprehensive income.
Leases
IFRS16 "Leases" addresses the definition of a lease, the recognition and
measurement of leases and establishes the principles for the reporting useful
information to users of the financial statements about the leasing activities
of both lessees and lessors.
The Group has applied judgement to determine the lease term for some lease
contracts, in which, as lessee, there includes a renewal option. The
assessment of whether the Group is reasonably certain to exercise such options
impacts the lease term, which affects the amount of lease liabilities and
right-of-use assets recognised.
The lease liability reflects the present value of the future rental payments
and interest, discounted using either the effective interest rate or the
incremental borrowing rate of the entity.
Payments associated with short-term leases and leases of low value assets are
recognised on a straight-line basis over the lease term as an expense within
the income statement.
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease
(i.e. the date the underlying asset is available for use). Right-of-use assets
are measured at cost, less any accumulated depreciation and impairment losses
and adjusted for any remeasurement of lease liabilities. The cost of
right-of-use assets includes the amount of lease liabilities recognised,
initial direct costs incurred, and lease payments made at, or before, the
commencement date less any lease incentives received. Right-of-use assets are
related to the property leases, plant and machinery and motor vehicles, and
are depreciated on a straight-line basis over the lease term.
Right-of-use lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities
measured at the present value of lease payments to be made over the lease
term. The lease payments include lease payments less any lease incentives
receivable. In calculating the present value of lease payments, the Group uses
its incremental borrowing rate at the lease commencement date because the
interest rate implicit in the lease is not readily determinable.
After the commencement date, the amount of lease liabilities is increased to
reflect the accretion of interest and reduced for the lease payments made. In
addition, the carrying amount of lease liabilities is remeasured if there is a
modification, a change in the lease term or a change in the lease payments
(e.g. changes to future payments resulting from a change in an index or rate
used to determine such lease payments).
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
based on either average purchase cost or the cost of purchase on a first in,
first out basis, which is the most appropriate for the category of inventory.
Work in progress and finished goods include labour and attributable overheads.
Net realisable value is based on estimated selling price less any additional
costs to completion and disposal.
Financial instruments
Classification and measurement of financial instruments under IFRS9 classifies
financial assets as either held at amortised cost, fair value through other
comprehensive income (FVOCI) or fair value through profit or loss, dependent
on the business model and cash flow characteristics of the financial
instrument.
Financial assets and financial liabilities are recognised when the Company
becomes party to the contractual provisions of the instrument.
Trade and other receivables
Trade receivables are initially measured at their transaction price. Other
receivables are initially recognised at fair value plus transaction costs.
Receivables are held to collect the contractual cash flows, which are solely
payments of principal and interest. Therefore, these receivables are,
subsequently, measured at amortised cost using the effective interest rate
method.
The effect of discounting on these financial instruments is not considered to
be material.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid
interest-bearing securities with maturities of three months or less. Bank
overdrafts are shown within borrowings in current liabilities on the balance
sheet.
Impairment of financial assets
IFRS9 requires an expected credit loss ("ECL") model, which broadens the
information that an entity is required to consider when determining its
expectations of impairment. Under this new model, expectations of future
events must be taken into account and this will result in the earlier
recognition of potential impairments.
An impairment loss is recognised for the expected credit losses on-financial
assets when there is an increased probability that the counterparty will be
unable to settle an instrument's contractual cash flows on the contractual due
dates, a reduction in the amounts expected to be recovered, or both.
The probability of default and expected amounts recoverable are assessed using
reasonable and supportable past and forward-looking information that is
available without undue cost or effort. The expected credit loss is a
probability weighted amount determined from a range of outcomes and takes into
account the time value of money.
Impairment of trade receivables
For trade receivables, expected credit losses are measured by applying an
expected loss rate to the gross carrying amount. The expected loss rate
comprises the risk of a default occurring and the expected cash flows on
default based on the ageing of the receivable.
The risk of a default occurring always takes into consideration all possible
default events over the expected life of those receivables ("the lifetime
expected credit losses"). Different provision rates and periods are used based
on groupings of historic credit loss experience by product type, customer type
and location.
Impairment of other receivables
The measurement of impairment losses depends on whether the financial asset is
"performing", "underperforming" or "non-performing" based on the Company's
assessment of increases in the credit risk of the financial asset since its
initial recognition and any events that have occurred before the year end,
which have a detrimental impact on cash flows.
The financial asset moves from "performing" to "underperforming" when the
increase in credit risk since initial recognition becomes significant.
In assessing whether credit risk has increased significantly, the Company
compares the risk of default at the year end with the risk of a default when
the investment was, originally, recognised using reasonable and supportable
past and forward-looking information that is available without undue cost.
The risk of a default occurring takes into consideration default events that
are possible within 12 months of the year end ("the 12-month expected credit
losses") for "performing" financial assets, and all possible default events
over the expected life of those receivables ("the lifetime expected credit
losses") for "underperforming" financial assets.
Impairment losses and any, subsequent, reversals of impairment losses are
adjusted against the carrying amount of the receivable and are recognised in
profit or loss.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the
assets of the Company after deducting all of its liabilities.
Financial liabilities are classified as either:
• Financial liabilities at amortised cost; or
• Financial liabilities as at fair value through profit or loss
(FVTPL).
Any contingent consideration due in relation to acquisitions is measured at
FVTPL with all other financial liabilities measured at amortised cost and
include:
• Trade and other payables;
• Contract liabilities;
• Borrowings;
• Lease liabilities;
• Deferred consideration for acquisitions.
Trade payables
Trade payables are obligations to pay for goods or services that have been
acquired in the ordinary course of business from suppliers.
Accounts payable are classified as current liabilities if payment is due
within one year or less (or in the normal operating cycle of the business if
longer). If not, they are presented as non-current liabilities.
They are, initially, recognised at fair value net of direct transaction costs
and, subsequently, held at amortised cost.
Contract liabilities
Contract liabilities comprise payments in advance of revenue recognition and
revenue deferred due to contract performance obligation not being completed.
They are classified as current liabilities if the contract performance
obligations payment are due to be completed within one year or less (or in the
normal operating cycle of the business if longer). If not, they are presented
as non-current liabilities.
Contract liabilities are recognised, initially, at fair value, and,
subsequently, stated at amortised cost.
Borrowings
Borrowings are recognised, initially, at fair value, net of transaction costs
incurred and, subsequently, stated at amortised cost. Borrowing costs are
expensed using the effective interest method.
Equity instruments and share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction, net of tax, from the proceeds.
Treasury shares
Where any Group Company purchases the Parent Company's equity share capital
(treasury shares), the consideration paid, including any directly attributable
incremental costs (net of income taxes), is deducted from equity attributable
to the Company's equity holders until the shares are cancelled, reissued or
disposed of.
These shares are held in a separate negative reserve in the capital section of
the consolidated statement of financial position. Any dividends payable in
relation to these shares are cancelled.
Where such shares are, subsequently, sold or reissued, any consideration
received, net of any directly attributable incremental transaction costs and
the related income tax effects, is included in equity attributable to the
Company's equity holders.
Dividends
Equity dividends are recognised when they become legally payable. Interim
dividends are recognised when paid. Final dividends are recognised when
approved by the shareholders at an annual general meeting.
Adjusted performance metrics and non-recurring charges/credits
Non-recurring charges/credits are disclosed separately in the financial
statements where it is necessary to do so to provide further understanding of
the financial performance of the Group. Transactions are classified as
non-recurring where they relate to an event that falls outside of the ordinary
activities of the business and where individually or in aggregate, they have a
material impact on the financial statements.
In presenting our adjusted performance metrics we also exclude the non-cash
charges/credits that relates to acquisition accounting and share-based
payments and the associated tax effect of these items.
Foreign currency
Transactions entered into by Group entities in a currency other than the
currency of the primary economic environment in which it operates are recorded
at the rates ruling when the transactions occur. Foreign currency monetary
assets and liabilities are retranslated at the rates ruling at the balance
sheet date. Exchange differences arising are recognised in the statement of
comprehensive income.
Revenue
The Group manufactures and distributes a range of electronic equipment.
Revenue comprises sales to external customers after discounts, excluding
value-added taxes.
The Group's performance obligations with respect to physical goods is to
deliver a finished product to a customer.
Revenue is recognised when control of the products has transferred, being when
the products are delivered to the customer, the customer has full control over
the products supplied, and there is no unfulfilled obligation that could
affect the customer's acceptance of the products.
Delivery occurs when the products have been shipped to the specific location,
the risks of obsolescence and loss have been transferred to the customer, and
either the customer has accepted the products in accordance with the sales
contract, the acceptance provisions have lapsed, or the Group has objective
evidence that all criteria for acceptance have been satisfied.
Where performance obligations have not be satisfied at the reporting date any
advanced payments are recognised as contract liabilities.
For goods that are subject to bill and hold arrangements this means:
• the goods are complete and ready for collection;
• the goods are separately identified from the Group's other stock
and are not used to fulfil any other orders; and
• the customer has specifically requested that the goods be held
pending collection.
Normal payment terms apply to the bill and hold arrangements.
Revenue is only recognised to the extent that it is highly probable that a
significant reversal will not occur.
No element of financing is deemed present as the sales are made with a credit
term of 30 to 90 days, which is consistent with market practice. The Group
does not expect to have any contracts where the period between the transfer of
the promised goods or services to the customer and payment by the customer
exceeds one year. As a consequence, the Group does not adjust any of the
transaction prices for the time value of money.
The Group's obligation to provide a refund for faulty products under the
standard warranty terms is recognised as a returns provision. A receivable is
recognised when the goods are delivered as this is the point in time that the
consideration is unconditional because only the passage of time is required
before the payment is due.
Segmental reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the Executive Directors, who are responsible for
allocating resources and assessing performance of the operating segments.
A business segment is a group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from those of other business segments.
A geographical segment is engaged in providing products or services within a
particular economic environment that are subject to risks and returns that are
different from those of segments operating in other economic environments.
The Executive Directors assess the performance of the operating segments based
on the measures of revenue, Profit Before Taxation (PBT) and Profit After
Taxation (PAT). Central overheads are not allocated to the business segments.
Government grants
Income received from government grants is recognised as "Other Income" within
operating profit in the Statement of Comprehensive Income in the same period
as the staff costs to which the income relates. Government grant income is
only recognised once there is reasonable assurance both that the Group will
comply with any conditions and that the grant will be received.
Pensions
The pension schemes operated by the Group are defined contribution schemes.
The pension cost charge represents the contributions payable by the Group.
Current and deferred taxation
Income tax on the profit or loss for the year comprises current and deferred
tax.
Taxable profit differs from accounting profit because it excludes certain
items of income and expense that are recognised in the financial statements
but are treated differently for tax purposes. Current tax is the amount of tax
expected to be payable or receivable on the taxable profit or loss for the
current period. This amount is then amended for any adjustments in respect of
prior periods.
Current tax is calculated using tax rates that have been written into law
("enacted") or irrevocably announced/committed by the respective Government
("substantively enacted") at the period end date. Current tax receivable
(assets) and payable (liabilities) are offset only when there is a legal right
to settle them net and the entity intends to do so. This is, generally, true
when the taxes are levied by the same tax authority.
Because of the differences between accounting and taxable profits and losses
reported in each period, temporary differences arise on the amount certain
assets and liabilities are carried at for accounting purposes and their
respective tax values. Deferred tax is the amount of tax payable or
recoverable on these temporary differences.
Deferred tax assets and liabilities are recognised where the carrying amount
of an asset or liability in the balance sheet differs from its tax base,
except for differences arising on:
• the initial recognition of goodwill;
• the initial recognition of an asset or liability in a transaction
which is not a business combination and at the time of the transaction affects
neither accounting nor taxable profit; and
• investments in subsidiaries and jointly controlled entities where
the Group is able to control the timing of the reversal of the difference and
it is probable the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it
is probable that taxable profit will be available against which the
differences can be utilised.
The amount of the asset or liability is determined using tax rates that have
been enacted, or substantively, enacted by the balance sheet date and are
expected to apply when the deferred tax liabilities/(assets) are
settled/(recovered).
Deferred tax assets and liabilities are offset when the Group has a legally
enforceable right to offset current tax assets and liabilities, and the
deferred tax assets and liabilities relate to taxes levied by the same tax
authority.
Share-based payment
Where share options are awarded to employees, the fair value of the options at
the date of grant is charged to the consolidated statement of comprehensive
income over the vesting period. Non-market vesting conditions are taken into
account by adjusting the number of equity instruments expected to vest at each
statement of financial position date so that, ultimately, the cumulative
amount recognised over the vesting period is based on the number of options
that eventually vest. Market vesting conditions are factored into the fair
value of options granted. As long as all other vesting conditions are
satisfied, a charge is made irrespective of whether the market vesting
conditions are satisfied. The cumulative expense is not adjusted for failure
to achieve a market vesting condition.
Where the terms and conditions of options are modified before they vest, the
increase in the fair value of the options, measured immediately before and
after the modification, is also charged to the consolidated statement of
comprehensive income over the remaining vesting period.
2. Critical accounting estimates and judgements
The preparation of financial statements requires the use of accounting
estimates, which, by definition, will seldom equal the actual results.
Management also needs to exercise judgement in applying the Group's accounting
policies and relevant legislation. This Note provides an overview of the areas
that involved a higher degree of judgement or estimation complexity as noted,
and of items that are more likely to be materially adjusted due to assumptions
driving the estimates or judgements turning out to be wrong.
Acquisition accounting (estimation)
In accounting for the Custom Power acquisition (see Note 32) in accordance
with IFRS 3, there were several key areas identified where the estimation of
the value could have changed if key assumptions were varied. This primarily
relates to the fair value of tangible assets, the fair value of brand and
customer relationship intangible assets, and the recognition of the $5m of
contingent consideration (and the impact to the resultant goodwill carrying
value).
A £0.9m uplift to the carrying value of tangible assets was booked as a fair
value adjustment, primarily reflecting the substantial replacement cost value
for testing equipment. The estimation range on these assets was calculated as
between £Nil (book value) and £1.7m (estimated replacement cost). The fair
value adopted was based on the best estimate of depreciated replacement cost
for items that are not available for sale on the open market, due to creation
via internally generated expertise, and the expected useful economic life
("UEL") for those assets. If the estimated full replacement cost had been
used, the uplift value recognised could have increased by £0.8m.
A third-party expert completed an independent valuation of IFRS 3, intangible
assets recognised on acquisition, with two material assets identified, being
Customer Relationships and Brand. These assets will be depreciated between
three and ten years based on the value of incremental earnings in the model.
Estimates required included customer attrition, future profitability, and
appropriate discount rates.
The $5m contingent consideration liability has not been recognised in the
acquisition accounting consideration as the stretch threshold set for revenue
is not expected to be achieved. The fair value of this element of the
consideration is estimated to be Nil as the hurdle is an "all or nothing"
target and will not be achieved based on the agreed budget target and the
current open orderbook. This is still considered an estimate as there is an
outside possibility that Custom Power may receive a transformational order,
where all components are easily available to fulfil by the deadline.
However, in the opinion of the Directors, this is considered highly unlikely.
The above estimations of the quantum of the fair value of intangibles and
tangible assets and the consideration would impact the recognised goodwill
value.
Expected credit losses (estimation)
In accordance with IFRS 9, the Group is required to assess the expected credit
loss occurring over the life of its trade receivables. As a result of the
continued component shortages and rising inflation across the globe, the
Directors expect that the risk of credit default continues to be higher than
historical norms, however, the Group has experienced no material credit losses
in the reported period after careful credit management. As a result, the
Directors have made a judgemental assessment of the potential credit losses in
the current business environment. This includes the forward assessment of
ongoing component shortages, where customers could invest in most of the goods
required to complete their product and suffer adverse cash flow due to any
missing components and the impact of rising inflation. In these financial
statements the Directors have provided full disclosures of the provisions for
credit default in Note 21.
Custom Power also has a historically high collection rate and trades with
large, reputable customers so is judged to have decreased the overall credit
risk of the Group. The calculation of the provision based on the Directors'
judgemental assessment of expected credit loss reflects the impact of the
acquisition of Custom Power with a small increase to the overall figure from
2022 of £39k.
If the Group were to provide for all debt that is overdue according to agreed
credit terms, the recognised provision would increase by £2m to £2.7m.
Provisions for slow moving or obsolete inventories (estimation)
Inventories are carried at the lower of cost and net realisable value ("NRV").
NRV is reviewed in detail on an ongoing basis and provision for obsolete
inventory is made based on several factors including age of inventories, the
risk of technical obsolescence, the risk that customers default on customised
product and the expected future usage.
This estimate is considered highly judgemental given the deliberate investment
in inventory during the financial year to mitigate the challenge presented by
market component shortages. An element of working capital risk can be
mitigated with receiving advance customer deposits, however, there remains a
risk of default and order cancellation.
Differences between such estimates and actual market conditions may have a
material impact on the amount of the carrying value of inventories and may
result in adjustments to cost of sales. If an additional 10% of the
year-on-year increase in underlying inventory values were to be provided, the
provision increase would be £1.2m. See Note 15 for details of the inventory
provisions and the amounts written off to the consolidated statement of
comprehensive income in the year.
Estimated useful life of intangible assets arising on acquisitions
(estimation)
The periods of amortisation adopted to write down intangible assets arising on
acquisitions (Note 12) requires estimates to be made in respect of the useful
economic lives of the intangible assets to determine an appropriate
amortisation rate.
Intangible assets arising on acquisitions are amortised on a straight-line
basis over the period during which economic benefits are expected to be
received, which is typically five to ten years.
The amortisation charge for intangible assets arising on the Custom Power
acquisition in August is £575k; if the lives of all the acquired assets were
reduced to five years, the impact would be to increase the charge by £554k.
Level of R&D expenditure that is eligible for R&D tax credits
(judgement)
Uncertainties exist in relation to the interpretation of complex tax
legislation, changes in tax laws and the amount and timing of future taxable
income. This could necessitate future adjustments to taxable income and
expense already recorded (Note 7).
At the year-end date, tax liabilities and assets reflect management's
judgements in respect of the application of the tax regulations, in particular
the R&D tax. In assessing our year-end corporation tax liability, we have
made a provisional assessment as to the likely amount of development
expenditure that will be eligible under each of the HMRCs large company and
SME R&D tax credit schemes as the detailed tax computations have not been
completed. The assumption is that the statutory Group entities previously
eligible for the SME R&D tax scheme will move into the large company
scheme for the 2023 tax year, so a £285k RDEC credit has been recognised in
Other Income.
Our estimated taxation exposure at year-end assumed that the level of eligible
R&D spend was comparable with prior years. At 31 March 2023, there are net
current and deferred tax provisions totalling approximately £2.9m (2022:
£1.8m).
Due to the uncertainties noted above, it is possible that the Group's initial
R&D position is different to the final position adopted when the tax
computation is finalised, resulting in a different tax payable or recoverable
from the amounts provided.
Recognition criteria for capitalisation of development expenditure (judgement)
The Group capitalises R&D in accordance with IAS 38 (Note 12). There is
judgement in respect of when (or if) R&D projects meet the requirement for
capitalisation, which internal costs are directly attributable and, therefore,
appropriate to capitalise and when the development programme is complete, and
capitalisation should cease.
Amounts capitalised include the total cost of any external products or
services and labour costs directly attributable to the development programme.
Management judgement is involved in determining the appropriate internal costs
to capitalise that are directly attributable to the development programme.
If there is any uncertainty in terms of the technical feasibility, ability to
sell the product or any other risk that means the programme does not meet the
requirements of the standard the R&D costs are expensed within the
consolidated statement of comprehensive income.
Revenue recognition on customer contracts spanning financial periods
(judgement)
The Group is now entering into a higher volume of contracts with customers
that require judgement on appropriate milestones to recognise the related
revenue. This has partially driven the £1.9m increase in contract liabilities
(Note 18) in the financial year.
Key judgements can include the timing of transfer of ownership of inventory to
the customer under bill-and-hold arragements as well as the determination of
the appropriate contractual milestones and whether the criteria have been met
to recognise revenue.
For material contracts that involve a significant level of judgement,
management from various business areas will document and communicate the key
judgement areas regarding ownership obligations, contractual commitments, and
any other relevant inputs to result in the recognition of revenue to the Audit
Committee.
3. Revenue
The Group derives revenue from the transfer of goods at a point in time in the
following major product lines and geographical regions:
2023 2022
£'000 £'000
Geography
United Kingdom 71,649 53,030
Rest of Europe 18,202 15,726
Asia 8,811 6,542
North America 27,205 9,175
Rest of World 636 524
Total revenue 126,503 84,997
2023 2022
£'000 £'000
Product
Computing products 21,718 16,103
Communications products 11,005 7,745
Power products 24,789 8,681
Opto electronic and electronic components and modules 68,991 52,468
126,503 84,997
See further segmental disclosures in Note 31.
4. Profit from operations
This has been arrived at after charging/(crediting):
2023 2022
£'000 £'000
Staff costs excluding share-based payments (see Note 5) 23,646 16,562
Share-based payment expenses 551 295
Depreciation of property, plant and equipment 1,159 729
Depreciation of right-of-use asset 965 763
Amortisation of intangible assets 2,035 1,327
(Profit)/loss on disposal of property, plant and equipment (45) 3
Auditors' remuneration:
Audit fees 245 120
Other assurance fees - -
Non audit fees
Other advisory services - 6
Research and development costs (includes relevant staff costs) 2,190 2,044
RDEC Credit (285) (10)
Foreign exchange expense/(credit) 269 (33)
Stock write downs 777 59
Acquisition of subsidiaries legal and due diligence 234 533
Other income from government grants (14) (2)
The foreign exchange differences have been treated as an adjustment to cost of
sales rather than as an overhead as they arise from sales income and
cost-of-sales expenditures.
5. Staff costs
Staff costs for all employees during the year, including the Executive
Directors, were as follows:
2023 2022
£'000 £'000
Wages and salaries 20,173 13,985
Social security costs 2,147 1,377
Pension costs 1,361 1,200
Share-based payment charges 551 295
Total staff costs 24,232 16,857
Wages and salaries include termination costs of £45k (2022: £56k).
The average monthly number of employees during the year, including the
Executive Directors, was as follows:
2023 2022
Number Number
Selling and distribution 136 134
Manufacturing and assembly 167 110
Management and administration 101 59
404 303
As the Group continues to grow, we continue to invest in and develop the
senior leadership team, which are considered to be key management.
This senior management team includes Executive Directors. The key management
team and their total compensation, including employers NI, totals £4,075k
(2022: £3,857k). The amount charged in respect of share-based payments for
key management personnel is £382k (2022: £202k). The amount charged in
respect of defined contribution pension payments for key management personnel
is £143k (2022: £198k).
6. Finance costs
2023 2022
£'000 £'000
Bank borrowings 790 127
Interest on lease liabilities 46 99
Imputed Interest on deferred consideration 136 -
Total finance costs 972 226
7. Tax expense
2023 2022
£'000 £'000
Analysis of total tax expense
Total tax charge 1,840 716
1,840 716
Current tax expense
Group corporation tax on profits for the year 1,537 735
Adjustment in respect of prior periods (283) (8)
1,254 727
Deferred tax expense
Deferred tax expense charged to income statement 398 250
Adjustment in respect of prior periods 94 -
Total tax charge to income statement 1,746 977
Deferred tax expense/(credit) charged to other comprehensive income 94 (261)
Total tax charge to comprehensive income 1,840 716
The reasons for the difference between the actual tax charge for the year and
the standard rate of corporation tax in the UK applied to profits for the year
are as follows:
2023 2022
£'000 £'000
Profit before tax 8,436 3,500
Expected tax charge based on the standard rate of corporation tax in the UK of 1,603 665
19% (2022: 19%)
Effect of:
Expenses not deductible for tax purposes 101 443
Non-taxable credit (62) -
Difference between depreciation/amortisation for the year and capital 115 (60)
allowances
Tax relief on exercise of share options exercised (60) -
Deferred tax asset released/(recognised) on share option expense 75 (226)
Movement in relief on research and development expenditure 143 (483)
Change in rate in respect of deferred tax recognition - 343
Taxation difference in respect of Intangibles on acquisition (14) -
Tax losses recognised/(utilised) 78 -
Adjustments in respect of prior years (189) (9)
Overseas tax rate differences 56 8
Foreign exchange (6) 35
Total tax charge 1,840 716
The UK corporation tax rate is 19% (effective from 1 April 2017). Amendments
were, substantively, enacted on 24 May 2021, so the rate of UK corporation tax
will rise to 25% from 1 April 2023. The deferred tax liabilities and assets on
31 March 2023 and comparative figures from March 2022 have been calculated
based on this revised 25% rate.
R&D tax credits
The Group recognised a credit of £285k (2022: £10k) within other income in
relation to claims made under the Research and Development expenditure credit
scheme (RDEC). The UK entities in the Group are no longer considered eligible
for the SME scheme estimated based on tax calculations. Claims were made under
the SME scheme and recognised within the tax expense for the March 2022
comparative period.
8. Earnings per share
The earnings per share is based on the following:
2023 2022
£'000 £'000
Reported earnings post tax 6,693 2,523
Adjusted earnings post tax 8,553 6,158
Weighted average number of shares 10,374,314 8,551,455
Diluted number of shares 10,604,768 8,728,268
Reported EPS
Basic EPS from profit for the year 64.5p 29.5p
Diluted EPS from profit for the year 63.1p 28.9p
Adjusted EPS
Adjusted Basic EPS from profit for the year 82.5p 72.0p
Adjusted Diluted EPS from profit for the year 80.7p 70.6p
Earnings per ordinary share has been calculated using the weighted average
number of shares in issue during the year. The weighted average number of
equity shares in issue was 10,374,314 (2022: 8,551,455) net of the treasury
shares disclosed in Note 27.
The diluted earnings per share is based on 10,604,768 (2022: 8,728,268)
ordinary shares, which allow for the exercise of all dilutive potential
ordinary shares.
The adjustments to profit made in calculating the adjusted earnings are set
out in Note 30.
9. Dividends
2023 2022
£'000 £'000
Prior year final dividend paid of 13.25p per share (2022: 10.75p) 1,500 920
Current year interim dividend paid of 6.5p per share (2022: 6.25p) 736 535
Cancelled dividends on shares held in treasury (1) (2)
2,235 1,453
Final dividend proposed for the year at 13.5p per share (2022: 13.25p) 1,528 1,134
The proposed final dividend has not been accrued for as the dividend will be
approved by the shareholders at the Annual General Meeting.
10. Property, plant and equipment
Year ended 31 March 2023 Land and buildings Short Motor Fittings, Total
£'000 leasehold vehicles equipment and £'000
property £'000 computers
improvements £'000
£'000
Cost
1 April 2022 466 1,976 773 4,169 7,384
Foreign exchange 30 1 - (33) (2)
Additions - 94 308 1,113 1,515
Acquisitions - - - 991 991
Disposals - - (84) (61) (145)
31 March 2023 496 2,071 997 6,179 9,743
Depreciation and impairment
1 April 2022 - 987 308 2,675 3,970
Foreign exchange - - - (11) (11)
Charge - 164 151 844 1,159
Impairment - - - - -
Disposals - 21 (74) (40) (93)
31 March 2023 - 1,172 385 3,468 5,025
Net book value
31 March 2023 496 899 612 2,711 4,718
Year ended 31 March 2022 Land and buildings Short Motor Fittings, Total
£'000 leasehold vehicles equipment and £'000
property £'000 computers
improvements £'000
£'000
Cost
1 April 2021 446 1,951 678 3,570 6,645
Additions - 121 302 755 1,178
Disposals - (98) (207) (158) (463)
Foreign exchange 20 2 - 2 24
31 March 2022 466 1,976 773 4,169 7,384
Depreciation and impairment
1 April 2021 - 896 371 2,397 3,664
Charge for the year - 189 103 437 729
On disposals - (98) (166) (160) (424)
Foreign exchange - - - 1 1
31 March 2022 - 987 308 2,675 3,970
Net book value
31 March 2022 466 989 465 1,494 3,414
11. Right-of-use assets
Year ended 31 March 2023 Land and buildings Motor Total
£'000 vehicles/other £'000
£'000
Cost
1 April 2022 3,820 213 4,033
Additions 115 7 122
Acquisition additions 883 - 883
Disposals (63) - (63)
Foreign exchange 20 - 20
31 March 2023 4,775 220 4,995
Amortisation
1 April 2022 1,937 113 2,050
Charge for the year 915 50 965
Disposals (33) - (33)
Foreign exchange 32 - 32
31 March 2023 2,851 163 3,014
Net book value
31 March 2023 1,924 57 1,981
Year ended 31 March 2022 Land and buildings Motor Total
£'000 vehicles/other £'000
£'000
Cost
1 April 2021 3,604 188 3,792
Additions 285 28 313
Disposals (69) (3) (72)
31 March 2022 3,820 213 4,033
Depreciation
1 April 2021 1,263 53 1,316
Charge for the year 701 62 763
Disposals (27) (2) (29)
31 March 2022 1,937 113 2,050
Net book value
31 March 2022 1,883 100 1,983
12. Intangible assets
Year ended 31 March 2023 Development Computer Goodwill on Acquisition Total
costs software consolidation intangible £'000
£'000 £'000 £'000 assets
£'000
Cost
1 April 2022 1,783 724 9,898 8,781 21,186
Foreign Exchange - (2) (492) (164) (658)
Additions 810 387 - - 1,197
Acquisitions (Note 32) - 52 20,320 6,858 27,230
Disposals - (74) - - (74)
31 March 2023 2,593 1,087 29,726 15,475 48,881
Amortisation
1 April 2022 1,583 399 - 3,373 5,355
Foreign Exchange - (1) - (23) (24)
Charge for the year 328 105 - 1,602 2,035
Disposals - (48) - - (48)
31 March 2023 1,911 455 - 4,952 7,318
Net book value
31 March 2023 682 632 29,726 10,523 41,563
The cost of acquisition intangible assets includes the estimated net present
value identified on acquisition of:
• customer relationships with a net book value of £8,594k and a
remaining useful economic life between one and ten years.
• brand with a net book value of £2,777k and a remaining useful
economic life of approx. six years.
The development costs relate to the cost of developing new products and
technology to enable the Company to extend its operations into new growth
areas. Any assets developed that are no longer deemed to meet the recognition
criteria of development costs have been written down.
Year ended 31 March 2022 Development Computer Goodwill on Acquisition Total
costs software consolidation intangible £'000
£'000 £'000 £'000 assets
£'000
Cost
1 April 2021 1,433 473 9,898 8,781 20,585
Additions 350 251 - - 601
Acquisitions - - - - -
31 March 2022 1,783 724 9,898 8,781 21,186
Amortisation
1 April 2021 1,333 350 - 2,345 4,028
Charge for the year 250 49 - 1,028 1,327
31 March 2022 1,583 399 - 3,373 5,355
Net book value
31 March 2022 200 325 9,898 5,408 15,831
Cost NBV
£'000 £'000
Systems Division commercial relationships 8,769 7,126
Components Division commercial relationships 6,706 3,397
31 March 2023 15,475 10,523
13. Goodwill and impairment
Details of the carrying amount of goodwill allocated to cash-generating units
(CGUs) are as follows:
2023 2022
£'000 £'000
Systems Division - UK 3,946 3,946
Systems Division - Custom Power 19,828 -
Components division 5,952 5,952
Total 29,726 9,898
The recoverable amounts of all the above CGUs have been determined from a
review of the current and anticipated performance of these units using a value
in use calculation over a period of 5 years then a terminal value. In
preparing the base case projection, a pre-tax discount rate of between 10% and
12% (2022: 10%) was used based on the Group's estimated weighted average cost
of capital.
Future growth rates of between 5% and 7.5% and terminal growth rate of 2.5%
(2022: 2.5%) has been assumed beyond the first year, for which the projection
is based on the budget approved by the Board of Directors. It has been assumed
that investment in capital equipment will equate to depreciation over this
period. The key assumptions are the growth rates and discount rates.
The recoverable amount exceeds the carrying amount for the Group by £141.9m
(2022: £95.0m) in the base case.
The headroom within the UK Systems Division is significant at £59.9m (2022:
£53.8m), and the Custom Power CGU £14.5m with the Components division having
headroom of £75.7m (2022: £47.3m). The following changes can be made to the
above key assumptions in respect of each division and the carrying amount
would still exceed, or equal, the recoverable amount for each CGU. It is not
considered reasonably possible that changes to the assumptions would trigger
an impairment.
Discount rate: Increase the rate of each CGU by 2%
Growth rate: Reduce the annual growth to Nil and retain a 2.5% terminal growth
rate
The Custom Power goodwill carrying value is $24,588k and the value in GBP is
recalculated at the closing reporting date exchange rate with an FX loss of
£492k from the acquisition date.
14. Subsidiaries
The subsidiaries of Solid State PLC included in these consolidated financial
statements are as follows:
Subsidiary undertakings Proportion of voting Nature of business
rights and Ordinary share capital held
Solid State Supplies Limited UK 100% Supply of electronic components
Steatite Limited UK 100% Supply of electronic components and manufacture
of electronic equipment
Custom Power Holdings Inc USA 100% Holding Company
Custom Power LLC* USA 100% Battery systems and energy solutions supplier
Pacer Technologies Limited UK 100% Non trading entity
Pacer Components Limited* UK 100% Supply of opto-electronic components
Pacer LLC* USA 100% Supply of opto-electronic components
Willow Technologies Limited UK 100% Supply of opto-electronic components
American Electronic Components, Inc.* USA 100% Supply of opto-electronic components
Active Silicon Limited UK 100% Digital image design and manufacturing
Active Silicon, Inc.* USA 100% Manufacturing sales facility
Solid State Supplies Electronics Limited Ireland 100% Sales office
eTech Developments Limited UK 75% Engineering consultation
Custom Power Limited UK 100% Non trading entity
Creasefield Limited UK 100% Non trading entity
Q-Par Angus Limited UK 100% Non trading entity
Ginsbury Electronics Limited UK 100% Non trading entity
Wordsworth Technology Kent Limited UK 100% Non trading entity
Solsta Limited UK 100% Non trading entity
Durakool Limited UK 100% Non trading entity
* Indirect holdings. All other holdings are direct.
The non trading entities are exempt from filing audited accounts with the
registrar under Section 479a of the Companies Act 2006.
Subsequent to the year end, a new USA holding company, Solsta Holding Inc. was
incorporated.
Aside from the operations in the USA and Ireland identified above, the
countries of operation and of incorporation are England and Wales, with the
same registered office as Solid State PLC. The registered offices for
operations in the US and Ireland are listed below.
Subsidiary undertaking Registered office
Pacer USA LLC 661 Maplewood Drive, Suite 10, Jupiter, FL 33458, USA
American Electronic Components, Inc. 1101 Lafayette Street, Elkhart, Indiana, 46516, USA
Active Silicon, Inc. 479 Jumpers Hole Road, Suite 301, Severna Park, MD 21146, USA
Solid State Supplies Electronics Limited 3rd Floor Ulysses House, 23/24 Foley Street, Dublin 1, Dublin D01 W2T2,
Ireland
Custom Power Holdings Inc 10910 Talbert Ave, Fountain Valley, CA 92708, USA
Custom Power LLC 10910 Talbert Ave, Fountain Valley, CA 92708, USA
As set out in the audit committee report, the 100%-owned UK trading
subsidiaries are exempt from the requirements to have an audit and file
audited financial statements by virtue of Section 479A of the Companies Act
2006. In adopting the exemption, Solid State PLC has provided a statutory
guarantee to these subsidiaries in accordance with Section 479C of the
Companies Act 2006.
15. Inventories
2023 2022
£'000 £'000
Finished goods and goods for resale 30,195 15,333
Work in progress 3,033 2,265
Total inventories 33,228 17,598
The Directors are of the opinion that the replacement value of inventories is
not materially different to the carrying value stated above. These carrying
values are stated net of provisions of £5,053k (2022: £3,694k).
An impairment loss of £1,012k (2022: £610k loss) was recognised in the cost
of sales during the year against inventory due to slow-moving and obsolete
items.
Inventory recognised in cost of sales during the year, as an expense, was
£83,958k (2022: £57,812k).
16. Trade and other receivables
2023 2022
£'000 £'000
Trade receivables 16,379 14,948
Other receivables 163 126
Prepayments 3,157 2,904
19,699 17,978
An impairment credit against trade receivables of £77k (2022: Credit of
£13k) was recognised within operating costs during the year.
17. Trade and other payables (current)
Note 2023 2022
£'000 £'000
Trade payables 12,919 8,083
Other taxes and social security taxes 2,952 2,607
Other payables 376 89
Accruals 7,488 5,709
Deferred consideration on acquisitions 21, 32 4,029 -
Contingent consideration on acquisitions 21 1,650 4,625
29,414 21,113
18. Contract liabilities
2023 2022
£'000 £'000
Contract liabilities 5,380 3,461
The contract liabilities identified above relate to unsatisfied performance
obligations resulting from proforma and advanced customer payments, where we
have not recognised the revenue and provisions for product returned for
rework. All these contract liabilities are expected to be recognised in the,
subsequent, financial year.
Revenue recognised within the year includes £2,910k (2022: £1,980k), which
was included within contract liabilities in the prior year.
19. Bank borrowings and facilities
2023 2022
£'000 £'000
Current borrowings
Bank borrowings - overdraft facility - 2,059
Bank borrowings - term loans 1,279 -
Non-current borrowings
Bank borrowings 13,383 1,500
Total borrowings 14,662 3,559
2023 2022
£'000 £'000
Within one year 1,279 2,059
Between one and two years 4,958 1,500
Between two and five years 8,425 -
Total borrowings 14,662 3,559
The bank facilities are secured by a fixed and floating charge over the assets
of the Company and the Group. At the balance sheet date, the Group had the
following facilities:
• The Group has a term loan of £6.5m entered into in August 2022,
as part of the Custom Power acquisition financing, which is repayable in full
in August 2025. The full principal balance was utilised at the year end.
• The Group also entered into a term loan of £6.5m in August 2022
as part of the Custom Power acquisition financing that is repayable in
quarterly tranches over a five-year period. A principal balance of £5.85m was
outstanding at the year end.
• A revolving credit facility of £7.5m (2022: £7.5m) of which
£2.4m (2022: £1.5m) was drawn at the balance sheet date. This facility was
committed until November 2023 and then renewed in March 2023 to a November
2024 commitment date.
• In addition, the Group has a multi-currency overdraft facility of
£3.0m (2022: £3.0m), which was not utilised at the year end (2022: £2.1m
for USD). Subsequent to the year end, the Group agreed a facility extension on
the USD overdraft facility of up to $10m to the end of September 2023 in order
to cover the maximum potential impact of the NATO project's timing differences
to cashflow.
The multi-currency overdraft facility is in place to provide flexibility in
financing short-term, multi-currency working capital requirements. This
facility is available to utilise as long as the overall balance netted across
all accounts in the bank nets to an overall position of £Nil or higher.
The Group's banking facilities are subject to three financial covenants:
leverage, debt service and a tangible net worth covenant. These covenants were
met at all measurement points throughout the period.
20. Right-of-use lease liabilities
2023 2022
£'000 £'000
Current right-of-use lease liabilities 1,057 758
Non-current right-of-use lease liabilities 986 1,326
Total right-of-use lease liabilities 2,043 2,084
2023 2022
£'000 £'000
Within one year 1,057 758
Between one and two years 942 650
Between two and five years 44 676
Total right-of-use lease liabilities 2,043 2,084
Lease liabilities relate to leased properties and vehicles and an analysis of
the undiscounted maturity analysis of the remaining lease payments is
presented in Note 21.
The following is a reconciliation of the Group's lease liabilities:
2023 2022
£'000 £'000
Right-of-use lease liabilities at 1 April 2,084 2,543
Additions 123 313
Acquisitions 883 -
Payments made (1,026) (795)
Discounting charge 46 99
Disposals (56) (76)
FX (11) -
Right-of-use lease liabilities at 31 March 2,043 2,084
21. Financial instruments
The Group's overall risk management programme seeks to minimise potential
adverse effects on the Group's financial performance.
The Group's financial instruments comprise cash and cash equivalents and
various items such as trade payables and receivables that arise directly from
its operations. The Group is exposed through its operations to the following
risks:
• Credit risk
• Foreign currency risk
• Liquidity risk
• Cash flow interest rate risk
In common with all other businesses, the Group is exposed to risks that arise
from its use of financial instruments. This note describes the Group's
objectives, policies and processes for managing those risks. Further
quantitative information in respect of these risks is presented throughout
these financial statements.
The acquisition of Custom Power and the related draw-down of additional
long-term fixed borrowings is a substantive change in the Group's exposure to
financial instrument risks. Consequently, the objectives, policies and
processes have been reassessed to determine the updated risk profile (where
relevant).
The Board has overall responsibility for the determination of the Group's risk
management policies. The objective of the Board is to set policies that seek
to reduce the risk as far as possible without unduly affecting the Group's
competitiveness and effectiveness. Further details of these policies are set
out below.
Credit risk
The Group is exposed to credit risk, primarily, on its trade receivables,
which are spread over a range of customers and countries, a factor that helps
to dilute the concentration of the risk.
It is Group policy, implemented locally, to assess the credit risk of each new
customer before entering binding contracts. Each customer account is then
reviewed on an ongoing basis (at least once a year) based on available
information and payment history.
The maximum exposure to credit risk is represented by the carrying value of
receivables as shown in Note 16 and in the statement of financial position.
The amount of the exposure shown in Note 16 is stated net of provisions for
doubtful debts.
The credit risk on liquid funds is low as the funds are held at banks with a
high credit rating assigned by international credit rating agencies.
Foreign currency risk
Foreign exchange transaction risk arises when individual Group operations
enter into transactions denominated in a currency other than their functional
currency. The general policy for the Group is to sell to customers in the same
currency that goods are purchased in, reducing the transactional risk. Where
transactions are not matched, excess foreign currency amounts generated from
trading are converted back to sterling and required foreign currency amounts
are converted from sterling. Forward currency contracts are not used
speculatively and are considered where the Group has a demand for foreign
currency that it can reliably forecast. The Group overdraft facility is
available on an individual currency basis as well as an overall basis.
Liquidity risk
The Group operates a Group overdraft facility common to all its trading
companies (with the exception of the recent Willow, Active and Custom Power
acquisitions). This facility has a right of offset, so individual accounts in
an overdraft position can be netted from cash held in other accounts in the
same bank to a maximum position of £Nil in total.
The Group has, approximately, a three month visibility in its trading and runs
a rolling six-month cash flow forecast. If any part of the Group identifies a
shortfall in its future cash position, the Group has sufficient facilities
that it can direct funds to the location where they are required. If this
situation is forecast to continue, remedial action is taken.
Cash flow interest rate risk
External Group borrowings are approved centrally. The Board accepts that this
neither protects the Group entirely from the risk of paying rates in excess of
current market rates nor fully eliminates the cash flow risk associated with
interest payments. It considers, however, that by ensuring approval of
borrowings is made by the Board, the risk of borrowing at excessive interest
rates is reduced. The Board considers that the rates being paid are in line
with the most competitive rates it is possible for the Group to achieve. The
Group does not currently hedge interest rates on financing, but monitors the
impact of rising interest rates and will put an instrument in place if
considered an effective risk mitigation.
Credit risk
The carrying amount of financial assets represents the maximum credit
exposure. The Group maintains its cash reserves at reputable banks. The
maximum exposure to credit risk at the reporting date was:
Loans and receivables 2023 2022
£'000 £'000
Trade and other receivables 16,542 15,074
Cash and cash equivalents 12,224 2,924
28,766 17,998
The maximum exposure to credit risk for trade receivables at the reporting
date by geographic region was:
Debt exposure 2023 2022
£'000 £'000
UK 8,257 8,471
Non-UK 8,122 6,477
16,379 14,948
The Group policy is to make a provision against those debts that are overdue,
unless there are grounds for believing that all, or some, of the debts will be
collected. During the year, the value of provisions made in respect of bad and
doubtful debts was a charge of £233k (2022: £193k), which represented 0.2%
(2022: 0.1%) of revenue. This provision is included within the sales, general
and administration expenses in the Consolidated Statement of Comprehensive
Income. Trade receivables are written off where there is no reasonable
expectation of recovery. Indicators that there is no reasonable expectation of
recovery include, amongst others, the failure of a debtor to engage in a
repayment plan with the Group, insolvency or a lack of contact with the
customer.
Trade receivables ageing by geographical segment
Total Current 30 days 60 days 90 days
Geographical area £'000 £'000 past due past due past due
£'000 £'000 £'000
2023
UK 8,576 7,969 394 81 132
Non-UK 8,492 6,711 725 971 85
Total 17,068 14,680 1,119 1,052 217
UK (319) (131) (80) (1) (107)
Non-UK (370) (164) (4) (119) (83)
Total provisions (689) (295) (84) (120) (190)
Total 16,379 14,385 1,035 932 27
IFRS9
UK expected loss rate 3.71% 1.65% 20.17% 1.00% 80.94%
Non-UK expected loss rate 4.35% 2.44% 0.59% 12.26% 97.38%
Total Current 30 days 60 days 90 days
Geographical area £'000 £'000 past due past due past due
£'000 £'000 £'000
2022
UK 8,860 8,273 418 128 41
Non-UK 6,737 6,122 412 116 87
Total 15,597 14,395 830 244 128
UK (389) (322) (21) (11) (35)
Non-UK (260) (136) (24) (23) (77)
Total provisions (649) (458) (45) (34) (112)
Total 14,948 13,937 785 210 16
IFRS9
UK expected loss rate 4.4% 3.9% 5.0% 8.6% 85.4%
Non-UK expected loss rate 3.9% 2.2% 5.8% 19.8% 88.5%
The Group records provision for impairment losses on its trade receivables
separately from gross receivables. The movements on this allowance account,
during the year, are summarised below:
2023 2022
£'000 £'000
Opening balance 649 658
Acquisition of subsidiaries 124 -
(Decrease)/increase in provisions (77) (14)
Written off against provisions (9) 4
Foreign exchange 2 1
Closing balance 689 649
The main factor used in assessing the expected impairment losses of trade
receivables is the age of the balances and the circumstances of the individual
customer.
As shown in the earlier table, at 31 March 2023, trade receivables of
£1,994k, which were past their due date, were not impaired
(2022: £1,011k).
Liquidity risk
Carrying Contractual 12 months 1-2 2-5 5+
amount cash flow or less Years Years Years
2023
Trade and other payables 21,628 21,628 21,628 - - -
Borrowings 14,662 16,722 2,142 5,671 8,909 -
Right-of-use lease liabilities 2,043 2,138 1,088 792 258 -
Provisions 1,038 1,038 323 94 621 -
Deferred consideration on acquisition 5,679 5,679 5,679 - - -
45,050 47,205 30,860 6,557 9,788 -
2022
Trade and other payables 16,488 16,488 16,488 - - -
Borrowings 3,559 3,559 2,059 1,500 - -
Right-of-use lease liabilities 2,084 2,215 781 690 744 -
Provisions 694 694 - 150 544 -
Deferred consideration on acquisition 6,601 6,601 4,625 1,976 - -
29,426 29,557 23,953 4,316 1,288 -
Movement in deferred 2023 2022 2023 2022 2023 2022 2023 2022
consideration on acquisitions
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Willow Active Custom Power Group
1 April 3,500 5,089 3,101 2,433 - - 6,601 7,522
Initial recognition - - - - 8,264 - 8,264 -
Increase/(decrease) in estimation - - (326) 1,651 - - (326) 1,651
Settlement (3,500) (1,589) (1,125) (983) (4,065) - (8,690) (2,572)
FX movement - - - - (170) - (170) -
31 March - 3,500(*) 1,650(*) 3,101(*) 4,029 - 5,679 6,601
* level 3 contingent consideration values calculated based on forecast
management data.
The fair value hierarchy of financial instrument is considered as follows:
Level 1: The fair value of financial instruments traded in active markets
(such as publicly traded derivatives, and equity securities) is based on
quoted market prices at the end of the reporting period. These instruments are
included in level 1.
Level 2: The fair value of financial instruments that are not traded in an
active market (e.g. over-the-counter derivatives) is determined using
valuation techniques that maximise the use of observable market data and rely
as little as possible on entity-specific estimates. If all significant inputs
required to fair value an instrument are observable, the instrument is
included in level 2.
Level 3: If one or more of the significant inputs is not based on observable
market data, the instrument is included in level 3. This is the case for
unlisted equity securities.
All the Group's financial instruments as disclosed are considered to fall
under Level 1, except for deferred contingent consideration due on
acquisitions (Willow and Active table above) which are classified as Level 3
instruments.
The measurement of the contingent deferred consideration liability on Active
Silicon is based on the performance of the business during the 25 month
earn-out period up to the 31st March 2023. The basis of the calculation is a
multiple of the post tax profit included within the consolidated Group
financial statements and the only immaterial variable that is considered
subject to change is the final taxation figure. The contingent consideration
in relation to Custom Power has been recognised at £Nil value based on the
discounted future forecasts prepared as described in Note 2.
Foreign currency risk
The Group's main foreign currency risk is the short-term risk associated with
accounts receivable and payable denominated in currencies that are not the
subsidiaries' functional currency. The risk arises on the difference in the
exchange rate between the time invoices are raised/received and the time
invoices are settled/paid. For sales denominated in foreign currencies the
Group will try, as far as practical, to ensure that the purchases associated
with the sale will be in the same currency.
All monetary assets and liabilities of the Group were denominated in sterling
except for the following items, which are included in the financial statements
at the sterling value based on the exchange rate ruling at the statement of
financial position date.
The following tables show the Group net assets/(liabilities) exposed to US
dollar and Euro exchange rate risk:
USD 2023 2022
£'000 £'000
Trade receivables 8,870 8,786
Cash and cash equivalents 8,235 (1,308)
Trade payables (8,149) (4,005)
8,956 3,473
EUR 2023 2022
£'000 £'000
Trade receivables 448 287
Cash and cash equivalents 444 272
Trade payables (178) (175)
714 384
The Group is exposed to currency risk because it undertakes trading
transactions in US dollars and Euros (and immaterial transactions in other
currencies). The Directors do not, generally, consider it necessary to enter
into derivative financial instruments to manage the exchange risk arising from
its operations, but, from time to time, when the Directors consider foreign
currencies are weak and it is known that there will be a requirement to
purchase those currencies, forward arrangements are entered into. There were
no forward purchase agreements in place at 31 March 2023 (2022: £Nil) with
£Nil net exposure (2022: £Nil).
The effect of a strengthening of 10% in the rate of exchange in the currencies
against sterling at the statement of financial position date would have
resulted in an estimated net increase in pre-tax profit for the year and an
increase in net assets of, approximately, £1,074k (2022: £428k). In
addition, the effect of a weakening of 10% in the rate of exchange in the
currencies against sterling at the statement of financial position date would
have resulted in an estimated net decrease in pre-tax profit for the year and
a decrease in net assets of, approximately, £879k (2022: £351k).
Interest rate risk
The Group finances its ongoing business through a revolving credit facility.
During the year, the Group utilised this facility at a floating rate of
interest. The Group also, partially, financed the acquisition of Custom Power
with two new term loans drawn down in August 2022, as described in Note 19.
The Group's banking facilities with Lloyds Bank PLC incur interest at the rate
of 2.55% over LIBOR. The Group is affected by changes in the UK interest rate.
As the loans are all based on variable interest rates, the fair value of the
Group's borrowings is not materially different to the book value.
In terms of sensitivity, if the ruling base rate had been 1% higher throughout
the year, the level of interest payable would have been £122k (2022: £82k)
higher, and if 1% lower throughout the year, the level of interest payable
would have been lower by the same amount.
Capital risk management
The Group defines total capital as equity in the consolidated statement of
financial position plus net debt or less net funds plus deferred
consideration. Total capital at 31 March 2023 was £66,070k (2022: £32,251k).
The Group defines net (cash)/leverage as net (cash)/debt plus deferred
consideration, which totals £8,117k (2022: £5,177k). In calculating net
(cash)/debt, the Group has excluded the right-of-use lease liabilities of
£2,042k (2022: £2,084k) from its definition and calculation.
When managing its capital, the Group's main objectives when managing capital
are to safeguard the Group's ability to continue as a going concern, to
provide returns for shareholders and benefits for other stakeholders, and to
maintain an optimal capital structure to reduce the cost of capital.
Consistent with others in the industry, the Group monitors capital based on
the gearing ratio. This ratio is calculated as leverage divided by total
capital. At 31 March 2023, the gearing ratio was 12.3% (2022: 16.0%).
The Group seeks to maintain a gearing ratio that balances risks and returns at
an acceptable level and to maintain sufficient funding to enable the Group to
meet its working capital and strategic investment needs in the light of
changes in economic conditions and the characteristic of the underlying
assets.
In making decisions to adjust its capital structure to achieve these aims, the
Group considers not only its short-term position, but also its long-term
operational and strategic objectives and sets the amount of capital in
proportion to risk.
The Group's gearing ratio at 31 March 2023 is shown below:
2023 2022
£'000 £'000
Cash and cash equivalents (12,224) (4,983)
Borrowings/bank overdrafts 14,662 3,559
Deferred consideration 5,679 6,601
Net leverage/(cash) 8,117 5,177
Share capital 567 428
Share premium account 30,474 3,625
Retained earnings 27,805 23,042
Capital redemption reserve 5 5
Foreign exchange reserve (836) 33
Shares held in treasury (108) (57)
Equity 57,907 27,076
Gearing ratio (net leverage/(equity + net leverage)/cash)) 12.3% 16.0%
22. Net debt
Year ended 31 March 2023 (£'000) At Cash flow Other At
1 April non-cash movement 31 March 2023
2022
Bank borrowing due within one year - (1,279) - (1,279)
Bank borrowing due after one year (1,500) (11,822) (61) (13,383)
Total borrowings (1,500) (13,101) (61) (14,662)
Deferred consideration on acquisition of subsidiaries within one year (4,625) 4,625 (5,679) (5,679)
Deferred consideration on acquisition of subsidiaries after one year (1,976) - 1,976 -
Cash and cash equivalents 2,924 9,314 (14) 12,224
(Net debt)/net cash (5,177) 838 (3,778) (8,117)
2023 2022
£'000 £'000
Increase/(decrease) in cash in the year 9,314 (4,006)
Increase in borrowings in the year (15,873) -
Repayment of borrowings in the year 2,772 2,250
Payment of deferred consideration on acquisitions 4,625 2,572
Net movement resulting from cashflows 838 816
2023 2022
£'000 £'000
Net debt at 1 April (5,177) (4,358)
Net movement resulting from cashflows 838 816
Contingent consideration recognised in year - short term (3,704) -
Contingent consideration recognised in year - long-term - (1,651)
Other non-cash movements (74) 16
Net debt at 31 March (8,117) (5,177)
Although the Group's banking facilities allow a right of offset between cash
balances held at the bank with overdraft balances at the same bank, the
overdraft balance at 31 March 2022 was presented as gross on the Statement of
Financial Position rather than net in accordance with the Interpretations
Committee March 2016 Agenda decision on IAS 32 interpretation of cash-pooling
arrangements. No overdraft was utilised as at 31 March 2023.
Lease liabilities are excluded from the Group's definition of net debt and a
separate roll-forward of lease liabilities is presented in note 20.
23. Deferred tax
The Group's deferred tax positions arise primarily on share-based payments,
accelerated capital allowances, capitalised development costs and intangible
assets arising on acquisition of subsidiaries:
2023 2022
£'000 £'000
At 1 April (1,293) (1,303)
Deferred tax arising on acquisition of subsidiaries 67 -
(Expense)/credit for the year (485) 348
Effect of changes to foreign exchange rates (7) 5
Deferred tax adjustment in respect of prior periods (94) -
Effect of tax rate change - (343)
Net deferred tax at 31 March (1,812) (1,293)
Deferred tax (liabilities)/assets in relation to:
Accelerated capital allowances on property plant and equipment (747) (504)
Short-term timing differences on intangible assets (1,736) (1,437)
Share-based payments 351 415
Short-term timing differences 114 98
Losses carried forward 206 135
Net deferred tax at 31 March (1,812) (1,293)
Deferred tax assets 375 539
Deferred tax liabilities (2,187) (1,832)
Net deferred tax at 31 March (1,812) (1,293)
The movements in respect of deferred tax in the year were as follows:
Accelerated Short-term timing Share-based payments Short-term timing Losses carried forward Total
capital allowances differences on intangible assets differences
At 1 April (504) (1,437) 415 98 135 (1,293)
Acquisition of subsidiaries (31) 62 - 36 - 67
Recognised in statement of comprehensive income (212) (361) 30 (20) 71 (492)
Recognised in other comprehensive income - - (94) - - (94)
At 31 March (747) (1,736) 351 114 206 (1,812)
The UK corporation tax rate is 19% (effective from 1 April 2017), which was,
substantively, enacted on 17 March 2020. As substantively enacted on 24 May
2021, the UK corporation tax rate will increase to 25% with effect from 1
April 2023. The impact of recalculating the deferred tax at the 25% rate was
recognised in comprehensive income in the 2022 comparative period.
The amount of the net reversal of deferred tax expected to occur next year is,
approximately, £447k (2022: £231k) relating to the timing differences
identified above.
The deferred tax asset of £166k (2022: £261k), in respect of the future tax
deduction that would be available based on the share price at the balance
sheet date compared to the share price at the date of grant of the options and
share bonus, which is used to calculate the share-based payments charge, was
recalculated in the year after initial recognition in 2022. The movement in
the deferred tax asset has been debited to other comprehensive income ("OCI")
and treated as an adjustment to profit. The share price post year end, when
the shares are exercised, may be higher/lower than at the balance sheet date;
therefore, this deferred tax asset is considered judgemental as it may not be
fully recoverable.
In addition, there is an unrecognised deferred tax asset in relation to
capital losses carried forward. The capital losses carried forward are,
approximately, £275k. The associated deferred tax asset of, approximately,
£69k has not been recognised due to the uncertainty over the recoverability
combined with the fact it is immaterial.
24. Provisions
2023 2022
£'000 £'000
At 1 April 694 741
Dilapidations acquired on acquisitions at FV 22 -
Provisions utilised during the year - (18)
Recognition of decommissioning asset 323 -
(Released)/charged to statement of comprehensive income (1) (29)
Provisions at 31 March 1,038 694
The Group has provided for property related provisions, which, include
obligations in respect of exited legacy premises and dilapidations provisions
it expects to exit within the next five years. Based on using a discount rate
of 6%, the Group has assessed the impact of discounting to be immaterial and
has not, therefore, discounted the provisions. Provisions are split in current
£323k (2022: Nil) and non-current £715k (2022: 694k).
25. Share capital
2023 2022
£'000 £'000
Allotted issued and fully paid 11,346,394 (2022: 8,564,878) Ordinary shares of 567 428
5p
The Ordinary shares carry no right to fixed income, the holders are entitled
to receive dividends as declared and are entitled to one vote per share at
shareholder meetings.
2023 2022
Shares Value Shares Value
No. £'000 No. £'000
Share Capital at 1 April 8,564,878 428 8,564,878 428
Issue of new shares on equity raise 2,757,516 138 - -
Share options exercised 24,000 1 - -
Share Capital at 31 March 11,346,394 567 8,564,878 428
At 31 March 2023, the number of shares covered by option agreements amounted
to 352,925 (2022: 248,100). At the balance sheet date, there were 72,000
(2022: 96,000) share options which had vested and remained unexercised. 24,000
(2022: Nil) options were exercised in the current year.
26. Reserves
Full details of movements in reserves are set out in the consolidated
statement of changes in equity. The total value of transaction costs incurred
that have been offset against the share premium account movement in the year
total £1,275k (2022: £Nil).
The following describes the nature and purpose of each reserve within owners'
equity.
Reserve Description and purpose
Share premium Amount subscribed for share capital in excess of nominal value
Capital redemption Amounts transferred from share capital on redemption of issued shares
Retained earnings Cumulative net gains and losses recognised in the consolidated statement of
comprehensive income
Shares held in treasury Shares held by the Group for future staff share plan awards
Foreign exchange Foreign exchange translation differences arising from the translation of the
financial statements of foreign operations
Non-controlling interest Equity attributable to non-controlling shareholders
27. Treasury shares
At 31 March 2023, the Group held 9,146 (2022: 6,946) shares in treasury with a
cost of £108k (2022: £57k). No shares have been cancelled.
2023 2022
Shares Shares
At 1 April 6,946 11,374
Purchase of shares into treasury 15,000 7,000
Transfer of shares to the All Employee Share Plan (AESP) (12,800) (11,428)
At 31 March 9,146 6,946
28. Share-based payment
The total amount charged to the income statement in 2023 in respect of
share-based payments was £551k (2022: £295k).
The company operates two long-term share incentive schemes set out below:
Long-term incentive plan (LTIP):
Normal LTIP awards of up to 125% of salary may be made to Executive Directors
and senior management.
For all participants, awards will vest after three years in accordance with
the performance conditions applicable to each grant. Options are granted with
a contractual life of ten years and with a fixed exercise price of 5p equal to
the par value of the shares or as otherwise disclosed in the Remuneration
Report.
The performance conditions will be determined and set by the Remuneration
Committee in accordance with the remuneration policy. No award will vest below
Threshold performance, and vesting will increase on a straight-line basis
between threshold, target and stretch.
On 4 October 2022, 56,000 (2022: 42,800) share options were granted to the
Executive Directors under the LTIP.
Principal assumptions 2023 2022
Weighted average share price at grant date in pence 986 1,085
Weighted average exercise price in pence 5 5
Weighted average vesting period (years) 3 3
Option life (years) 10 10
Weighted average expected life (years) 3 3
Weighted average expected volatility factor 49% 47%
Weighted average risk-free rate 2.28% 1.50%
Dividend yield 2.10% 2.50%
The expected volatility factor is based on historical share price volatility
over the three years immediately preceding the grant of the option. The
expected life is the average expected period to exercise. The risk-free rate
of return is the yield of zero-coupon UK government bonds of a term consistent
with the assumed option life.
Non-market performance conditions are incorporated into the calculation of
fair value by estimating the proportion of share options that will vest and be
exercised based on a combination of historical trends and future expected
trading performance. These are reassessed at the end of each period for each
tranche of unvested options.
Company Share Option Plan (CSOP):
CSOP awards of up to the HMRC tax approved levels of £30,000 may be made to
senior staff and Executive Directors. For all participants, awards will vest
after three years in accordance with the performance conditions applicable to
each grant.
Options are granted with a contractual life of ten years and with a fixed
exercise price equal to the market value of the shares under option at the
date of grant or as otherwise disclosed in the Remuneration Report
The performance conditions will be determined and set by the Remuneration
Committee in accordance with the remuneration policy. No award will vest below
Threshold performance, and vesting will increase on a straight-line basis
between threshold, target and stretch.
Between 4 October 2022 and 12 January 2023, 48,825 (2022: 36,750) share
options were granted to senior management under CSOP.
Principal assumptions 2023 2022
Weighted average share price at grant date in pence 1,006 1,050
Weighted average exercise price in pence 1,008 1,050
Weighted average vesting period (years) 3 3
Option life (years) 10 10
Weighted average expected life (years) 3 3
Weighted average expected volatility factor 49% 46%
Weighted average risk-free rate 2.28% 1.50%
Dividend yield 2.10% 2.50%
Movement in share options during the year
In addition to the current CSOP and LTIP there are bought forward executive
EMI options which have vested. 24,000 were exercised in the year, leaving
72,000, which remain unexercised at the balance sheet date.
2023 2023 2022 2022
Number of options Average exercise price in pence Number of options Average exercise price in pence
At 1 April 248,100 225 175,550 125
Granted 104,825 471 79,550 488
Exercised (24,000) 0.1 - -
Cancelled/lapsed - - (7,000) (707)
At 31 March 328,925 320 248,100 225
24,000 options were exercised in the year (2022: Nil) and the weighted average
share price at the date share options were exercised was 1,320p.
As at 31 March 2023, the total number of long-term incentive awards and share
options held by employees was 328,925 (2022: 248,100) as follows:
Option price pence/share Option period ending 2023 Number of options 2022 Number of options
0.1p 31 March 2027 72,000 96,000
5p - 592p 31 March 2030 74,300 74,300
5p - 1050p 31 March 2031 77,800 77,800
5p - 1254p 31 March 2032 104,825 -
At 31 March 328,925 248,100
No share options have vested in the period (2022: Nil).
All Employee Share plan (AESP)
AESP awards, of up to HMRC tax-approved levels, are given to all UK employees.
These awards vest tax free from the AESP after at least three years, but not
more than five years from the date of grant subject to continued employment.
On the 27 February 2023, 12,800 (2022: 12,250) share options were awarded to
the employees under the AESP.
The share price at the date of award was 1,160p (2022: 960p). As the awards
are, effectively, £nil cost awards, the fair value is determined to equal to
the share price at the date of grant under the Black-Scholes model. This
resulted in a share-based payments charge of £148k (2022: £118k) as part of
the total share-based payments charge.
29. Capital commitments
At 31 March 2023, there were capital commitments of £172k (2022: £303k).
30. Adjustments to profit
The Group's results are reported after several imputed non-cash charges and
non-recurring items. We have provided additional adjusted performance metrics
to aid understanding and provide clarity over the Group's performance on an
ongoing cash basis before imputed non-cash accounting charges. This is
consistent with how analysts and investors tell us they review our business
performance in presenting an adjusted profit metric adjusting for the
following items:
• Non-cash charges arising from share-based payments and the
amortisation of acquisition intangibles
• Non-recurring costs relating to acquisition costs (including fair
value adjustments and earn-out estimation changes)
• Non-recurring tax credits arising, primarily, from prior year
R&D claims and tax deductions on share options
• The movement via OCI of the deferred tax asset relating to the
future tax deduction that would be available based on the share price at the
balance sheet date compared to the share price at the date of grant of options
and share bonus
2023 2022
£'000 £'000
Reported gross profit 39,674 27,527
Adjustments to gross profit 88 168
Adjusted gross profit 39,762 27,695
Reported operated profit 9,408 3,726
Adjustments to operating profit 2,219 3,674
Adjusted operating profit 11,627 7,400
Reported operating margin percentage 7.4% 4.4%
Operating margin percentage impact of adjustments 1.8% 4.3%
Adjusted operating margin percentage 9.2% 8.7%
Reported profit before tax 8,436 3,500
Adjustments to profit before tax 2,355 3,674
Adjusted profit before tax 10,791 7,174
Reported profit after tax 6,690 2,523
Adjustments to profit after tax 1,863 3,635
Adjusted profit after tax 8,553 6,158
Reported total other comprehensive income 5,727 2,784
Adjustments to total other comprehensive income 1,957 3,374
Adjusted total other comprehensive income 7,684 6,158
2023 Components Systems Head office Total
£'000 £'000 £'000 £'000
Acquisition fair value adjustments within cost of sales - 88 - 88
Acquisition fair value adjustments, reorganisation and deal costs - 289 15 304
Decrease in deferred consideration on acquisition of Active Silicon - (326) - (326)
Amortisation of acquisition intangibles - - 1,602 1,602
Share-based payments - - 551 551
Imputed interest on deferred consideration unwind - 136 - 136
Adjustment to profit before tax - 187 2,168 2,355
Current and deferred taxation effect - (26) (466) (492)
Adjustments to profit after tax - 161 1,702 1,863
Movement of deferred tax asset in OCI re. share price impact - - 94 94
on options
Adjustments to total other comprehensive income - 161 1,796 1,957
All amortisation charges relating to acquisition intangibles have been
consistently classified into head office overheads for the current and
comparative year to provide a consistent presentation and accurate
representation of underlying divisional trading as presented to the Directors.
In evaluating our adjusted performance metric in respect of Earnings Per Share
(EPS) the board consider "Adjusted Fully Diluted EPS" to be the most
appropriate metric as our investors and the analysts who cover Solid State PLC
use this metric to monitor performance. However, we also recognise the equal
importance of the statutory metric of "Reported EPS" as the other relevant
metric (which includes the IFRS2 charge for the value gained from employees
but excludes the dilution so not to double count with the charge).
Whilst we disclose "Reported Fully Diluted EPS" and "Adjusted EPS" for
completeness in note 8 these are not considered to be as appropriate metrics
by the Board as "Reported Fully Diluted EPS" reflects a double hit to the
results of the IFRS2 charge and the dilution and "Adjusted EPS" does not
reflect either the IFRS2 charge or the dilution which clearly makes these
metric much less appropriate when assessing performance.
2022 Components Systems Head office Total
£'000 £'000 £'000 £'000
Acquisition fair value adjustments within cost of sales 168 - - 168
Acquisition fair value adjustments, reorganisation and deal costs - 533 - 533
Increase in deferred consideration on acquisition of Active Silicon - 1,650 1,650
Amortisation of acquisition intangibles - - 1,028 1,028
Share-based payments - - 295 295
Adjustment to profit before tax 168 2,183 1,323 3,674
Current and deferred taxation effect (31) (75) (221) (327)
Deferred tax rate change impact on acquisition intangibles and share-based - - 288 288
payments
Adjustments to profit after tax 137 2,108 1,390 3,635
Recognition of deferred tax asset in OCI re. share price impact on options - - (261) (261)
Adjustments to total other comprehensive income 137 2,108 1,129 3,374
Acquisition fair value adjustments within cost of sales relates to the unwind
of the IFRS3 fair value uplift on stock to selling price less cost to sell in
both periods.
Acquisition fair value adjustments, reorganisation and deal costs in the
current year and comparative period relate to transaction costs for the
acquisition of Custom Power.
31. Segment information
The Group's primary reporting format for segment information is business
segments, which reflect the management reporting structure in the Group. The
Components Division comprises Solid State Supplies Limited, Pacer LLC, Pacer
Components Limited, Willow Technologies Limited and American Electronic
Components, Inc. The Systems Division includes Steatite Limited, Custom Power
LLC, Active Silicon Limited, Active Silicon Inc. and eTech Developments
Limited.
Year ended 31 March 2023 Components division Systems division Total
£'000 £'000 Head Group
office £'000
£'000
External revenue 68,986 57,517 - 126,503
Operating profit 5,754 7,941 (4,287) 9,408
Adjusted operating profit 5,754 7,992 (2,119) 11,627
Profit before tax 5,723 7,718 (5,005) 8,436
Taxation (1,041) (1,488) 783 (1,746)
Profit after taxation 4,682 6,230 (4,222) 6,690
Consolidated statement of financial position
Assets 30,435 38,408 44,945 113,788
Liabilities (13,220) (25,331) (17,283) (55,834)
Net assets 17,215 13,077 27,662 57,954
Other
Capital expenditure:
Intangible assets 339 858 - 1,197
Intangible assets - acquisitions - 52 27,178 27,230
Tangible fixed assets 836 679 - 1,515
Tangible fixed assets - acquisitions - 991 - 991
Right-of-use assets 115 7 - 122
Right-of-use assets - acquisitions - 883 - 883
Depreciation - PPE 559 600 - 1,159
Depreciation - right-of-use assets 217 748 - 965
Amortisation 50 383 1,602 2,035
Share-based payments - - 551 551
Interest 30 222 720 972
No individual customer contributed more than 10% of the Group's revenue in the
financial year ended 31 March 2023 or the prior year.
Year ended 31 March 2022 Components division Systems division Head Total
office Group
External revenue 52,480 32,517 - 84,997
Profit before tax 4,433 2,492 (3,425) 3,500
Taxation (903) (297) 223 (977)
Profit after taxation 3,530 2,195 (3,202) 2,523
Consolidated statement of financial position
Assets 24,616 21,665 16,045 62,326
Liabilities (11,587) (14,253) (9,410) (35,250)
Net assets 13,029 7,412 6,635 27,076
Other
Capital expenditure:
Tangible assets 524 654 - 1,178
Tangible assets - acquisitions - - - -
Intangible fixed assets 268 333 601
Intangible fixed assets - acquisitions - - - -
Right-of-use assets 216 97 - 313
Right-of-use assets - acquisitions - - - -
Depreciation - PPE 331 398 - 729
Depreciation - right-of-use assets 264 499 - 763
Amortisation 20 279 1,028 1,327
Share-based payments - - 295 295
Interest 48 61 117 226
External revenue by Total assets by Net capital expenditure
location of customer location of assets by location of assets
2023 2022 2023 2022 2023 2022
£'000 £'000 £'000 £'000 £'000 £'000
United Kingdom 71,649 53,030 102,687 59,023 2,134 1,723
Rest of Europe 18,202 15,726 31 1 - -
Asia 8,811 6,542 - - - -
North America 27,205 9,175 11,070 3,302 578 56
Other 636 524 - - - -
126,503 84,997 113,788 62,326 2,712 1,779
32. Acquisition accounting for Custom Power LLC
Book value Fair value Adjustment Fair value Fair value
$'000 $'000 to Group to Group*
$'000 £'000
Intangible assets - 8,298 8,298 6,858
Property, plant and equipment 362 895 1,257 1,039
Right-of-use assets(**) - 1,069 1,069 883
Deferred tax asset - 81 81 67
Inventory 4,105 (303) 3,802 3,142
Trade and other receivables 4,368 (250) 4,118 3,403
Trade and other payables (2,305) (337) (2,642) (2,183)
Right-of-use lease liabilities(**) - (1,069) (1,069) (883)
Provision for dilapidations - (25) (25) (21)
Cash and cash equivalents 319 - 319 264
Net assets on acquisition 6,849 8,359 15,208 12,569
Goodwill on acquisition - - 24,588 20,321
Discounted consideration 39,796 32,890
Discharged by:
Cash paid on acquisition 30,001 24,795
Short-term deferred consideration 10,000 8,264
Gross consideration 40,001 33,059
Discounting (205) (169)
Discounted consideration 39,796 32,890
* Exchange rate at date of acquisition was 1.21.
** These adjustments are GAAP alignments rather than fair value adjustments.
Solid State PLC incorporated Custom Power Holdings Inc. as a new 100%-owned US
subsidiary to subsequently acquire Custom Power, LLC on 5 August 2022. Custom
Power LLC is a Company based in Orange County, California, which designs and
manufactures custom battery pack solutions. The entire membership interest,
and therefore control, of the LLC was purchased for a maximum consideration of
$45m, including $10m of deferred consideration (payable in two equal tranches
in February 2023 and August 2023) and a $5m contingent earn-out payable on
achievement of a revenue performance target.
The fair value of intangible assets recognised is in relation to the brand
"Custom Power", the open order book and the customer relationships. The
goodwill recognised represents expected synergies from combining the
operations of Custom Power LLC with those of the existing Systems Division,
expected value from incremental sales arising across the combined operation
that is not separately recognisable at the date of acquisition and the value
of the work force not recognised as an intangible asset under IFRS3 revised.
The Group acquired the membership interests of Custom Power LLC, which is a
disregarded entity for US tax, so we expect to benefit from a tax deduction in
the US in relation to the goodwill arising. The goodwill carrying value on
consolidation is not amortised, but is assessed for impairment at the end of
each reporting period. If no impairment is recognised, the initial asset
recognised for deferred taxation will unwind until it becomes a deferred tax
liability when the local deduction is fully recognised.
The revenue and profit after tax for the post-acquisition period included in
the Statement of Comprehensive Income arising from Custom Power's operations
were $19.8m (£16.7m) and $1.7m (£1.4m), respectively. If Custom Power had
been acquired on 1 April 22, the estimated values to include in the Group's
Statement of Comprehensive Income would have been revenue of $29.4m (£24.5m)
and profit after tax of $2.4m (£2.0m). The Group incurred acquisition related
costs of £786k (of which £565k was expensed in prior periods and £221k
expensed in the current period) on legal fees and due diligence costs,
included in sales, general and administration expenses.
Lloyds Bank Plc provided a $10m standby letter of credit which was fully
funded by the $10m cash on deposit. By setting aside $10m in a separate
deposit account, to minimise charges, the Group fully funded the short-term
deferred consideration. $5 million was settled in the year, leaving a balance
of $5m disclosed as a separate element of cash and cash equivalents on the
face of the consolidated balance sheet.
The final $5m of deferred contingent consideration only becomes payable if
Custom Power achieves a last 12-month revenue in excess of $37.5m within an
18-month period post acquisition. Based on the information available to
management at the year end date, this stretch hurdle is, currently, not
considered to be achievable, and the contingent consideration of $5m has been
removed from the goodwill calculations. The deferred consideration amounts
were discounted at an appropriate cost of debt and the impact was to reduce
the fair value of the consideration by $205k. The discounting will be charged
as a non-cash interest charge over the period of the deferment with £136k
charged to date.
The total cash settled to date is the initial consideration of £24.8m plus
the first $5m of deferred consideration at £4.1m.
33. Related parties
On the 8 June 2022, the Group formed a new entity, eTech Developments Limited,
registered Co. number 14159260. eTech Developments Limited is 75% owned by
Solid State PLC following an initial £150k investment. This is a new
business, which provides engineering consultancy by employing an engineering
team. The team provide power engineering services to the Group and external
customers on an arm's length basis.
eTech made sales to the Group totalling £196k (2022: £Nil) and purchases
from the Group totalling £49k (2022: £Nil). As at 31 March 2023, £60k is
owed to the Group from eTech and £8k is owed from eTech to the Group.
34. Post balance sheet events
Subsequent to the year end, the Group agreed a facility extension on the USD
overdraft facility of up to $10m to the end September 2023 in order to cover
the maximum potential impact of the NATO project's timing differences to
cashflow.
A new USA holding company, Solsta Holding Inc., was incorporated with the
intention to simplify the structure of the US Components Division legal
entities. This entity is 100% owned by Solid State Plc.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR NKNBBBBKBAOKRecent news on Solid State
See all newsRCS - Solid State PLC - Capital Markets Day
AnnouncementREG - Solid State PLC - PDMR Dealings
AnnouncementRCS - Solid State PLC - Shares Investor Webinar - Wednesday 24 April 2023
AnnouncementREG - Solid State PLC - PCA Dealings
AnnouncementREG - Solid State PLC - PCA Dealings
Announcement