REG - Strix Group PLC - Results for the year ended 31 December 2022
29/03/2023 07:00
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RNS Number : 5314U Strix Group PLC 29 March 2023
29 March 2023
Strix Group Plc
("Strix", the "Group" or the "Company")
Preliminary results for the twelve months ended 31 December 2022
Financial Summary(1)
2022 2021 Change (22 - 21)
£m £m %(4)
Revenue 106.9 119.4 -10.5%
Gross profit 41.5 47.4 -12.4%
EBITDA(2) 32.1 40.5 -20.7%
Operating profit 25.9 33.7 -23.1%
Profit before tax 22.2 32.2 -31.1%
Profit after tax 23.0 31.4 -26.8%
Net debt(3) 87.4 51.2 +70.7%
Net cash generated from operating activities 23.4 22.3 +4.9%
Basic earnings per share (pence) 10.9 15.2 -28.3%
Diluted earnings per share (pence) 10.8 14.9 -27.5%
Total dividend per share (pence) 6.00 8.35 -28.1%
1. Adjusted results exclude exceptional items, which include share based
payment transactions, COVID-19 related costs, other reorganisation and
strategic project costs. Adjusted results are non-GAAP metrics used by
management and are not an IFRS disclosure.
2. EBITDA, which is defined as earnings before finance costs, tax,
depreciation and amortisation, is a non-GAAP metric used by management and is
not an IFRS disclosure.
3. Net debt excludes the impact of IFRS 16 lease liabilities, pension
liabilities, deferred tax liabilities and earn-out provisions on satisfaction
of performance conditions.
4. Figures are calculated from the full numbers as presented in the
consolidated financial statements.
Financial Highlights
· The Group reported revenue of £106.9m, a decrease of 10.5% versus the same
period in prior year driven predominantly by a reduction in Kettle Controls
due to market environment.
· Adjusted EBITDA was £32.1m, a decrease of 20.7% versus the same period in
prior year driven by a reduction in revenue.
· Adjusted PAT was £23.0m which was in line with previous guidance given at the
trading update on 30 November 2022 (2021: £31.4m), representing a 26.8%
decrease compared to the same period last year driven by a reduced EBITDA and
an increase in SONIA through the year coupled with higher net debt post the
acquisition of Billi.
· Net debt increased to £87.4m (FY 2021: £51.2m).This represents a net
debt/adjusted EBITDA ratio (calculated on a trailing twelve-month
basis) of 2.2x.
· Adjusted basic earnings per share and adjusted diluted earnings per share were
10.9p (2021: 15.2p) and 10.8p (2021: 14.9p) respectively.
· As capital allocation decisions prioritise debt reduction, the Board is
proposing a final dividend of 3.25p per share (2021: 5.60p) which would
represent a total dividend of 6.00p per share (2021: 8.35p).
Operational Highlights
· Acquisition of Billi continues to be successfully integrated in line with plan
to achieve the identified operational benefits, and the business has opened up
new sales channels for Strix. Trading performance so far has been in line with
budget.
· Retained global kettle control market share by value at c. 56% (excluding
Russia and other impacted territories).
· Manufacturing operations in China are fully operational with efficiency
improved by 6.1% in 2022 versus 2021.
· Pipeline of new product launches through 2023 include an integrated tap in
Billi, the Ontario desktop appliance and Aurora coffee appliance.
· Updated ESG and Sustainability report published on 28 March 2023.
Strategic Highlights
· Completion of the transformational acquisition of Billi in November at a
reported multiple of 3.8x EBITDA at transaction date.
· The Appliance and Water categories now account for almost 50% of pro forma
Group revenue.
· Significant progress through the year in improving the geographic diversity of
the business reducing reliance on any one territory.
· The Company has access to a range of new sales channels including to
professional customers such as restaurants, hotels, and commercial premises
through Billi and a much improved B2C footprint.
· Strong progress through the year for Aqua Optima driven by the increasing
popularity of the Aurora range.
· New EMEA Sales Director has been appointed and Global Distributions &
Logistics Director role created to provide the leadership team with additional
expertise in commercialization and cost optimisation.
Mark Bartlett, Chief Executive Officer of Strix Group plc, said:
"Following a period of uncertainty across a number of Strix's key export
markets in Q4, recent sales data in 2023 indicates some green shoots are
appearing and the path to a return of growth is opening across all segments.
The successful integration of Billi will propel Strix into a new growth phase,
further diversifying away from the core Kettle Controls business with strong
potential for greater top line growth and improved margins going forward.
Strix continues to implement a range of strategic initiatives to minimise the
impact of the continued headwinds it is facing, which includes a functional
streamlining programme and a focus on the reduction of inventory in order to
maximise cash generation for the Group. Strix will prioritise debt reduction
and free cash flow generation with a clear plan to get net debt / EBITDA to
below 2.0x during 2023 and to below 1.5x during 2024."
For further enquiries, please contact:
Strix Group Plc +44 (0) 1624 829829
Mark Bartlett, CEO
Raudres Wong, CFO
Zeus (Nominated Advisor and Joint Broker) +44 (0) 20 3829 5000
Nick Cowles / Jamie Peel / Jordan Warburton (Investment Banking)
Stifel Nicolaus Europe Limited (Joint Broker) +44 (0) 20 7710 7600
Matthew Blawat / Francis North
IFC Advisory Limited (Financial PR and IR) +44 (0) 20 3934 6630
Graham Herring / Tim Metcalfe / Florence Chandler
ABOUT STRIX GROUP PLC
Isle of Man based Strix, is a global leader in the design, manufacture and
supply of kettle safety controls and other components and devices involving
water heating and temperature control, steam management and water filtration.
Strix's core product range comprises a variety of safety controls for small
domestic appliances, primarily kettles. Kettle safety controls require
precision engineering and intricate knowledge of material properties in order
to repeatedly function correctly. Strix has built up market leading capability
and know-how in this field since being founded in 1982.
Strix trades on the AIM Market of the London Stock Exchange (AIM: KETL).
CEO's report:
Financial performance
The Group reported revenue of £106.9m, a decrease of 10.5% versus the same
period in prior year driven predominantly by a reduction in Kettle Controls
due to market environment.
Adjusted profit after tax was £23.0m (2021: £31.4m), representing a 26.8%
decrease compared to the same period last year driven by a reduced EBITDA and
an increase in SONIA through the year coupled with higher net debt post the
successful acquisition of Billi.
Adjusted operating profit margins were diluted by 4.0% to 24.2% (FY 2021:
28.2%) compared to last year. The main reasons for the dilution in margin are
attributable to lower kettle controls sales in the regulated markets that
command higher margins, partially offset by a price increase implemented in
the second quarter of 2022 across all kettle controls. In addition, the
water and the appliances categories showed margin improvements as appliances
that were launched in 2021 had a better sales mix, supported further by
Billi's contributions post completion.
The Group's net debt increased to £87.4m (FY 2021: £51.2m).This represents a
net debt/adjusted EBITDA ratio (calculated on a trailing twelve-month
basis) of 2.2x.
Strix is focused on its highly cash generative operating model and the
management team will prioritise on the integration and the unlocking of
anticipated revenue and cost synergies following the acquisition of Billi.
There will be no further M&A activity or investment into new factory
builds, with significantly reduced capex and working capital over the medium
term. Capital allocation decisions will prioritise debt reduction and free
cash flow generation with a clear plan to get net debt / EBITDA to below 2.0x
during 2023 and to below 1.5x during 2024.
As capital allocation decisions prioritised debt reduction, the Board decided
after reviewing the level of net debt to propose a final dividend of 3.25p per
share (2021: 5.60p) which would represent a total dividend of 6.00p per share
(2021: 8.35p).
Kettle control category
Overall, the kettle control category reported a decrease in revenue of 19.9%
to £68.2m in 2022.
The key characteristic in 2022 was a continual and unprecedented worsening of
the macro backdrop in Q4, but in Q1 signs of green shoots are returning.
Overall market softened by c.18% in 2022, with volume and value reductions
experienced in all sectors. Key negative drivers included the cost of living
crisis in Regulated markets, COVID shutdowns in China and the Ukraine/Russia
crisis impacting Less Regulated markets.
In line with western government sanctions, Strix's key global brands withdrew
from Russia (a significant market for them) and Strix also stopped trading
directly with Russian brands. It is worth noting that excluding the effected
regions, Strix's market share in Kettle Controls remained at c. 56%.
The Kettle Safety Controls category remains a resilient business and there
is evidence of green shoots returning in Q1 2023.
These include:-
· Estimated Kettle Sales through major online retailer channel shows
January and February 2023 grew by 17% versus the same period last year;
· After reduced usage at Strix's top five OEMs in H2 2022, the Group is
now seeing a recovery in Q1 2023 which is particularly reassuring as this has
historically been a quieter trading period; and
· Signs of a pipeline refill are returning. Historical data shows a
small increase in consumer demand can have an outsized effect on the demand
for Strix's components.
Strix has also continued to focus product development on opportunities and
design improvements in a sustainable way to reduce the overall manufactured
product footprint that will further strengthen Strix's position and support
its market share aspirations.
Examples include the Series Z controls development which is maturing, with the
objective to drive cost and customer benefits and the roll out of new
electronic kettle features & designs with a focus on design trends,
consumer energy saving and OEM cost benefits.
Appliance category
Overall, the appliance category reported growth in revenue of 12.8% to £14.5m
in 2022.
Strix's Aqua Optima brand recorded 87% growth in appliances, driven through
geographical expansion, successful Aqua Optima expansion across Europe and
North America, Strix/LAICA cross selling, and new innovative product launches.
The Billi acquisition helps diversify positioning with a premium category
offering through new channels as well as giving cross-selling opportunities to
drive additional growth.
Other notable achievements included:-
· Aurora (Strix's Instant Flow Heater technology, delivering auto-dispensed hot,
boiled, and chilled filtered water at the touch of a button) won housewares
award: Sustainable Product of the Year 2022;
· Successful launch of the world's fastest sterilizer-dryer with a leading USA
Baby Care brand; and
· Successful launch of Strix innovations under the LAICA brand with the launch
of the Dual Flo range. This newly launched product utilises superior, energy
efficient technology and is believed to be the only combined kettle and one
cup hot water dispenser.
Key growth initiatives for the category will be Ontario (market leading
beverage station range covering hot, chilled, sparkling and coffee products),
geographic expansion, optimising product mix and vertical integration.
Water category
Overall, the water category reported a growth in revenue of 12.8% to £24.1m
in 2022.
Both Aqua Optima & LAICA water brands have seen growth year on year due to
initial geographical expansion via Amazon sales outperforming the private
label business.
Strix now manufactures the majority of its filters in-house in two locations
freeing us from 3(rd) party risk, whilst allowing a new level of flexibility
to offer our customers.
Integration of Billi into the portfolio will enhance the total water solution
offering for Strix and unlocks new opportunities in the 'professional' market.
Key growth initiatives for the category will be geographic expansion (cross
selling existing LAICA & Aqua Optima products into new territories),
coffee filtration expertise and using private label water products as a way to
open doors into large retailers for other categories.
Transformational acquisition of Billi
Billi is a leading brand in Australia for the supply of premium instant
boiling, chilled and sparking filtered water systems. A clear #2 player in the
space within Australia, New Zealand and UK. With 30+ year history, Billi is
renowned for its premium and innovative products. Billi has a successful
history of growth, with double digit revenue CAGR over the past 5 years,
attractive margins and is highly cash generative, delivering cash conversion
of >70%.
Acquisition of Billi was for £38.9m cash and completed on 30 November
following regulatory approval in Australia, New Zealand and the UK. Billi was
acquired from Culligan following its merger with Waterlogic; the divestment
was a condition of that merger. The acquisition multiple was 3.8x EBITDA
reflecting the unique circumstances that Culligan found itself in and the
progress Strix had made with the competition regulator in Australia, New
Zealand and the UK . As reported in the press, there were other bidders at
significantly higher valuations than Strix even at the very end of the
process. The transaction was funded through a £13.0m equity raise and debt
refinance consisting of an extension of the current RCF and a new acquisition
facility.
Overview of strategic rationale
The acquisition materially changes the earnings profile of the Group,
accelerating growth plans for the Water & Appliance categories and
supporting the medium-term ambition.
It adds well developed and premium products in the high growth and
strategically important hot tap market and increases Strix's position and
portfolio of water dispenser systems. The Board expects Strix's existing
technology, resource and expertise can be used to further enhance Billi's new
product development roadmap.
Efficiencies were identified across Billi's product lifecycle and will be
enhanced utilising Strix's Chinese operation to improve procurement,
insourcing of certain key parts, and consolidation of the marketing group.
There are also opportunities for further organic growth. These include
residential sales, new product development particularly in sparkling,
internationalising Billi's revenue stream through Strix's global footprint,
cross selling Strix products into commercial applications and growing
aftermarket sales.
Progress since completion
The acquisition of Billi continues to be successfully integrated in line with
plan to achieve the identified operational benefits, as the business opened up
new sales channels for Strix.
The trading performance so far has been in line with budget.
Very positive progress has been made at Billi UK with elements of the TSA
already removed:-
· Head office established in Wolverhampton with all staff now transferred;
· Showroom in London (Farringdon) due to be signed imminently;
· Stock to be moved into Strix storage locations during March / April;
· All HR functions now managed by Strix HR team; and
· Agreed to move forward with Microsoft Dynamics for their ERP system with
target completion in July.
Solid order book for Q1:-
· New Zealand secured their largest ever contract to a hospital in the North of
the island;
· UK and Australia secured February revenue budget with encouraging 3 month
& 12 month pipeline; and
· ROW also secured February revenues.
NPD on track for launch in Q2. This will be a major opportunity for all
markets, particularly within the residential sector.
Good progress has also been made with new sites identified as Strix procures
smaller storage locations in New South Wales, Western Australia and South
Australia.
Barriers to entry and defence of intellectual property
Strix constantly assesses the risks posed by competitive threats and sees the
real benefits of market disruption which drives its determination to
constantly evolve its innovative technologies in a sustainable way by
investing in its portfolio of intellectual property to protect its new
products and technologies.
The Group actively monitors the markets in which its operates for violation of
its intellectual property rights. Strix has unique relationships with its
brands, OEMs and retailers and provides its support across the value chain and
throughout the product lifecycle, including product design and advice on
specification and manufacturing solutions. These value-added services and
existing strong relationships ensure brands, OEMs and retailers continue to
rely on Strix's components and support.
Strix remains committed to consumer safety and continues to prompt regulatory
enforcement authorities to remove unsafe and poor quality products from its
major markets. Nine such actions were undertaken in 2021 resulting in product
recalls and withdrawal of kettles from Bulgaria. Defence of intellectual
property and regulatory enforcement remain core activities of its business and
there have now been 66 in total since 2017 until the end of 2021, with 4
further regulatory and 3 intellectual property actions conducted in 2022.
Sustainability
Strix core products are associated with the consumption of critical resources,
primarily electricity and water, hence Strix's drive for continual improvement
has aligned it with a sustainability led agenda. Recent years have seen an
increase in the emphasis and broadening of the scope of its sustainability
agenda. This was highlighted by the adoption of a wide range of KPIs and
associated targets in 2021.
One of the most challenging and differentiating goals is to achieve Scope
1&2 net zero by 2023. Key elements have been put in place with long term
renewable power contracts for all key facilities and head office along with
investment in solar capacity. Indeed, Strix now expects its own renewable
sources to generate around 10% of the Group's total energy requirements. As a
consequence, the group started 2023 in-line with its net zero agenda. This is
increasingly important as its customers look to assess their own emissions
footprint, of which Strix forms part of their Scope 3 inventory. Strix's
position as a leader in low emissions therefore offers a potential commercial
advantage over its competition. Efforts are being expanded into analysing its
own Scope 3 inventory in 2023 to fully embrace its extended emissions chain.
This leads to additional constructive conversation with suppliers and
customers including re-assessment of operational and supply chain practices.
The Group's sustainability agenda is sympathetic to changing consumer trends
and hence is key for driving the roadmap and pace of new product development.
The Group's sustainability strategy and adopted KPIs are generating greater
emphasis and efforts on a broad range of aspects. Employee training has been a
focus with significant increase in training hours assisted by adoption of a
more structured approach, including Kallidus e-learning system and a new
training management structure in China. Health & Safety continues to be a
top priority with the three year average trend continuing in a positive
direction. The Company values its employees and their contribution and looks
to develop their wellbeing reflected in improved facilities offered by the new
Chinese facility, whilst the West has seen changes in the working week, which
has also increased holiday entitlement, and the introduction of two charity
days a year.
Strix's sustainability agenda for 2023 remains high on the agenda as it
delivers on its Scope 1&2 targets, analyses its Scope 3 emissions and
continues to focus on its other KPIs. The pace and delivery of these goals
reflects the strong employee ethos and commitment to the agenda.
Dividend policy
As capital allocation decisions prioritised debt reduction, the Board decided
after reviewing the level of the net debt to propose a final dividend of 3.25p
per share (2021: 5.60p) which would represent a total dividend of 6.00p per
share (2021: 8.35p).
The final dividend will be paid on 11 August 2023 to shareholders on the
register at 30 June 2023 and the shares will trade ex-dividend from 29 June
2023.
Operations review
The factory within Zengcheng district in Guangzhou, China, continues to be
fully operational with efficiency improved by 6.1% in 2022 versus 2021.
A new EMEA Sales Director was appointed and a new Global Distributions &
Logistics Director role created to provide the leadership team with additional
expertise in commercialisation and cost optimisation.
An updated ESG and Sustainability report will be published on 29 March 2023.
Strix continues to implement a range of strategic initiatives to minimise the
impact of the headwinds it is facing, which includes a functional streamlining
programme and a focus on the reduction of inventory in order to maximise cash
generation for the Group.
Financial Position
Strix is focused on its highly cash generative operating model and the
management team will prioritise the integration and unlocking the anticipated
revenue and cost synergies following the acquisition of Billi.
There will be no further M&A activity or investment into new factory
builds, with significantly reduced capex and working capital over the medium
term. Capital allocation decisions will prioritise debt reduction and free
cash flow generation with a clear plan to get net debt / EBITDA to below 2.0x
during 2023 and to below 1.5x during 2024.
Over the past few years, Strix has made significant investments in
acquisitions, a new factory and working capital. A primary driver of the
increased exceptional costs is due to the number of acquisitions and one-off
costs relating to capital expenditures.
HaloSource was acquired in 2019 and contributed to the exceptional costs
through the associated transaction fees. LAICA was acquired in 2020 and
included an earn out clause which caused exceptional costs in outer years,
along with the transaction fees in 2020. The new factory in China was
completed in 2021, adding to exceptional costs from large scale capital
expenditure. Most recently, Billi was acquired and its transaction fees
contributed to the 2022 total. As these one-off costs are not recurring, we
expect cash conversion to materially improve in coming years.
Net working capital which includes inventories, trade and other receivables,
and trade and other payables (including tax liabilities, but excluding
short-term portions of long-term liabilities) increased to £27.6m (FY 2021:
£18.0m), an increase on £9.6m. The main driver behind this is an increase in
net working capital of c.£5.9m (including tax liabilities) recognised as part
of the acquisition of Billi. The rest of the increase relates to slightly
higher inventory levels from prior year as the Group looks to fuel anticipated
increase in demand in the new year, evident from green shoots returning in Q1
2023. Decreases in trade and other payables were due to lower procurement
activities, partially offset by decreases in trade and other receivables which
were largely due to collection of VAT receivables from the Chinese government
relating to the construction and completion of the new factory in China.
Outlook
Following a period of uncertainty across a number of Strix's key export
markets in Q4, recent sales data in 2023 indicates that some green shoots are
appearing and the path to a return of growth is opening across all segments:-
· It is anticipated that the Chinese economy will rebound in 2023, given the
change in COVID policy;
· Estimated Kettle Sales through a major online retailer channel shows January
2023 grew by 17% versus the same period last year;
· After usage at Strix's top five OEMs in H2 2022, the Group is now seeing a
recovery in Q1 2023 which is reassuring as this has historically been a
quieter trading period;
· Signs of a pipeline refill are returning, as a small increase in consumer
demand can have an outsized effect on the demand for Strix's components; and
· The Group has delivered consumer goods business growth, despite the underlying
market softening and positive contracts secured in Q1 2023.
Strix continues to implement a range of strategic initiatives to minimise the
impact of the headwinds it is facing, which includes a functional streamlining
programme and a focus on the reduction of inventory in order to maximise cash
generation for the Group.
The successful integration of Billi will propel Strix into a new growth phase,
further diversifying away from the core Kettle Controls business with strong
potential for greater top line growth and improved margins going forward.
Chief financial officer's review
Adjusted results(1) Reported results
FY 2022 FY 2021 Change % FY 2022 FY 2021 Change %
(22 - 21)
(22 - 21)
£m £m %(4) £m £m %(4)
Revenue 106.9 119.4 -10.5% 106.9 119.4 -10.5%
Gross profit 41.5 47.4 -12.4% 40.7 43.8 -7.1%
EBITDA(2) 32.1 40.5 -20.7% 26.2 30.6 -14.4%
Operating profit 25.9 33.7 -23.1% 19.9 23.7 -16.0%
Profit before tax 22.2 32.2 -31.1% 16.1 21.5 -25.1%
Profit after tax 23.0 31.4 -26.8% 16.9 20.6 -18.0%
Net debt(3) 87.4 51.2 +70.7% 87.4 51.2 +70.7%
Net cash generated from operating activities 23.4 22.3 +4.9% 23.4 22.3 +4.9%
Basic earnings per share (pence) 10.9 15.2 -28.3% 8.0 10.0 -20.0%
Diluted earnings per share (pence) 10.8 14.9 -27.5% 7.9 9.8 -19.4%
Total dividend per share (pence) 6.00 8.35 -28.1% 6.00 8.35 -28.1%
1. Adjusted results exclude exceptional items, which include share-based payment
transactions, COVID-19 related costs, and other reorganisation and strategic
project costs. Adjusted results are non-GAAP metrics used by management and
are not an IFRS disclosure. A table which shows both Adjusted and Reported
results is included in the Chief Financial Officer's review.
2. EBITDA, which is defined as earnings before finance costs, tax, depreciation
and amortisation, is a non-GAAP metric used by management and is not an IFRS
disclosure.
3. Net debt excludes the impact of IFRS 16 lease liabilities, pension
liabilities, deferred tax liabilities and earn-out provisions on satisfaction
of performance conditions and providing post-combination services. Net debt
including earn-out provisions was £94.9m.
4. Figures are calculated from the full numbers as presented in the consolidated
financial statements.
Financial performance
Revenues decreased by 10.5% year on year to £106.9m (FY 2021 £119.4m). This
was predominantly due to a drop in sales within our kettle controls category.
As stated previously in our trading updates released both in July 2022 and
November 2022, revenues have been adversely impacted by the ongoing conflict
in Ukraine, and the disruptive effect of ongoing lockdowns which were enforced
in China throughout most of 2022, impacting two of our top five major OEM
customers. This resulted in a decrease of c.£16.9m (19.8% decrease) for
kettle controls. Despite the drop in overall sales, the water category showed
an improvement in sales from last year reflecting the success of our
performance from online market place launches as Strix continues to expand its
online presence, together with contributions from post-acquisition sales in
Billi. The appliances category also showed an uplift predominantly due to
Billi's acquisition, where organic Strix appliance revenues were flat against
a market that declined.
Adjusted gross profit decreased by 12.4% to £41.5m (FY 2021: £47.4m), in
most part due to the impact of revenues for kettle controls falling as
described above. The decrease was slightly offset by increases for both the
water and appliances categories of £1.0m (13.8% increase) and £0.9m (18.0%
increase) respectively, reflective of the increases in sales in these
categories as described above. Reported gross profits decreased by 7.1% to
£40.7m (FY 2021: £43.8m).
Adjusted gross profit margin in FY 2022 was 38.8% (FY 2021: 39.7%), showing a
small margin dilution of 0.9% compared to last year. This dilution is mainly
attributable to lower kettle controls sales in the regulated markets that
command higher margins but helped partially by the price increase implemented
in the second quarter of FY 2022 across all kettle controls. The dilution in
kettle controls was partially compensated by the water and the appliances
categories that showed margin improvements of 0.3% and 1.7% respectively. The
appliances that were launched in FY 2021 had better sales mixes in FY 2022,
and together Billi's contributions post acquisition of one month, both helped
to drive better margins.
Adjusted EBITDA was £32.1m (FY 2021: £40.5m), showing a decrease of 20.7%
compared to last year. The decrease is directly attributable to the decrease
in revenues as described above. Adjusted EBITDA is defined as profit before
depreciation, amortisation, finance costs, finance income, taxation, and
exceptional items including share based payments. Reported EBITDA decreased by
14.4% to £26.2m (FY 2021: £30.6m).
Adjusted EBITDA margin in FY 2022 was 30.0% (FY 2021: 33.9%), representing a
margin dilution of 3.9%. In addition to the margin dilution in adjusted gross
profit margins described above, other various factors which then contributed
to the dilution of adjusted EBITDA margins included, amongst others:
· Billi costs incurred post acquisition,
· investment in human resources in our commercial areas to meet medium-term
targets,
· higher advertising and promotional costs as the Group continued to further
promote water and appliances products in the market, and
· higher stock handling and outward carriage and freight costs due to global
inflationary pressures experienced in the current year.
Adjusted operating profits decreased by 23.1% to £25.9m (FY 2021: £33.7m), a
decrease of £7.8m, attributable mainly to the drop in revenues. Reported
operating profits decreased by 16.0% to £19.9m (FY 2021: £23.7m) after
deducting exceptional costs of £5.9m (FY 2021: £9.9m) which decreased mainly
due to reasons described in the "Costs" section further below.
Adjusted operating profit margins were diluted by 4.0% to 24.2% (FY 2021:
28.2%) compared to last year. Main reasons for the dilution in margin are the
same as those attributable to the dilution in adjusted EBITDA margins
described earlier above. Despite the margin dilution, as disclosed in the
interim results released in September 2022, accounting estimates changes were
made during the year relating to the reassessment of the useful lives of
certain production and other assets which resulted in lower depreciation and
amortisation charges of c.£1.8m being recognised in the current year compared
to last year (excluding the change of accounting estimates, adjusted operating
profit margins dilution year over year is 4.8%). Refer to notes 2, 11 and 12
of the consolidated financial statements below for full disclosures of the
change in accounting estimates.
Adjusted profit before tax was £22.2m (FY 2021: £32.2m), a decrease of
£10.0m (31.1% decrease) from last year. This is attributable to the reasons
stated above for decreases in operating profit, and also increases in net
finance costs. Net finance costs (excluding the impact of exceptional finance
costs of £0.2m (FY 2021: £0.8m) relating to the discount unwinding of the
present value of contingent consideration recognised on acquisition of LAICA
in 2020) increased by £2.3m from last year due to an increase in the net debt
to fund the Billi acquisition and a higher interest rates environment.
Reported profit before tax was £16.1m (FY 2021: £21.5m).
Adjusted profit after tax was £23.0m (FY 2021: £31.4m), a decrease of £8.4m
(26.8% decrease). The tax expense significantly decreased in the current year
mainly due to tax incentive credits granted in Italy during the year, and
continued adoption of certain tax measures in China with the move of
operations to the new factory location in 2021 which prompted the release of
previous years' tax provisions. Reported profit after tax was £16.9m (FY
2021: £20.6m).
Costs
Costs in FY 2022 generally decreased across the board compared to the prior
year, mainly reflective of the decrease in the top line revenues.
Cost of sales (excluding exceptional costs) decreased by 9.2% to £65.4m (FY
2021: £72.0m), in line with the decrease in revenues. Positive measures taken
to counter the costs pressure included price increases implemented on our
kettle controls and water filtration products in the first half of the year,
improved margins in our appliances category, and efficiencies realized from
use of automation and lean production processes.
Distributions costs increased by 18.1% to £10.8m (FY 2021: £9.2m) mainly due
to inflationary pressures causing higher stock handling costs, higher outward
carriage and freight costs, higher payroll costs for the Group's sales and
marketing function, and increased advertising and promotional costs as we
continue our drive to expand our reach in the market for our water and
appliance products. Billi's consolidation of one month also contributed to
the increase. Strix's organic distribution costs increased by 16%.
Administration costs (excluding exceptional costs) increased by 9.0% to £5.6m
(FY 2021: £5.1m), increasing mainly due to costs incurred in Billi post
acquisition. Strix's organic administration costs has reduced modestly by
c.1%.
Exceptional costs (including exceptional finance costs for the discount
unwinding of the present value of contingent consideration recognised on
acquisition of LAICA in 2020, which are included in net finance costs)
decreased by 43% to £6.1m (FY 2021: £10.7m). As previously stated in the
interim results released in September 2022, due the completion of the new
manufacturing plant in China last year, there were no material factory-related
exceptional costs incurred in the current year, which is the main reason for
the decrease. Exceptional costs incurred in the current year mainly related to
the accrual of the employment earn-out costs payable in 2023 to vendor
shareholders of LAICA per the supplemental consulting agreement signed at
acquisition, and costs relating to the Billi acquisition. Other exceptional
items include disaster recovery costs from the cyber incident reported in Feb
2022, COVID-related costs due to lockdowns in China in the earlier part of the
current year, and reorganisation costs relating to internal streamlining.
Cash flow
Cashflows from operating activities showed a modest improvement of £1.1m
despite the softening of trading performance. This is largely due to the
improvement in the changes of net working capital (£8.8m), that largely
offset the downside of cashflows from operating profit (£8.4m).
Movements in net working capital showed a decrease in cash outflows compared
to the prior year. Net working capital cash outflows decreased from £11.4m
in FY 2021 to £2.6m in FY 2022. The decrease in net cash outflows from net
working capital were mainly due to:
· Stocks: diligent measures were put in place to optimise Strix's Core supply
chains and procurement levels, including manufacturing and in-sourcing, and
this resulted in a reduction of stock-related cash outflows to £0.7m vs prior
year cash outflows of £5.3m. The increase of stocks in Billi was c.£0.5m
post acquisition. This resulted in a total cash outflow of stock in the
current year of £1.2m to fuel anticipated increase in demand in the new year,
evident from green shoots returning in Q1 2023.
· Debtors: a significant improvement in debtor cash flows due to concerted
efforts to tighten up accounts receivables collections and to also collect
on c.£4.0m of new factory-related VAT from the Chinese government in the
year, slightly offset by increases in debtor balances in Billi post
acquisition (c.£0.8m);
· Creditors: the significant improvements in cash flows from inventories and
debtors were however partially offset (marginally) by lower creditors due to
lower procurement activities.
Tax-related cash outflows decreased from £1.9m in FY 2021 to £1.2m in FY
2022 mainly due to tax incentive credits granted in Italy.
Cash outflows for investing activities significantly increased in the current
year from £17.0m in FY 2021 to £47.8m in FY 2022 mainly due to the
acquisition of Billi, which was paid for in cash and funded through
refinancing of our revolving credit facility (see next paragraph below). This
was partially offset by a decrease in capital expenditures because of the new
Chinese manufacturing plant which was completed in the second half of the
prior year.
Cash inflows for financing activities significantly increased by £37.1m
compared to the prior year, driven by an increase in the net debt from
refinancing of our revolving credit facility to fund the acquisition of Billi.
Balance Sheet
Property, plant and equipment increased to £47.4m (FY 2021: £42.8m),
presenting a net increase of £4.6m (11% increase). Part of the increase,
amounting to £3.4m, is attributable to assets recognised as part of the
acquisition of Billi. The remainder of the increase in property, plant and
equipment is attributable to (1) additions to plant and machinery and
production tools of £3.8m for improvement of automation and production
efficiencies in the new factory, and an increase of fixtures, fittings,
equipment (including computer hardware), motor vehicles and right-of-use
assets totaling £2.1m, (2) partially offset de-recognition of assets worth
£0.7m, a significantly amount of this being right-of-use assets from
streamlining of offices overseas, and then also depreciation charges of £4.2m
(FY 2021: £4.6m).
Intangible assets increased to £73.4m (FY 2021: £30.5m) reflecting a net
increase of £42.9m. The net increase is mainly due to intangible assets
(including goodwill) of c.£40.1m recognized in the current year as part of
the purchase price allocation (PPA) exercise from the acquisition of Billi.
Other notable additions to intangible assets were relating to capitalised
development costs from new product development projects of circa £3.3m, and
computer software and other intangible asset additions of circa £0.5m. The
total amortisation charges were £2.1m (FY 2021: £2.3m), and foreign currency
movements of £1.1m were recognised on translation of intangible assets
denominated in foreign currencies.
Net working capital balance which includes inventories, trade and other
receivables, and trade and other payables (including tax liabilities, but
excluding short-term portions of long-term liabilities) increased to £27.6m
(FY 2021: £18.0m), an increase on £9.6m. The main driver behind this is an
increase in net working capital c.£5.9m (including tax liabilities)
recognised as part of the acquisition of Billi. The rest of the increase
relates to taxes, foreign exchange revaluation, inventory and creditors
movements as largely explained above in the cash flow section.
Non-current liabilities (including short-term portions) increased to £141.6m
(FY 2021: £85.0m), an increase of £56.6m, which is mainly driven by the
further drawdowns in the year from the revolving credit facility to fund the
acquisition of Billi and for payment of outstanding amounts accrued as
contingent consideration (earn-out provisions set up in FY 2020) payable in FY
2023 to the previous owners of LAICA upon meeting certain performance and
employment conditions.
Net debt
The Group's net debt position, excluding earn-out provisions, as at 31
December 2022 increased to £87.4m (FY 2021: £51.2m).
Total committed debt facilities, net of arrangement fees, at 31(st) December
2022 amounted to £117.8m, giving a liquidity pool of £30.4m. Net debt
equated to 2.18 times trailing twelve months' EBITDA, which compares
favourably to our debt covenant threshold of 3.50 times.
Dividend
Given the increase in net debt due to the strategic acquisition of Billi, and
with the high interest rates environment, the Board continues to take
precautions to balance the capital allocation priorities. To be prudent, the
Board has decided to declare a final dividend of 3.25p per share (FY 2021:
5.60p). With an interim dividend paid on October 2022, the total dividend
declared for FY 2022 is 6.00p per share (FY 2021: 8.35p per share).
The final dividend will be paid on 11 August 2023 to shareholders on the
register at 30 June 2023 and the shares will trade ex-dividend from 29 June
2023.
Consolidated statement of comprehensive income
for the year ended 31 December 2022
Note 2022 2021
£000s £000s
Revenue 7 106,920 119,410
Cost of sales - before exceptional items (65,395) (71,986)
Cost of sales - exceptional items 6 (847) (3,578)
Cost of sales (66,242) (75,564)
Gross profit 40,678 43,846
Distribution costs (10,824) (9,168)
Administrative expenses - before exceptional items (5,570) (5,107)
Administrative expenses - exceptional items 6 (5,101) (6,363)
Administrative expenses (10,671) (11,470)
Share of losses from joint ventures (18) (50)
Other operating income 751 562
Operating profit 19,916 23,720
Analysed as:
Adjusted EBITDA(1) 32,128 40,540
Amortisation 11 (2,063) (2,310)
Depreciation 12 (4,201) (4,569)
Exceptional items 6 (5,948) (9,941)
Operating profit 19,916 23,720
Finance costs 8 (3,925) (2,226)
Finance income 59 13
Profit before taxation 16,050 21,507
Income tax credit / (expense) 9 805 (860)
Profit for the year 16,855 20,647
Other comprehensive income/(expense)
Items that may be reclassified to profit or loss:
Exchange differences on translation of foreign operations 1,495 (1,693)
Total comprehensive income for the year 18,350 18,954
Profit for the year attributable to:
Equity holders of the Company 16,790 20,599
Non-controlling interests 65 48
16,855 20,647
Total comprehensive income for the year attributable to:
Equity holders of the Company 18,324 18,736
Non-controlling interests 26 218
18,350 18,954
Earnings per share (pence)
Basic 10 8.0 10.0
Diluted 10 7.9 9.8
(1) Adjusted EBITDA, which is defined as earnings before finance costs, tax,
depreciation, amortisation, and exceptional items, is a non-GAAP metric used
by management and is not an IFRS disclosure
Consolidated statement of financial position
as at 31 December 2022
Note 2022 2021
ASSETS £000s £000s
Non-current assets
Intangible assets 11 73,374 30,468
Property, plant and equipment 12 47,364 42,763
Investments in joint ventures 19 28
Net investments in finance leases 16 15
Total non-current assets 120,773 73,274
Current assets
Inventories 15 27,702 20,022
Trade and other receivables 16 29,791 25,511
Current income tax receivable 16 497 -
Cash and cash equivalents 17 30,443 19,670
Total current assets 88,433 65,203
Total assets 209,206 138,477
EQUITY AND LIABILITIES
Equity
Share capital and share premium 24 23,861 13,139
Share based payment reserve 23 202 2,039
Retained earnings 12,479 10,146
Non-controlling interests 707 681
Total equity 37,249 26,005
Current liabilities
Trade and other payables 18 29,963 25,886
Borrowings 19 14,734 1,064
Lease liabilities 26 1,069 773
Contingent consideration 14 7,532 6,082
Current income tax liabilities 18 444 1,631
Total current liabilities 53,742 35,436
Non-current liabilities
Lease liabilities 26 2,819 2,598
Deferred tax liability 9 11,387 2,303
Borrowings 19 103,092 69,782
Contingent consideration 14 - 1,382
Post-employment benefits 5(c) 917 971
Total non-current liabilities 118,215 77,036
Total liabilities 171,957 112,472
Total equity and liabilities 209,206 138,477
Consolidated statement of changes in equity
for the year ended 31 December 2022
Share capital and share premium Share based payment reserve Retained (deficit) / earnings Total Equity attributable to owners Non-controlling interests Total Equity
£000s £000s £000s £000s £000s £000s
Balance at 1 January 2021 13,130 1,913 6,290 21,333 716 22,049
Profit for the year - - 20,599 20,599 48 20,647
Other comprehensive income / (expenses) - - (1,863) (1,863) 170 (1,693)
Total comprehensive income for the year - - 18,736 18,736 218 18,954
Dividends paid (note 25) - - (16,510) (16,510) - (16,510)
Dividends paid to non-controlling interests - - 253 253 (253) -
Transfers between reserves (note 23) 9 (1,249) 1,240 - - -
Share based payment transactions (note 23) - 1,549 - 1,549 - 1,549
Total transactions with owners recognised directly in equity 9 300 (15,017) (14,708) (253) (14,961)
Other transactions recognised directly in equity (note 23) - (174) 137 (37) - (37)
Balance at 1 January 2022 13,139 2,039 10,146 25,324 681 26,005
Profit for the year - - 16,790 16,790 65 16,855
Other comprehensive income / (expenses) - - 1,534 1,534 (39) 1,495
Total comprehensive income for the year - - 18,324 18,324 26 18,350
Dividends paid (note 25) - - (17,300) (17,300) - (17,300)
Share-based payment transactions (note 23) - (491) - (491) - (491)
Transfers between reserves (note 23) 7 (1,210) 1,203 - - -
Issue of shares (note 24) 13,000 - - 13,000 - 13,000
Transaction costs (note 24) (2,285) - - (2,285) - (2,285)
Total transactions with equity holders recognised directly in equity 10,722 (1,701) (16,097) (7,076) - (7,076)
Other transactions recognised directly in equity (note 23) - (136) 106 (30) - (30)
Balance at 31 December 2022 23,861 202 12,479 36,542 707 37,249
Consolidated statement of cash flows
for the year ended 31 December 2022
2022 2021
Note £000s £000s
Cash flows from operating activities
Cash generated from operations 27 24,567 24,206
Tax paid (1,204) (1,916)
Net cash generated from operating activities 23,363 22,290
Cash flows from investing activities
Purchase of property, plant and equipment (4,749) (12,049)
Capitalised development costs 11 (3,326) (3,609)
Purchase of LAICA S.p.A (deferred consideration) (1,671) (1,605)
Purchase of Billi, net of cash acquired 14 (37,658) -
Purchase of other intangibles 11 (484) (1,487)
Proceeds on sale of property, plant and equipment - 1,750
Finance income 59 13
Net cash used in investing activities (47,829) (16,987)
Cash flows from financing activities
Drawdowns under credit facility 19 46,487 24,000
Repayment of borrowings 19 - (5,820)
Finance costs paid 19 (3,263) (1,170)
Principal elements of lease payments 26 (833) (1,562)
Proceeds from issue of new shares, net of issuance transaction costs 24 10,715 -
Dividends paid 25 (17,300) (16,510)
Dividends paid to non-controlling interests - (254)
Net cash used in financing activities 35,806 (1,316)
Net increase in cash and cash equivalents 11,340 3,987
Cash and cash equivalents at the beginning of the year 19,670 15,446
Effects of foreign exchange on cash and cash equivalents (567) 237
Cash and cash equivalents at the end of the year 30,443 19,670
Notes to the consolidated financial statements
for the year ended 31 December 2022
1. GENERAL INFORMATION
Strix Group Plc ("the Company") was incorporated and registered in the Isle of
Man on 12 July 2017 as a company limited by shares under the Isle of Man
Companies Act 2006 with the registered number 014963V. The address of its
registered office is Forrest House, Ronaldsway, Isle of Man, IM9 2RG.
The Company's shares were admitted to trading on AIM, a market operated by the
London Stock Exchange, on 8 August 2017. The principal activities of Strix
Group Plc and its subsidiaries (together "the Group") are the design,
manufacture and supply of kettle safety controls and other components and
devices involving water heating and temperature control, steam management,
water filtration and small household appliances for personal health and
wellness.
2. PRINCIPAL ACCOUNTING POLICIES
The Group's principal accounting policies, all of which have been applied
consistently to all of the years presented, are set out below.
Basis of preparation
The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and International
Financial Reporting Standards Interpretation Committee ("IFRS IC")
interpretations as adopted by the European Union. The financial statements
have been prepared on the going concern basis.
The preparation of consolidated financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group's
accounting policies. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are significant to the
consolidated financial statements, are disclosed in note 3.
Historical cost convention
The financial statements have been prepared on a historical cost basis, except
for the following:
· contingent consideration - measured at fair value
Going concern
These consolidated financial statements have been prepared on the going
concern basis.
The Directors have made enquiries to assess the appropriateness of continuing
to adopt the going concern basis. In making this assessment the Directors have
considered the following:
· the strong historic trading performance of the Group;
· budgets and cash flow forecasts for the period to December 2024;
· the current financial position of the Group, including its cash and cash
equivalents balances of £30.4m;
· the availability of further funding by way of access to the AIM market
afforded by the Company's admission to AIM);
· the low liquidity risk the Group is exposed to;
· the fact that the Group operates within a sector that is experiencing
relatively stable demand for its products, despite a dip in sales due to the
global COVID-19 pandemic and the conflict in Ukraine.; and
· that there has minimal disruption to the Group's manufacturing or supply
chain.
Based on these considerations, the Directors have concluded that there are no
material uncertainties that may cast significant doubt on its ability to
continue as a going concern and the Group has adequate resources to continue
in operational existence for the foreseeable future. As a result, the
Directors continue to adopt the going concern basis of accounting in preparing
the consolidated financial statements.
There are no standards, amendments to standards or interpretations that the
Group has applied for the first time in the reporting period commencing 1
January 2022 that have had a material impact on the financial statements.
Standards, amendments and interpretations which are not effective or early
adopted
Certain new accounting standards and interpretations have been published that
are not mandatory for 31 December 2022 reporting periods and have not been
early adopted by the Group. These standards are not expected to have a
material impact on the entity in the current or future reporting periods and
on foreseeable future transactions.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and all of its subsidiary undertakings. Subsidiaries are fully
consolidated from the date on which control commences and are deconsolidated
from the date that control ceases. The financial statements of all group
companies are adjusted, where necessary, to ensure the use of consistent
accounting policies.
Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the
Group is exposed to or has the rights to variable returns from its involvement
with the entity and has the ability to affect those returns through its power
over the entity.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. Consolidation of subsidiaries ceases from the date
that control also ceases.
Non-controlling interests in the results and equity of subsidiaries are shown
separately in the consolidated statement of comprehensive income, consolidated
statement of changes in equity and the consolidated statement of financial
position, respectively.
Joint ventures
Joint ventures are joint arrangements of which the Group has joint control,
with rights to the net assets of those arrangements. Joint control is the
contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of
the parties sharing control. Interests in joint ventures are accounted for
using the equity method of accounting (detailed below) after being recognised
at cost in the consolidated statement of financial position.
Equity method of accounting
Under the equity method of accounting, investments in joint ventures are
initially recognised at cost and adjusted thereafter to recognise the Group's
share of the post-acquisition profits or losses from the joint arrangement in
profit or loss, and the Group's share of movements in other comprehensive
income of the joint arrangement in other comprehensive income. Dividends
received from joint ventures are recognised as a reduction in the carrying
amount of the investment.
Unrealised gains on transactions between the Group and its joint ventures are
eliminated to the extent of the Group's interest in these entities.
The carrying amount of equity-accounted investments is tested for impairment
in accordance with the impairment of assets policy as described below in this
note.
Transactions eliminated on consolidation
Intra-group balances, and any gains and losses or income and expenses arising
from intra-group transactions, are eliminated in preparing the consolidated
financial statements.
Business combinations
Business combinations are accounted for using the acquisition method as at the
acquisition date with the assets and liabilities of subsidiaries being
measured at their fair values. Any excess of the cost of acquisition over the
fair values of the identifiable net assets acquired is recognised as goodwill.
The Group measures goodwill at the acquisition date as:
· the fair value of the consideration transferred; plus
· the recognised amount of any non-controlling interests in the acquiree; plus
· if the business combination is achieved in stages, the fair value of the
pre-existing interest in the acquiree; less
· the fair value of the identifiable assets acquired and liabilities assumed.
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 at the non-controlling interest's
proportionate share of the fair value of the acquired entity's net
identifiable assets. Transaction costs that the Group incurs in connection
with a business combination are expensed as incurred.
If the initial accounting for a business combination is preliminary by the end
of the reporting period in which the business combination occurs, provisional
amounts are reported. Those provisional amounts are adjusted during the
measurement period, or additional assets or liabilities recognised
retrospectively to reflect the new information obtained about facts and
circumstances that existed as at the acquisition date, and if known, would
have affected the measurement of assets and liabilities recognised at that
date. 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.
Foreign currency translation
Functional and presentational currency
Items included in the financial information of each of the Group's entities
are measured using the currency of the primary economic environment in which
the entity operates ("the functional currency"). The consolidated financial
statements are presented in Pound Sterling, which is Strix Group Plc's
functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency
using the exchange rates at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions, and from
the translation of monetary assets and liabilities denominated in foreign
currencies at year end exchange rates, are recognised in the consolidated
statement of comprehensive income within cost of sales.
Group companies
The results and financial position of foreign operations that have a
functional currency different from the presentation currency are translated
into the presentation currency as follows:
· assets, including intangible assets and goodwill arising on acquisition of
those foreign operations, and liabilities for each statement of financial
position presented are translated at the closing rate at the date of that
statement of financial position, or at historic rates for certain line items;
· income and expenses for each statement of comprehensive income presented are
translated at average exchange rates (unless this is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the
dates of the transactions); and
· all resulting exchange differences are recognised in other comprehensive
income. Such translation differences are reclassified to profit or loss only
on disposal or partial disposal of the foreign operation.
Property, plant and equipment
Initial recognition and measurement
Items of property, plant and equipment are stated at cost less accumulated
depreciation and impairment losses. Cost includes the original purchase price
of the asset and the costs attributable to bringing the
asset to its working condition for its intended use. When parts of an item of
property, plant and equipment have different useful lives, the components are
accounted for as separate items.
Subsequent costs are included in the asset's carrying amount or recognised as
a separate asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group and the cost
of the item can be measured reliably. Repairs and maintenance are charged to
profit or loss during the reporting period in which they are incurred.
Subsequent measurement
Depreciation is calculated using the straight-line method to allocate the cost
of the assets, net of any residual values, over their estimated useful lives.
At the beginning of the year, Management reassessed the economic useful lives
of certain property, plant and equipment. The reassessment was performed in
light of the Group's historical usage of the assets, condition of the assets
at the time of the assessment, technical and or commercial factors as well as
legal and contractual terms where applicable. Based on the reassessment, the
assets' useful lives were extended to appropriately reflect Management's
expected use of the assets. The revision to the accounting estimate has been
effected prospectively as from the beginning of the current year. Note 12
details the financial impact of the change in the useful lives of these
assets.
The revised useful lives are shown below:
Asset class Previous estimate Revised estimate
· Plant and machinery 3-10 years 3-25 years
· Fixtures, fittings and equipment 2-5 years 2-10 years
· Motor vehicles 3-5 years unchanged
· Production tools 1-5 years 1-10 years
· Right-of-use assets 2-8 years (based on the lease term) unchanged
· Land and buildings 50 years unchanged
The asset class 'Point-of-use dispensers' were acquired on acquisition of the
Billi entities (notes 12 and 14) and are depreciated over 4 - 10 years.
The Group manufactures some of its production tools and equipment. The costs
of construction are included within a separate category within property, plant
and equipment ("assets under construction") until the tools and equipment are
ready for use at which point the costs are transferred to the relevant asset
category and depreciated. Any items that are scrapped are written off to the
consolidated statement of comprehensive income.
The assets' residual values and useful lives are reviewed at the end of each
reporting period.
Fixtures, fittings and other equipment includes computer hardware.
Derecognition
Property, plant and equipment assets are derecognised on disposal, or when no
future economic benefits are expected from use or disposal. Gains or losses
arising from derecognition of property, plant and equipment, measured as the
difference between net disposal proceeds and the carrying amount of the asset,
are recognised in the consolidated statement of comprehensive income on
derecognition.
Impairment
Tangible assets that are subject to depreciation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by
which the asset's carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset's fair value less costs to sell
and value in use.
Intangible assets
Initial recognition and measurement
The Group's intangible assets relate to goodwill, capitalised development
costs, intellectual property, customer relationships, brands and computer
software. Goodwill is the excess of the consideration paid over the fair value
of the identifiable assets, liabilities and contingent liabilities in a
business combination and relates to assets which are not capable of being
individually identified and separately recognised. Goodwill acquired is
allocated to those cash-generating units ("CGUs") expected to benefit from the
business combination in which the goodwill arose. Goodwill is measured at cost
less any accumulated impairment losses and is held in the functional currency
of the acquired entity to which it relates and remeasured at the closing
exchange rate at the end of each reporting period, with the movement taken
through other comprehensive income. The CGUs represent the lowest level within
the Group at which goodwill is monitored for internal management purposes.
Capitalised development costs are recorded as intangible assets and amortised
from the point at which the asset is ready for use. Internal costs that are
incurred during the development of significant and separately identifiable new
products and manufacturing techniques for use in the business are capitalised
when the following criteria are met:
· it is technically feasible to complete the project so that it will be
available for use;
· management intends to complete the project and use or sell it;
· it can be demonstrated how the project will develop probable future economic
benefits;
· adequate technical, financial, and other resources to complete the project and
to use or sell the project output are available; and
· expenditure attributable to the project during its development can be reliably
measured.
Capitalised development costs include employee, travel and other directly
attributable costs necessary to create, produce and prepare the asset to be
capable of operating in the manner intended by management. Refer to note 6(a)
for details.
Intellectual property is capitalised where it is probable that future economic
benefits associated with the patent will flow to the Group, and the cost can
be measured reliably. The costs of renewing and maintaining patents are
expensed in the consolidated statement of comprehensive income as they are
incurred.
Customer relationships, intellectual property and brands are recognised on
acquisitions where it is probable that future economic benefits will flow to
the Group.
Computer software is only capitalised when it is probable that future economic
benefits associated with the software will flow to the Group, and the cost of
the software can be measured reliably. Computer software that is integral to
an item of property, plant and equipment is included as part of the cost of
the asset recognised in property, plant and equipment.
Other development expenditures that do not meet these criteria are recognised
as an expense as incurred.
Subsequent measurement
The Group amortises intangible assets with a limited useful life using the
straight-line method.
At the beginning of the year, Management reassessed the economic useful lives
of certain intangible assets. The reassessment was performed in light of the
Group's historical realisation of the economic benefits from the intangible
assets, technical and or commercial factors as well as legal and contractual
terms where applicable. Based on the reassessment, the assets' useful lives
were extended to appropriately reflect Management's expected realisation of
the economic benefits from the intangible assets. The revision to the
accounting estimate has been effected prospectively as from the beginning of
the current year. Note 11 details the financial impact of the change in the
useful lives of these assets.
The revised useful lives are shown below:
Asset class Previous estimate Revised estimate
· Capitalised development costs 2-5 years 2-10 years
· Intellectual property Lower of useful or legal life unchanged
· Technology and software 2-10 years unchanged
· Customer relationships 10-13 years unchanged
· Brands Indefinite useful life unchanged
· Goodwill Indefinite useful life unchanged
Brands have an indefinite useful life because there is no foreseeable limit on
the period during which the Group expects to consume the future economic
benefits embodied in the asset.
The LAICA brand has been trading since inception and has been a well
recognisable brand amongst the Group's trading partners, and the Group does
not foresee a time limit by when these partnerships will cease.
The Billi brand is a well-established and competitive brand, being one of the
top 2 brands in the Australian and New Zealand industries, and well recognised
in the United Kingdom among residential and commercial clientele. The Group
does not foresee a time limit by when this market presence will cease.
Amortisation is charged to the consolidated statement of comprehensive income
on a straight-line basis over the estimated useful lives above.
Derecognition
Intangible assets are derecognised on disposal, or when no future economic
benefits are expected from use or disposal. Gains or losses arising from
derecognition of intangible assets, measured as the difference between the net
disposal proceeds and the carrying amount of the asset, and are recognised in
the consolidated statement of comprehensive income when the asset is
derecognised. Where a subsidiary is sold, any goodwill arising on acquisition,
net of any impairment, is included in determining the profit or loss arising
on disposal.
Impairment
Intangible assets that are subject to amortisation are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by
which the asset's carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset's fair value less costs to sell
and value in use.
Goodwill and intangible assets that have an indefinite useful life are not
subject to amortisation and are tested annually for impairment, or more
frequently if events or changes in circumstances indicate that they might be
impaired.
An impairment loss is recognised for the amount by which the asset's carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of
an asset's fair value less costs of disposal and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash inflows which are largely
independent of the cash inflows from other assets or groups of assets
(cash-generating units). Non-financial assets other than goodwill that
suffered an impairment are reviewed for possible reversal of the impairment at
the end of each reporting period.
Intangible assets with indefinite useful lives impairment assessments
Intangible assets with indefinite useful lives arising on business
combinations are allocated to the relevant CGU and are treated as the foreign
operation's assets.
Impairment reviews are performed at least annually, or more frequently if
there are indicators that goodwill might be impaired. The Group has assessed
the carrying values of goodwill and brands to determine whether any amounts
have been impaired. The recoverable amount of the underlying CGU was based on
a value in use model where future cashflows were discounted using a weighted
average cost of capital as the discount rate with terminal values calculated
applying a long-term growth rate. In determining the recoverable amount, the
Group considered several sources of estimation uncertainty and made certain
assumptions or judgements about the future. Future events could cause the
assumptions used in the impairment review to change with an impact on the
results and net position of the group.
Leases
The leasing activities of the Group and how these are accounted for
The Group leases office space, workshops, warehouses and factory space. Rental
contracts are typically made for periods of 3 - 10 years, but may have
extension options. Lease terms are negotiated on an individual basis and
contain a wide range of different terms and conditions. The lease agreements
do not impose any covenants, but leased assets may not be used as security for
borrowing purposes.
Leases are recognised as a right-of-use ("ROU") assets and a corresponding
liability at the date at which the leased asset is available for use by the
Group. Each lease payment is allocated between the liability, finance costs
and foreign exchange (where the lease is denominated in a foreign currency).
The finance cost is charged to profit or loss over the lease period so as to
produce a constant periodic rate of interest on the remaining balance of the
liability for each period. The right-of-use asset is depreciated over the
shorter of the asset's useful life and the lease term on a straight-line
basis.
Measurement of future lease liabilities
Assets and liabilities arising from a lease are initially measured on a
present value basis. Future lease liabilities include the net present value of
the following lease payments:
· fixed payments (including in-substance fixed payments), less any lease
incentives receivable
· variable lease payments that are based on an index or a rate
· amounts expected to be payable by the lessee under residual value guarantees
· the exercise price of a purchase option if the lessee is reasonably certain to
exercise that options, and
· the payment of penalties for terminating the lease, if the lease term reflects
the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be readily determined, which is generally the case
for leases in the Group, the lessee's incremental borrowing rate is used,
being the rate that the individual lessee would have to pay to borrow the
funds necessary to obtain an asset of similar value to the right-of-use asset
in a similar economic environment with similar terms, security and conditions.
Lease payments are allocated between principal and finance cost. The finance
cost is charged to the consolidated statement of comprehensive income over the
lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
Measurement of right-of-use assets
Right-of-use assets are measured at cost comprising the following:
· the amount of the initial measurement of lease liability
· any lease payments made at or before the commencement date less any lease
incentives received
· any initial direct costs, and
· restoration costs
Right-of-use assets are generally depreciated over the shorter of the asset's
useful life and the lease term on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are
recognised on a straight-line basis as an expense in the consolidated
statement of comprehensive income. Short-term leases are leases with a lease
term of 12 months or less. Low-value assets comprise primarily IT equipment.
Extension and termination options
Extension and termination options are included in a number of property leases
across the Group. These terms are used to maximise operational flexibility in
terms of managing contracts.
Lease income
Lease income from operating leases where the Group is a lessor, and where
substantially all the risks and rewards associated with the leased asset
remain with the Group, is recognised in other income on a straight-line basis
over the lease term.
Financial assets
Classification
The Group classifies its financial assets as financial assets held at
amortised cost. Management determines the classification of its financial
assets at initial recognition.
The Group classifies its financial assets as at amortised cost only if both of
the following criteria are met:
· the asset is held within a business model whose objective is to collect the
contractual cash flows; and
· the contractual terms give rise to cash flows that are solely payments of
principal and interest.
Financial assets held at amortised cost are initially recognised at fair
value, and are subsequently stated at amortised cost using the effective
interest method. Financial assets at amortised cost comprise cash and cash
equivalents and trade and other receivables (excluding prepayments and the
advance purchase of commodities). Trade receivables are amounts due from
customers for products sold performed in the ordinary course of business. They
are due for settlement either on a cash in advance basis, or generally within
45 days, and are therefore all classified as current. Other receivables
generally arise from transactions outside the usual operating activities of
the Group.
Impairment of financial assets
The Group assesses, on a forward-looking basis, the expected credit losses
associated with its debt instruments carried at amortised cost. The impairment
methodology applied depends on whether there has been a significant increase
in credit risk.
The Group applies the expected credit loss model to financial assets at
amortised cost. For trade receivables, the Group applies the simplified
approach permitted by IFRS 9, which requires expected lifetime losses to be
recognised from initial recognition of the receivables. Given the nature of
the Group's receivables, expected lifetime losses are not material.
Financial liabilities
With the exception of contingent consideration, the Group initially recognises
its financial liabilities at fair value net of transaction costs where
applicable and subsequently they are measured at amortised cost using the
effective interest method. Financial liabilities comprise trade payables,
payments in advance from customers and other liabilities. They are initially
recognised at transaction price, unless the arrangement constitutes a
financing transaction, where the debt instrument is measured at the present
value of the future payments discounted at a market rate of interest.
Contingent consideration is measured at fair value with changes in fair value
recognised in profit or loss.
Trade payables are obligations to pay for goods or services that have been
acquired in the ordinary course of business from suppliers. Trade payables are
classified as current liabilities if payment is due within one year or less.
If not, they are presented as non-current liabilities. Other liabilities
include rebates.
Borrowing costs
Borrowing costs or arrangement fees, including option-type arrangements, are
recognised initially at fair value. Borrowing costs including option-type
borrowing arrangements are subsequently measured at amortised cost. The
establishment of such option-type arrangements are recognised as a 'right to
borrow' asset, and together with other borrowing costs or arrangement fees are
amortised over the period of the facilities to which the fees relate, and are
deducted from the carrying value of the financial liability.
General and specific borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset are capitalised
during the period of time that is required to complete and prepare the asset
for its intended use or sale. Qualifying assets are assets that necessarily
take a substantial period of time to get ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings,
pending their expenditure on qualifying assets, is deducted from the borrowing
costs eligible for capitalisation. Other borrowing costs are expensed in the
period in which they are incurred.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with a
maturity of three months or less. While cash and cash equivalents are also
subject to the impairment requirements of IFRS 9, impairment losses are not
material.
Employee benefits
The Group provides a range of benefits to employees, including annual bonus
arrangements, paid holiday entitlements and defined benefit and contribution
pension plans.
Short-term benefits
Short-term benefits, including holiday pay and similar non-monetary benefits,
are recognised as an expense in the period in which the service is rendered.
The Group recognises a liability and an expense for bonuses where
contractually obliged or where there is a past practice that has created a
constructive obligation.
Pensions
Subsidiary companies operate both defined contribution and defined benefit
plans for the benefit of their employees.
A defined contribution plan is a pension plan under which the Group pays fixed
contributions into a separate entity. The Group has no legal or constructive
obligations to pay further contributions if the fund does not hold sufficient
assets to pay all employees the benefits relating to employee service in the
current and prior periods. The Group has no further payment obligations once
the contributions have been paid. The contributions are recognised as employee
benefit expense when they are due. A defined benefit plan is a pension plan
that is not a defined contribution plan.
Typically, defined benefit plans define an amount of pension benefit that an
employee will receive on retirement, usually dependent on one or more factors,
such as age, years of service or compensation.
The liability recognised in the consolidated statement of financial position
in respect of the defined benefit scheme is the present value of the defined
benefit obligation at the statement of financial position date less the fair
value of the scheme assets, together with adjustments for unrecognised
actuarial gains or losses and past service costs. The defined benefit
obligation is calculated by qualified independent actuaries using the
projected unit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating
to the terms of the related pension liability.
The net pension finance cost is determined by applying the discount rate, used
to measure the defined benefit pension obligation at the beginning of the
accounting period, to the net pension obligation at the beginning of the
accounting period taking into account any changes in the net pension
obligation during the period as a result of cash contributions and benefit
payments.
Pension scheme expenses are charged to the consolidated statement of
comprehensive income within administrative expenses. Actuarial gains and
losses are recognised immediately in the consolidated statement of
comprehensive income. Net defined benefit pension scheme deficits before tax
relief are presented separately in the consolidated statement of financial
position within non-current liabilities.
Share-based payments
The Group has issued conditional equity settled share-based options and
conditional share awards under a Long-Term Incentive Plan ("LTIP") in the
parent company to certain employees. Under the LTIP, the Group receives
services from employees as consideration for equity instruments of the Group.
The fair value of the employee services received in exchange for the grant of
the options is recognised as an expense.
The total amount to be expensed is determined by reference to the fair value
of the options granted:
· including any market performance conditions such as the requirement for the
Group's shares to be above a certain price for a pre-determined period;
· excluding the impact of any service and non-market performance vesting
conditions, including earnings per share targets, dividend targets, and
remaining an employee of the Group over a specified period of time; and
· including the impact of any non-vesting conditions, where relevant.
These awards are measured at fair value on the date of the grant using an
option pricing model and expensed in the consolidated statement of
comprehensive income on a straight-line basis over the vesting period, after
making an allowance for the estimated number of shares that will not vest. The
level of vesting is reviewed and adjusted bi-annually in the consolidated
statement of comprehensive income, with a corresponding adjustment to equity.
If the terms of an equity settled award are modified, at a minimum, an expense
is recognised as if the terms had not been modified. An additional expense is
recognised for any modification that increases the total fair value of the
share-based payment, or is otherwise beneficial to the employee, as measured
at the date of modification.
If an equity award is cancelled by forfeiture, where the vesting conditions
(other than market conditions) have not been met, any expense not yet
recognised for that award as at the date of forfeiture is treated as if it had
never been recognised. At the same time, any expense previously recognised on
such cancelled equity awards is reversed, effective as at the date of
forfeiture.
The dilutive effect, if any, of outstanding options is included in the
calculation of diluted earnings per share.
Further details on the awards is included in note 23.
Inventories
Inventories consist of raw materials and finished goods which are valued at
the lower of cost and net realisable value. Cost is determined using the
weighted average cost formula. Cost comprises expenditure which has been
incurred in the normal course of business in bringing the products to their
present location and condition including applicable supplier rebates, and
include all related production and engineering overheads at cost. Net
realisable value is the estimated selling price in the ordinary course of
business, less applicable selling expenses. At the end of each reporting
period, inventories are assessed for impairment. If inventory is impaired, the
identified inventory is reduced to its selling price less costs to complete
and an impairment charge is recognised in the consolidated statement of
comprehensive income.
Supplier rebates
The Group enters into agreements with suppliers whereby volume-related
allowances and various other fees and discounts are received in connection
with the purchase of goods from those suppliers. Most of the income received
from suppliers relates to commercially agreed rebates based on historic sales
volumes.
Rebates are recognised when earned by the Group, which occurs when all
obligations conditional for earning income have been discharged, and the
income can be measured reliably based on the terms of the contract. The income
is recognised as a credit within cost of sales.
Where the income earned relates to inventories which are held by the Group at
the year end, the income is included within the cost of those inventories, and
recognised in cost of sales upon sale of those inventories. Amounts due
relating to supplier rebates are recognised within trade and other
receivables.
Revenue
The Group primarily recognises revenue from the sale of goods and services to
its customers as well as from licensing arrangements. The transaction price is
based on the sales agreement with the customer. Revenue is reported net of
sales taxes, discounts, rebates and after eliminating intra-group sales.
Rebates are based on a certain volume of purchases by a customer within a
given period and are recognised on an expected value approach.
Revenue is measured based on the consideration to which the Group expects to
be entitled in a contract with a customer and is recognised when the
performance obligations have been fulfilled. The Group recognises revenue from
the sale of goods and services either at a point in time or over time, based
on the nature of the contract terms. The Group recognises revenue from three
main categories namely kettle safety controls, water and appliances.
Kettle safety controls
The performance obligation is the delivery of the goods to customers, and
revenue is recognised on dispatch, otherwise it is recognised when the
products have been shipped to a specific location, or when the risks of
obsolescence and loss have been transferred to the Original Equipment
Manufacturer ('OEM') or wholesaler. All of the amounts recognised as revenue
are based on contracts with customers. No element of financing is deemed
present because the sales are made under normal credit terms, which is
consistent with market price.
Payment terms for the majority of customers in this category are to pay cash
in advance of the goods being delivered. The Group recognises the advance
payments within trade and other payables on the consolidated statement of
financial position as "Payments in advance from customers". At the point the
revenue is recognised, these balances are transferred from "Payments in
advance from customers" to revenue. For the majority of other customers
payment is normally due within 30 to 45 days from the date of sale.
Water and appliances
The Group recognises revenue from the following major sources under water and
appliances categories:
· Sale of components and devices involving water heating and temperature
control, steam management and water filtration;
· Sale of Point-of-use (POU) water and coffee machines;
· Rental of Point-of-use (POU) dispensers and coffee machines;
· Servicing of Point-of-use (POU) units; and
· Sale of consumables
Sale of components, devices and consumables
Sales are either 'direct' to the end user customers or 'indirect' to wholesale
and retail distributors. Revenue from the supply of goods is recognised once
control of the goods has been transferred to the customer, being when goods
have been delivered to a customer site or in the case of indirect sales, when
the goods have been delivered to the wholesale distributor.
Rental of dispensers
Rental income is made up of revenue from the supply of goods where the Group
is lessor in an operating lease and is recognised over time, with the
transaction price allocated to this service released on a straight-line basis
over the period of the lease. Included in the transaction price for the rental
of dispensers, in some contracts, is the installation of those dispensers. The
rental and installation elements of the contract are considered to be one
deliverable, as they are highly interrelated, and therefore there is no
allocation of a portion of the transaction price to the installation.
Rental income from operating leases is recognised on a straight-line basis
over the term of the relevant lease. Initial direct costs incurred in
negotiating and arranging an operating lease (except where immaterial) are
added to the carrying amount of the leased asset and recognised on a
straight-line basis over the lease term. Commissions on new contracts are
capitalised and depreciated over one and a half times the initial lease
term.
Rental agreements run for a minimum period of twelve months and typically for
three to five years. Some rental agreements have no fixed end date and may be
cancelled by either party subject to a minimum notice period or early
termination penalty. The average useful economic life for a POU water device
is approximately four to ten years whilst refurbishment can extend the life of
some devices to eleven years or more. For this reason, existing rental
agreements are not judged to transfer substantially all of the risks and
rewards of ownership to the lessee.
Combined rental and service contracts
The Group has in place some contracts that cover both the rental and servicing
and maintenance of dispensers. The transaction price is allocated to each
performance obligation to reflect the amount of consideration to which the
Group is entitled to, in exchange for transferring the promised goods or
services to the customer. The Group allocates combined rental and service
income to the separate rental and service categories based on a percentage
allocation method, which is calculated for each business unit. The percentage
allocation, which is recalculated periodically, is based on the transaction
price being allocated to each performance obligation in proportion to its
stand-alone selling price.
Servicing of POU units
Sale of services are recognised proportionally over the duration of the
service period, provided a right to consideration has been established.
Deferred revenue
Revenue recognised in the consolidated statement of comprehensive income but
not yet invoiced is held in the statement of financial position within 'Trade
receivables. Revenue invoiced but not yet recognised in the consolidated
statement of comprehensive income is held on the consolidated statement of
financial position within 'Payments in advance from customers'.
Licensing income
The Group holds a substantial portfolio of issued and registered intellectual
property rights relating to certain aspects of its hardware devices,
accessories, goods, software and services. This includes patents, designs,
copyrights, trademarks and other forms of intellectual property rights
registered in the U.K. and various foreign countries.
From time to time, the Group enters into term-based and exclusive licensing
arrangements with some of its customers in respect of its intellectual
property. Revenue from the licensing contracts is variable and is recognised
at the amount to which the Group expects to be entitled when control of the
intellectual property is transferred to its customers. Control is generally
transferred when the Company has a present right to payment and title and the
significant risks and rewards of ownership of the intellectual property,
products or services are transferred to its customers.
The licensing income is recognised at a point in time or over time based on
the following assessment. Where the licensing arrangement is a distinct
performance obligation, Management assess whether the licensing contract gives
the customer either:
· the right to access the Group's intellectual property as it exists throughout
the licence period; or
· right to use the Group's intellectual property as it exists at the point in
time at which the licence is granted.
Revenue from a licencing contract which is considered to provide a right to
the customer to access the Group's intellectual property as it exists
throughout the licence period is recognised over time, as and when the related
performance obligation is satisfied.
A licensing contract gives the customer the right to access the Group's
intellectual property as it exists throughout the license period when all the
following are met:
· the contract requires, or the customer reasonably expects, that we will
undertake activities that significantly affect the intellectual property to
which the customer has rights; and
· the rights granted by the licence directly expose the customer to any positive
or negative effects of the entity's activities identified above; and
· those activities do not result in the transfer of a good or a service to the
customer as those activities occur.
Revenue relating to a licensing contract which does not meet the above
criteria is recognised at a point in time, which is usually the point at which
the licence is granted to the customer but not before the beginning of the
period during which the customer is able to use and benefit from the licence.
Cost of sales
Cost of sales comprise costs arising in connection with the manufacture of
thermostatic controls, cordless interfaces, and other products such as water
dispensers, taps, jugs and filters. Cost is based on the cost of purchases on
a first in, first out basis and includes all direct costs and an appropriate
portion of fixed and variable overheads where they are directly attributable
to bringing the inventories into their present location and condition. This
also includes an allocation of non-production overheads, costs of designing
products for specific customers and amortisation of capitalised development
costs.
Research and development
Research expenditure is written off to the consolidated statement of
comprehensive income within cost of sales in the year in which it is incurred.
Development expenditure is written off in the same way unless the Directors
are satisfied as to the technical, commercial and financial viability of the
individual projects. In this situation, the expenditure is classified on the
consolidated statement of financial position as a capitalised development
cost.
Finance income
Finance income comprises bank interest receivable on funds invested. Finance
income is recognised using the effective interest rate method.
Finance costs
Finance costs directly attributable to the acquisition or construction of a
qualifying asset are capitalised. Qualifying assets are those that necessarily
take a substantial period of time to prepare for their intended use. All
other borrowing cost are recognised in the consolidated statement of income in
finance costs. Finance costs comprise interest charges on lease liabilities,
interest on borrowings, the unwind of discounts on the present value of
liabilities, and finance charges relating to letters of credit. Finance costs
are determined using the effective interest rate method.
Income tax
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the statement of financial
position date in the countries where the Company and its subsidiaries operate
and generate taxable income, and any adjustment to tax payable in respect of
previous years.
Current and deferred tax is recognised in profit or loss, except to the extent
that it relates to items recognised in other comprehensive income or directly
in equity. In this case, the tax is also recognised in other comprehensive
income or directly in equity, respectively.
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. However,
deferred tax liabilities are not recognised if they arise from the initial
recognition of goodwill.
Deferred income tax is also not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a business
combination that, at the time of the transaction, affects neither accounting
nor taxable profit or loss. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantively enacted by the end of the
reporting period and are expected to apply when the related deferred income
tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised only if it is probable that future taxable
amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary
differences between the carrying amount and tax bases of investments in
foreign operations where the company is able to control the timing of the
reversal of the temporary differences and it is probable that the differences
will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally
enforceable right to offset current tax assets and liabilities and where the
deferred tax balances relate to the same taxation authority. Current tax
assets and tax liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Share capital and share premium
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new ordinary shares are shown in equity as a
deduction from the proceeds. Share premium arising on the issue of shares is
distributable. Share capital and share premium have been grouped for the
purposes of financial statement presentation.
Dividends
Dividends are recognised when they become legally payable. In the case of
interim dividends to equity shareholders, this is when declared by the
Directors. In the case of final dividends, this is when approved by the
shareholders at the AGM.
Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating
decision maker, who is responsible for allocating resources and assessing the
performance of the operating segments, has been identified as the Board of
Directors. The Board of Directors consists of the Executive Directors and the
Non-Executive Directors.
Government grants
Subsidiary companies receive grants from the Isle of Man and Chinese
governments towards revenue and capital expenditure. Government grants are
recognised at their fair value where there is a reasonable assurance that the
grant will be received and all attached conditions complied with.
Revenue grants are recognised as income over the period necessary to match the
grant on a systematic basis to the costs that it is intended to compensate.
The grant income is presented within other operating income in the
consolidated statement of comprehensive income.
Capital grants are initially recognised as deferred income liabilities when
received, and subsequently recognised as other income in profit or loss on a
straight-line basis over the useful life of the related asset. The grants are
dependent on the subsidiary company having fulfilled certain operating,
investment and profitability criteria in the financial year, primarily
relating to employment.
EBITDA and adjusted EBITDA - non-GAAP alternative performance measures
In the reporting of financial information, the Directors have adopted Earnings
before Interest, Taxation, Depreciation and Amortisation ("EBITDA") and
adjusted EBITDA when assessing the operating performance of the Group.
Exceptional items are excluded from EBITDA to calculate adjusted EBITDA. The
Directors primarily use the adjusted EBITDA measure when making decisions
about the Group's activities
EBITDA and adjusted EBITDA are non-GAAP measures and may not be calculated in
the same way and hence may not be directly comparable to those reported by
other entities. In determining the adjusting items, the following criteria is
also considered:
· if a certain event (defined as exceptional) had not occurred, the costs would
not have been incurred or the income would not have been earned; or
· the costs attributable to the event have been identified using a reliable
methodology of splitting amounts on an ongoing basis; and economic resources
have been expended or diverted in order to directly contribute towards the
related activities; and
· costs have been incurred that cannot be recovered due to the event and the
related activities.
An item is treated as exceptional if it relates to certain costs or income
that derive from events or transactions that fall within the normal activities
of the Group but which, individually or, if of a similar type, in aggregate,
are excluded from the Group's Alternative Performance Measures (APMs) by
virtue of their nature or size, in order to better reflect management's view
of the underlying trends and operating performance of the Group that is more
comparable over time.
3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
In the application of the Group's accounting policies, which are described in
Note 2, the directors are required to make judgements (other than those
involving estimations) that have a significant impact on the amounts
recognised and to make estimates and assumptions about the carrying amounts of
assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and
other factors that are considered to be relevant. Actual results may differ
from these estimates. There is no change in applying accounting policies for
critical accounting estimates and judgements from the prior year.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
Critical judgements in applying the entity's accounting policies
Functional currency
The Directors consider the factors set out in paragraphs 9, 10 and 11 of IAS
21, "The effects of changes in foreign currency" to determine the appropriate
functional currency of its overseas operations. These factors include the
currency that mainly influences sales prices, labour, material and other
costs, the competitive market serviced, financing cash flows and the degree of
autonomy granted to the subsidiaries.
The Directors have applied judgement in determining the most appropriate
functional currency for all entities to be Pound Sterling, with the exception
of Strix (Hong Kong) Ltd which has a Hong Kong Dollar functional currency,
Strix (USA), Inc. which has a United States Dollar functional currency,
HaloSource Water Purification Technology (Shanghai) Co. Ltd which have a
Chinese Yuan functional currency, LAICA S.p.A and LAICA Iberia Distribution
S.L. which both have a Euro functional currency, and LAICA International
Corp.; Taiwan LAICA Corp. which both have a Taiwan Dollar functional currency,
Billi Australia (Pty) Ltd which has an Australian Dollar functional currency
and Billi New Zealand Ltd which has a New Zealand dollar functional currency.
This may change as the Group's operations and markets change in the future.
Capitalisation of development costs
The Directors consider the factors set out in the paragraphs entitled
'Intangible assets - initial recognition and measurement' in note 2 with
regard to the timing of the capitalisation of the development costs incurred.
This requires judgement in determining when the different stages of
development have been met.
Alternative performance measures (APMs) - Exceptional items
Management and the Board consider the quantitative and qualitative factors in
classifying items as exceptional and exercise judgement in determining the
adjustments to apply to IFRS measures. This assessment covers the nature of
the item, cause of occurrence, frequency, predictability of occurrence of the
item or related event, and the scale of the impact of that item on reported
performance. Reversals of previous exceptional items are assessed based on
the same criteria.
An analysis of the exceptional items included in the consolidated statement of
comprehensive income are disclosed in note 6(b).
Acquisition of Billi entities - fair value measurements
A determination of the provisional fair value of the assets acquired and
liabilities assumed in the acquisition, and the useful lives of intangible
assets and property, plant and equipment acquired is required. This exercise
is a substantial undertaking which requires the use of various valuation
techniques. Future events could cause underlying assumptions to change which
could have a significant impact on the Group's financial results. Refer to
Note 14 for further details regarding the acquisition, including estimations
used in determining the provisional fair values for the acquired assets and
liabilities assumed.
Impairment of indefinite lived intangible assets and goodwill
Determining whether goodwill and intangible assets with indefinite lives are
impaired requires an estimation of the value in use or the fair value less
costs to sell of the cash generating unit (CGU) to which the goodwill or
intangible asset has been allocated. The value in use calculation requires
management's estimation of the future cash flows expected to arise from the
CGU. Refer to Note 11 for the sensitivity analysis of the assumptions used in
the impairment analysis of goodwill and intangible assets with indefinite
lives.
4. SEGMENTAL REPORTING
Management has determined the operating segments based on the operating
reports reviewed by the Board of Directors that are used to assess both
performance and strategic decisions. Management has identified that the Board
of Directors is the chief operating decision maker in accordance with the
requirements of IFRS 8 'Operating Segments'.
The Group's activities consist of the design, manufacture and sale of
thermostatic controls, cordless interfaces, and other products such as water,
dispensers, jugs and filters, primarily to Original Equipment Manufacturers
("OEMs"), commercial and residential customers based in China, Italy,
Australia, New Zealand and the United Kingdom.
The Board of Directors has identified 3 reportable segments from a product
perspective, namely: kettle controls, water category and appliances. The Board
of Directors primarily uses a measure of gross profit to assess the
performance of the operating segments, broken down into revenue and cost of
sales for each respective segment which is reported to them on a monthly
basis. Information about segment revenue is disclosed below, as well as in
note 7.
Reported gross profit
2022
(£000s)
Kettle controls Water category Appliances Total
Revenue 68,243 24,135 14,542 106,920
Cost of sales (41,108) (16,303) (8,831) (66,242)
Gross profit 27,135 7,832 5,711 40,678
Reported gross profit
2021
(£000s)
Kettle controls Water category Appliances Total
Revenue 85,117 21,404 12,889 119,410
Cost of sales (52,880) (14,617) (8,067) (75,564)
Gross profit 32,237 6,787 4,822 43,846
Adjusted gross profit*
2022
(£000s)
Kettle controls Water category Appliances Total
Revenue 68,243 24,135 14,542 106,920
Cost of sales (40,306) (16,277) (8,812) (65,395)
Gross profit 27,937 7,858 5,730 41,525
Adjusted gross profit*
2021
(£000s)
Kettle controls Water category Appliances Total
Revenue 85,117 21,404 12,889 119,410
Cost of sales (49,455) (14,500) (8,031) (71,986)
Gross profit 35,662 6,904 4,858 47,424
*Adjusted gross profit excludes exceptional items as detailed in note 6(b).
Adjusted results are non-GAAP metrics used by management and are not an IFRS
disclosure.
Assets and liabilities
No analysis of the assets and liabilities of each operating segment is
provided to the Board of Directors as part of monthly management reporting.
Therefore, no analysis of segmented assets or liabilities is disclosed in this
note.
Non-current assets (i) attributed to country of domicile and (ii) attributable
to all other foreign countries
A geographical analysis of revenue from external customers has not been
presented, as the OEMs to whom the majority of sales are made are primarily
based in China and Italy.
In accordance with IFRS 8, the following table discloses the non-current
assets located in both the Company's country of domicile (the Isle of Man) and
foreign countries, primarily China, Italy, Australia, New Zealand and the
United Kingdom where the Group's principle subsidiaries are domiciled.
2022 2021
£000s £000s
Country of domicile
Intangible assets 11,354 9,756
Property, plant and equipment 3,151 2,742
Total country of domicile non-current assets 14,505 12,498
Foreign countries
Intangible assets 62,020 20,712
Property, plant and equipment 44,213 40,021
Total foreign non-current assets 106,233 60,733
Total non-current assets 120,738 73,231
Major customers
In 2022, there were two major customers that individually accounted for at
least 10% of total revenues (2021: two customers). The revenues relating to
these customers in 2022 were £13,587,000 and £9,538,000 (2021: £15,390,000
and £12,133,000).
5. EMPLOYEES AND DIRECTORS
(a) Employee benefit expenses
2022 2021
£000s £000s
Wages and salaries 27,500 28,167
Defined contribution pension cost (note 5(c)(i)) 782 684
Employee benefit expenses 28,282 28,851
Share based payment transactions (note 23) (491) 1,549
Total employee benefit expenses 27,791 30,400
(b) Key management compensation
The following table details the aggregate compensation paid in respect of the
key management, which includes the Directors and the members of the
Operational Board, representing members of the senior management team from all
key departments of the Group.
2022 2021
£000s £000s
Salaries and other short-term employee benefits 2,069 2,025
Post-employment benefits 181 149
Termination benefits 74 -
Share based payment transactions (348) 311
1,976 2,485
-There are no defined benefit schemes for key management. Pension costs under
defined contribution schemes are included in the post-employment benefits
disclosed above.
(c) Retirement benefits
(i) The Strix Limited Retirement Fund
The Strix Limited Retirement Fund is a defined contribution scheme under which
the assets of the scheme are held separately from those of the Group in an
independently administered fund. The pension cost charge represents costs
payable by the Group to the fund and amounted to £782,000 (2021: £684,000).
(ii) LAICA S.p.A. Termination Indemnity
LAICA S.p.A. operates a defined benefit plan for its employees in accordance
with the Italian Termination Indemnity (named "Trattamento di Fine Rapporto"
or "TFR") provisions defined by the National Civil Code (Article 2120). In
accordance with IAS 19, the TFR provision is a defined benefit plan, which is
based on the principle to allocate the final cost of benefits over the periods
of service which give rise to an accrual of deferred rights under each
particular benefit plan.
The calculation of the liability is based on both the length of service and on
the remuneration received by the employee during that period of service.
Article 2120 states that severance pay is due to the employee by the companies
in any case of termination of the employment contract. For each year of
service, severance pay accruals are based on total annual compensation divided
by 13.05. Although the benefit is paid in full by the employer, part (0.5% of
pay) of the annual accrual is paid to INPS by the employer, and is subtracted
from the severance pay accruals for the contribution reference period. As of
31(st) December of every year, the severance pay accrued as of 31(st) December
of the preceding year is revalued by an index stipulated by law as follows:
1.5% plus 75% of the increase over the last 12 months in the consumer price
index, as determined by the Italian Statistical Institute.
In accordance with IAS 19, the determination of the present value of the
liability is carried out by an independent actuary under the projected unit
method. This method considers each period of service provided by workers at
the company as a unit of additional right. The actuarial liability must
therefore be quantified based on seniority reached at the valuation date and
re-proportioned based on the ratio between the years of service accrued at the
reference date of the assessment and the overall seniority reached at the time
scheduled for the payment of the benefit. Furthermore, this method provides to
consider future salary increases, due to any cause (inflation, career,
contract renewals, etc.), up to the time of termination of the employment
relationship.
The below chart summarises the defined benefit pension liability of LAICA
S.p.A. at 31st December 2022:
2022 2021
£000s £000s
Liability as at 1 January 897 898
Current service cost for the period (113) 58
Exchange differences on translation of foreign operations 48 (59)
Liability as at 31 December 832 897
The key actuarial assumptions used in arriving at these figures include:
• annual discount rate of 3.77% (2021: 0.87%)
• annual price inflation of 2.3% (2021: 1.6%)
• annual TFR increase of 3.2% (2021: 2.7%)
• demographic assumptions based on INPS published data
The remainder of the post-employment benefit liability of £85,000 (2021:
£74,000) as at 31 December 2022 is made up of contractual post-employment
liabilities within LAICA S.p.A. that do not meet the definition of a defined
benefit plan in accordance with IAS 19.
6. EXPENSES
(a) Expenses by nature
2022 2021
£000s £000s
Employee benefit expense (note 5(a)) 28,282 28,851
Depreciation charges 4,201 4,569
Amortisation and impairment charges 2,063 2,310
Exceptional items (see below) 5,948 9,941
Foreign exchange losses 188 186
Research and development expenditure totalled £4,888,000 (2021: £5,324,000),
and £3,326,000 (2021: £3,609,000) of development costs have been capitalised
during the year.
(b) Exceptional items
The main categories of exceptional items relate to major exceptional events or
projects impacting the Group's underlying operations, namely strategic
projects relating to mergers and acquisitions with particular reference to the
acquisition of the Billi entities in the current year and LAICA in 2020 and
their continued integration into the Group, disaster recovery costs due to a
cyber incident, COVID-19 related costs and related impacts on Group
operations, reorganisation and restructuring projects, and the Group's share
incentive initiatives for conditional share options and awards issued to
certain employees of the Group (refer to note 23 for further details).
Exceptional items have been broken down as follows:
2022 2021
£000s £000s
Exceptional items in cost of sales:
Assets written off due to relocation to new factory - 1,679
Other costs relating to relocation to new factory - 1,596
COVID-19 related costs 485 226
Reorganisation costs 362 77
847 3,578
Exceptional items in administrative expenses:
Share-based payments (491) 1,549
Other costs relating to relocation to new factory - 1,140
Mergers and acquisitions related costs 3,992 2,749
COVID-19 related costs 673 819
Disaster recovery 377 -
Reorganisation and restructuring costs 550 106
5,101 6,363
Total exceptional items 5,948 9,941
Also included as an exceptional item are finance costs of £180,000 (2021:
£780,000) relating to the discount unwinding of the present values of
contingent liabilities recognised per note 14. These costs have been included
within finance costs in note 8.
Mergers and acquisitions exceptional costs relate mainly to the accrual of
consultancy and other acquisition related exceptional costs amounting to
£2,703,000 from the acquisition of the Billi entities in November 2022 as
well as an accrual of £2,481,000 for 2022 as part of a supplemental
consulting arrangement with the vendor shareholders of LAICA relating to
compensation for post-combination services as these services are rendered to
LAICA in 2022 (refer to note 14). Within the exceptional costs for mergers and
acquisitions is a reversal of £1,267,000 relating to the estimated contingent
consideration which was recognised at acquisition date when the Group acquired
LAICA. The adjustment is due to a revision of the estimate in relation to the
performance earn-out. LAICA's performance in the current year was lower than
originally expected at the date of acquisition. Other mergers and acquisitions
costs totalling £75,000 relate to legal and consultancy fees incurred on
integration of LAICA into the Group.
COVID-19 related exceptional costs are those items that are incremental and
directly attributable to COVID-19. These are costs that would not have been
incurred if the COVID-19 pandemic had not occurred and are not expected to
recur once the effects have largely receded. In the current year, these mainly
consisted of incremental labour costs as a result of the COVID lockdowns
mainly in China where the Group has significant operations. Other COVID-19
exceptional costs included mothballing of certain activities as resources were
reorganised in response to the impact of COVID-19 on the Group's operations,
additional cleaning and sanitation costs incurred as part of combined
infection control or prevention efforts, and exceptional freight and carriage
costs paid to fill shortages of supplies, materials and products directly
caused by impacts of COVID-19 on shipping and freight supply chains.
Disaster recovery costs relate to staff and non-staff costs incurred in
response to a cyber incident which occurred in February 2022. The Group
engaged external specialists, took precautionary measures with its IT
infrastructure and implemented its business continuity plan. The systems were
successfully restored and are fully operational. The Group continues to
monitor its exposure.
Reorganisation and restructuring costs include costs to re-qualify an
alternative supplier due to a natural disaster in the form of flooding at one
of the Group's suppliers as well as redundancy and relocation costs which
arose during the year.
In the prior year, costs relating to the new Chinese factory project were made
up of assets written off with a net book value of £1.7m which could not be
relocated as they would not be fit for the manufacturing operations at the new
factory, and other relocation costs totalling £2.7m relating to disassembly
of machinery at the old factory, moving costs, reassembly of machinery at the
new factory, labour costs incurred for the relocation, set-up and cleaning
costs, logistics services, approvals and inspections, consultancy and security
services, and other costs directly related to the relocation.
(c) Auditor's remuneration
During the year the Group (including its subsidiaries) obtained the following
services from the Company's auditor as detailed below:
2022 2021
£000s £000s
Fees payable to Company's auditor and its associates for the audit of the 245 201
consolidated financial statements
Fees payable to Company's auditor and its associates for other services:
- the audit of Company's subsidiaries 8 8
- other assurance services 3 56
- tax compliance and other 5 4
261 269
7. REVENUE
The following table shows a disaggregation of revenue into categories by
product line:
2022 2021
£000s £000s
Kettle controls 68,243 85,117
Water category 24,135 21,404
Appliances 14,542 12,889
Total revenue 106,920 119,410
Included within the revenue from the appliances category is licensing fee
income relating to intellectual property amounting to £1,442,000 (2021: nil).
8. FINANCE COSTS
2022 2021
£000s £000s
Letter of credit charges 94 95
Right-of-use lease interest 92 105
Discount unwinding of present value of contingent consideration 180 780
Borrowing costs 3,559 1,246
Total finance costs 3,925 2,226
The discount unwinding of present values relating to the contingent
consideration recognised on acquisition of LAICA S.p.A. (see note 14). The
amount has been included in finance costs as an exceptional item (refer to
note 6).
9. TAXATION
2022 2021
Analysis of (credit) / charge in year £000s £000s
Current tax (overseas) and deferred tax
Current tax on overseas profits for the year 491 1,115
Adjustments to prior years' overseas tax provisions (1,323) -
Movement in deferred tax assets and liabilities 27 (255)
Total tax (credit) / charge (805) 860
Overseas tax relates primarily to tax payable by the Group's subsidiaries in
China, Australia, New Zealand, Italy and the UK.
In relation to the prior year's tax provision adjustments, during 2015, the
Group's Chinese subsidiary took a prudent measure to make tax provisions
following a benchmarking assessment by the Chinese tax authorities relating to
the contract processing model adopted by the businesses in the years 2009 to
2014. The potential additional liabilities for 2015 to 2018 of £876,000 had
been included within the current tax liability balance up to the end of the
prior year. Based on the independent recommendations, and as a more acceptable
tax model by the Chinese tax authorities, the Chinese subsidiary converted to
an import processing model in 2019, which is also largely in use by the
majority of the OEMs in China. As result of this, the subsidiary obtained a
tax certificate from the in-charge tax bureau in the current year which
confirmed that all tax matters in the subsidiary have been settled. As such
the prior year tax provisions were therefore released in the current year as
they were no longer required.
In addition, withholdings taxes of £447,000 relating to anticipated dividends
payable by the Chinese subsidiary to its immediate holding company in the Isle
of Man had been accrued in previous years. In light of the recent developments
in the Group's operations in China, Management decided in the current year to
invest more into the new China factory in terms of capital expenditure,
thereby keeping profits within the Chinese subsidiaries. As a result of this
decision, the anticipated dividends were no longer payable and the relating
tax provisions were consequently released.
Reconciliation of the movement in deferred tax liabilities has been presented
below:
Deferred tax liabilities:
2022 2021
£000 £000
Deferred tax liability on 1 January 2,303 2,558
Deferred tax liabilities recognised on acquisition of Billi (note 14) 9,011 -
Reversal of deferred tax on utilisation of temporary differences 73 (255)
Deferred tax liability as at 31 December 11,387 2,303
The balance comprises temporary differences attributable to intangible assets
recognised on acquisition of LAICA in FY 2020 and Billi in the current year.
The Group has an immaterial deferred tax asset. Refer to note 16 for details.
As the most significant subsidiary in the Group is based on the Isle of Man,
this is considered to represent the most relevant standard rate for the Group.
The tax assessed for the year is different to the standard rate of income tax
in the Isle of Man of 0% (2021: 0%). The differences are explained below:
2022 2021
£000s £000s
Profit on ordinary activities before tax 16,050 21,507
Profit on ordinary activities multiplied by the rate of income tax in the Isle - -
of Man of 0% (2021: 0%)
Impact of higher overseas tax rate 518 860
Adjustments in relation to prior years' overseas tax provisions (1,323) -
Total taxation (credit)/charge (805) 860
The Group is subject to Isle of Man income tax on profits at the rate of 0%
(2021: 0%), UK income tax on profits at a rate of 19% (2021:19%), Chinese
income tax on profits at the rate of 25% (2021: 25%), and Italian income tax
on profits at a rate of 27.9% (2021: 27.9%). Following the acquisition of the
Billi entities, the group is subject to Australian income tax on profits at
the rate of 30% and New Zealand income tax on profits at the rate of 28%.
10. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is based on the
following data.
2022 2021
Earnings (£000s)
Earnings for the purposes of basic and diluted earnings per share 16,790 20,599
Number of shares (000s)
Weighted average number of shares for the purposes of basic earnings per share 209,911 206,271
Weighted average dilutive effect of share awards 2,585 3,381
Weighted average number of shares for the purposes of diluted earnings per 212,496 209,652
share
Earnings per ordinary share (pence)
Basic earnings per ordinary share 8.0 10.0
Diluted earnings per ordinary share 7.9 9.8
Adjusted earnings per ordinary share (pence) ((1))
Basic adjusted earnings per ordinary share ((1)) 10.9 15.2
Diluted adjusted earnings per ordinary share ((1)) 10.8 14.9
The calculation of basic and diluted adjusted earnings per share is based on
the following data:
2022 2021
£000s £000s
Profit for the year 16,790 20,599
Add back exceptional items included in (note 6(b)):
Cost of sales 847 3,578
Administrative expenses 5,101 6,363
Finance costs 180 780
Adjusted earnings ((1)) 22,918 31,320
(1. Adjusted earnings and adjusted earnings per share exclude exceptional
items, which include share-based payment transactions, COVID-19-related costs
reorganisation costs and other strategic project costs. Adjusted results are
non-GAAP metrics used by management and are not an IFRS disclosure)
The denominators used to calculate both basic and adjusted earnings per share
are the same as those shown above for both basic and diluted earnings per
share.
11. INTANGIBLE ASSETS
2022
Development costs Software Intellectual Property Customer relationships Brands Goodwill Intangible assets under construction Total
£000s £000s £000s £000s £000s £000s £000s £000s
At 1 January
Cost 15,971 4,186 1,128 2,232 6,174 8,736 66 38,493
Accumulated amortisation and impairment (6,565) (1,153) (111) (196) - - - (8,025)
Net book value 9,406 3,033 1,017 2,036 6,174 8,736 66 30,468
Period ended 31 December
Additions 3,326 178 272 - - - 34 3,810
Acquisition of Billi (note 14) 3 4 - 15,912 13,283 10,885 - 40,087
Transfers - - - - - - - -
Disposals (cost) (20) - - - - - - (20)
Disposals (accumulated amortisation) 1 - - - - - - 1
Amortisation charge (1,103) (605) (145) (210) - - - (2,063)
Exchange differences 99 25 82 108 328 446 3 1,091
Closing net book value 11,712 2,635 1,226 17,846 19,785 20,067 103 73,374
At 31 December
Cost 19,428 4,452 1,482 18,549 19,785 20,067 103 83,866
Accumulated amortisation and impairment (7,716) (1,817) (256) (703) - - - (10,492)
Net book value 11,712 2,635 1,226 17,846 19,785 20,067 103 73,374
Amortisation charges have been treated as an expense, and are allocated to
cost of sales (£1,707,000), distribution costs £NIL and administrative
expenses (£356,000) in the consolidated statement of comprehensive income.
The Group's goodwill, customer relationships and brands predominantly relate
to those arising on the acquisition of LAICA which was completed in 2020, and
also on the acquisition of the Billi entities (including pre-existing
intangibles assets), which were acquired in the current year (note 14). The
goodwill, customer relationships and brands recognised on acquisition of the
Billi entities have been measured on a provisional basis to allow for any
potential adjustments resulting from any new information obtained within one
year of the date of acquisition about facts and circumstances that existed at
the date of acquisition.
In the current year, the carrying values of existing goodwill and brands have
been subject to an annual impairment test, and the recoverable amounts
assessed at each cash generating unit (CGU) level determined on the basis of
value-in-use calculations over a five-year forecast period. The key
assumptions applied in the value-in-use calculations for LAICA are a discount
rate of 12%, variable trading margins, variable revenue growth rates as well
as the terminal growth rate of 2%. Based on these calculations, there is
sufficient headroom over the carrying values of goodwill and brands hence no
impairment has been recognised in the current year and there were no reversals
of prior year impairments during the year (2021: same). An impairment test of
the intangibles arising on the acquisition of the Billi entities has not been
performed given that they were acquired on 30 November 2022.
The results of the Group impairment tests are dependent upon estimates and
judgements, particularly in relation to the key assumptions described above.
Sensitivity analysis to a reasonable and possible change in the most sensitive
assumption, being the discount rate, was undertaken. An increase of 1% would
decrease the headroom by circa £3.4m but still leave headroom over the
carrying values of the goodwill and brands (circa £23.4m).
As highlighted in Note 2, Management revised the useful lives of certain
assets at the beginning of the year. As part of this assessment, the useful
lives of capitalised development costs were reassessed and extended with the
resulting impact being a decrease in amortisation of £694,000 for the full
year 2022. Going forward, the amortisation charges will be in line with the
revised useful life.
2021
Development costs Software Intellectual Property Customer relationships Brands Goodwill Intangible assets under construction Total
£000s £000s £000s £000s £000s £000s £000s £000s
At 1 January
Cost 12,346 3,286 834 2,406 6,643 9,906 - 35,421
Accumulated amortisation and impairment (4,999) (710) (64) - - - - (5,773)
Net book value 7,347 2,576 770 2,406 6,643 9,906 - 29,648
Period ended 31 December
Additions 3,609 950 299 - - - 238 5,096
Acquisition of LAICA S.p.A. (note 14) - - - - - (487) - (487)
Transfers - - - - - - (172) (172)
Disposals (cost) (29) (8) (1) - - - - (38)
Disposals (accumulated amortisation) - 8 - - - - - 8
Amortisation charge (1,563) (495) (47) (205) - - - (2,310)
Exchange differences 42 2 (4) (165) (469) (683) - (1,277)
Closing net book value 9,406 3,033 1,017 2,036 6,174 8,736 66 30,468
At 31 December
Cost 15,971 4,186 1,128 2,232 6,174 8,736 66 38,493
Accumulated amortisation and impairment (6,565) (1,153) (111) (196) - - - (8,025)
Net book value 9,406 3,033 1,017 2,036 6,174 8,736 66 30,468
Amortisation charges were treated as an expense, and allocated to cost of
sales (£2,029,000), distribution costs £NIL and administrative expenses
(£281,000) in the consolidated statement of comprehensive income.
£172,000 worth of intangible assets under construction were reclassified to
property plant and equipment.
12. PROPERTY, PLANT AND EQUIPMENT
2022
Plant & machinery Fixtures, fittings & equipment Motor vehicles Production tools Land & Buildings Right-of-use assets Point of use dispensers Assets under construction Total
(note 26)
£000s £000s £000s £000s £000s £000s £000s £000s £000s
At 1 January
Cost 26,093 5,833 218 12,829 20,541 6,450 - 2,176 74,140
Accumulated depreciation (13,812) (3,084) (185) (10,564) (529) (3,203) - - (31,377)
Net book value 12,281 2,749 33 2,265 20,012 3,247 - 2,176 42,763
Period ended 31 December
Additions 2,904 1,503 23 864 125 505 - (78) 5,846
Acquisition of Billi (note 14) 419 211 17 - - 1,237 1,386 144 3,414
Transfers - - - - - - - - -
Disposals (cost) (90) (237) (1) - - (698) - - (1,026)
Disposals (accumulated depreciation) 53 157 1 - - 125 - - 336
Depreciation charge (1,402) (883) (23) (484) (426) (920) (63) - (4,201)
Exchange differences 48 20 (6) (1) 1 129 36 5 232
Closing net book value 14,213 3,520 44 2,644 19,712 3,625 1,359 2,247 47,364
At 31 December
Cost 29,988 8,124 375 13,693 20,690 8,678 1,430 2,247 85,225
Accumulated depreciation (15,775) (4,604) (331) (11,049) (978) (5,053) (71) - (37,861)
Net book value 14,213 3,520 44 2,644 19,712 3,625 1,359 2,247 47,364
Point-of-use dispensers were acquired as part of the acquisition of Billi.
Refer to Note 14.
Depreciation charges are allocated to cost of sales (£3,149,000),
distribution costs (£184,000) and administrative expenses (£868,000) in the
consolidated statement of comprehensive income. In addition, borrowing costs
of £nil (2021: £306,000), calculated at prevailing rates of the revolving
credit facility (note 19), have been capitalised to land and buildings in the
year.
As highlighted in Note 2, Management revised the useful lives of certain
assets at the beginning of the year. As part of this assessment, the useful
lives of fixtures and fittings, plant and machinery and production tools were
reassessed and extended with the resulting impact being a decrease in
depreciation of £1,098,000 for the full year 2022. Going forward, the
depreciation charges will be in line with the revised useful lives.
2021
Plant & machinery Fixtures, fittings & equipment Motor vehicles Production tools Land & Buildings Right-of-use assets Assets under construction Total
(note 26)
£000s £000s £000s £000s £000s £000s £000s £000s
At 1 January
Cost 22,750 4,367 137 14,013 3,737 6,533 16,751 68,288
Accumulated depreciation (12,686) (3,428) (95) (12,140) (129) (2,605) - (31,083)
Net book value 10,064 939 42 1,873 3,608 3,928 16,751 37,205
Period ended 31 December
Additions 86 2,474 20 1 - 1,474 10,086 14,141
Transfers 5,257 - - 1,183 18,386 - (24,654) 172
Disposals (cost) (7,021) (1,238) (5) (901) (2,297) (1,469) - (12,931)
Disposals (accumulated depreciation) 5,720 1,140 4 833 322 772 - 8,791
Depreciation charge (1,776) (568) (27) (724) (78) (1,396) - (4,569)
Exchange differences (49) 2 (1) - 71 (62) (7) (46)
Closing net book value 12,281 2,749 33 2,265 20,012 3,247 2,176 42,763
At 31 December
Cost 26,093 5,833 218 12,829 20,541 6,450 2,176 74,140
Accumulated depreciation (13,812) (3,084) (185) (10,564) (529) (3,203) - (31,377)
Net book value 12,281 2,749 33 2,265 20,012 3,247 2,176 42,763
Depreciation charges in the prior year were allocated to cost of sales
(£3,821,000), distribution costs (£90,000), and administrative expenses
(£658,000) in the consolidated statement of comprehensive income.
13. PRINCIPAL SUBSIDIARY UNDERTAKINGS AND JOINT ARRANGEMENTS OF THE GROUP
A list of all subsidiary undertakings controlled by the Group, and existing
joint arrangements the Group is currently part of, which are all included in
the consolidated financial statements, is set out below.
Name of entity Nature of business Country of incorporation % of ordinary shares held by the Group Nature of shareholding
Sula Limited Holding company IOM 100 Subsidiary
Strix Limited Manufacture and sale of products IOM 100 Subsidiary
Strix Guangzhou Limited Dormant company China 100 Subsidiary
Strix (U.K.) Limited Holding company and group's sale and distribution centre United Kingdom 100 Subsidiary
Strix Hong Kong Limited Sale and distribution of products Hong Kong 100 Subsidiary
Strix (China) Limited Manufacture and sale of products China 100 Subsidiary
HaloSource Water Purification Technology (Shanghai) Co. Limited Manufacture and sales of products China 100 Subsidiary
Strix (USA), Inc. Research and development, sales, and distribution of products USA 100 Subsidiary
LAICA S.p.A. Manufacture and sales of products Italy 100 Subsidiary
LAICA Iberia Distribution S.L. Sale and distribution of products Spain 100 Subsidiary
LAICA International Corp. Sale and distribution of products Taiwan 67 Subsidiary
Taiwan LAICA Corp. Sale and distribution of products Taiwan 67 Subsidiary
Foshan Yilai Life Electric Appliances Co. Limited. Sale and distribution of products China 45 Joint venture
LAICA Brand House Limited Holding and licensing of trademarks Hong Kong 45 Joint venture
Strix Australia Pty Limited Holding company Australia 100 Subsidiary
Billi UK Limited Manufacture and sale of products United Kingdom 100 Subsidiary
Billi Australia Pty Limited Manufacture and sale of products Australia 100 Subsidiary
Billi New Zealand Limited Manufacture and sale of products New Zealand 100 Subsidiary
Billi R&D Limited Research and development Australia 100 Subsidiary
Billi Financial Services Limited Financial Services Australia 100 Subsidiary
Incorporation of Strix Australia Pty Limited
On 26 October 2022, Strix Australia Limited was incorporated in Australia and
is a wholly-owned subsidiary of Strix (U.K.) Limited. The entity was
incorporated for the purpose of effecting the acquisition of Billi.
Acquisition of Billi
On 30 November 2022, the Group completed the acquisition of the entire issued
share capital of Billi Australia Pty Ltd, Billi New Zealand Ltd and Billi UK
Ltd (together "Billi"). Details of the acquisition are disclosed in note 14
below.
Group restrictions
Cash and cash equivalents held in China are subject to local exchange control
regulations. These regulations provide for restrictions on exporting capital
from those countries, other than through normal dividends. The carrying amount
of the cash and cash equivalents included within the consolidated financial
statements to which these restrictions apply is £3,568,000 (2021:
£3,681,000). There are no other restrictions on the Group's ability to access
or use the assets and settle the liabilities of the Group's subsidiaries.
14. ACQUISITIONS
Acquisitions made in the current year
On 30 November 2022, the Group, through its subsidiaries, Strix (U.K.) Limited
and newly incorporated Strix Australia Pty Limited, acquired 100% of the share
capital of Billi Australia Pty Ltd, Billi New Zealand Ltd, and certain assets
and liabilities through a newly acquired company, Billi UK Ltd, (all together
referred to as "Billi"). The total consideration for the acquisition was
£38,912,000 paid in cash.
Goodwill of £10,885,000 has been recognised as the difference between the
purchase consideration of £38,912,000 and the provisional fair values of the
net assets acquired of £28,027,000. The goodwill is attributable to new
growth opportunities, workforce and synergies of the combined business
operations, and it is not expected to be deductible for tax purposes.
The objective of the acquisition is to accelerate the Group's growth plans for
its water and appliance categories and provide an entry into the high growth
and strategically important hot tap market. Billi is a leading brand supplying
premium filtered and non-filtered instant boiling, chilled and sparkling water
systems with manufacturing operations based in Australia.
The acquisition has been accounted for as a business combination in accordance
with IFRS 3. As at the date of these financial statements, the initial
accounting for the acquisition of Billi is preliminary, and fair values
amounts are provisional, given the short period of time since the date the
acquisition was completed. Fair values approximate gross contractual amounts.
A reassessment will be performed within twelve months post acquisition and
final amounts of fair values of assets and liabilities acquired will be
reported in the next reporting period.
Certain intangible assets were recognised on acquisition including brands and
customer relationships. The fair values of the intangible assets were
calculated using an income approach (multi-period excess earnings method for
customer related assets and the royalty relief method for brands) based on a
discounted cash flow model that reflects the expected future income they will
generate. The discount rates applied to customer related assets were based on
the assessed Weighted Average Cost of Capital for each territory of operations
ranging from 14.9% to 16.2%, with a 1% premium applied to brands, and a growth
rate based on forecasted revenues. The economic life of brands and customer
relationships applied within the model range from 11 years to 15 years. A
deferred tax liability has been recognised on the fair value adjustments to
intangible assets at the applicable corporate tax rates.
Acquisition costs included within 'Administration expenses - exceptional
items' in the consolidated statement of comprehensive income amounted to
£2.6m. These have been designated as a 'separate transaction' per IFRS 3 and
therefore not included as part of the purchase consideration.
Net cash flows on acquisition of the business are as follows:
2022
£000s
Consideration transferred on acquisition 38,912
less: Net cash acquired with business (1,254)
37,658
Billi contributed revenues of £2.7m and an adjusted profit after tax of
£0.6m to the Group for the period from 30 November 2022 to 31 December 2022.
If Billi had been acquired at the beginning of the year its contribution to
revenues and adjusted profits after tax would have been £38.8m and £5.6m
respectively. The following table details the Sterling equivalent provisional
fair values of assets and liabilities as acquired:
Book values FV Adjustments Fair values
£'000 £'000 £'000
Non-current assets
Intangible assets 5,993 23,209 29,202
Property, plant and equipment 3,609 (195) 3,414
Other non-current assets 130 - 130
Total non-current assets 9,732 23,014 32,746
Current assets
Inventories 6,461 (376) 6,085
Trade and other receivables 9,152 - 9,152
Cash and cash equivalents 1,254 - 1,254
Total current assets 16,867 (376) 16,491
Total assets 26,599 22,638 49,237
Non-current liabilities
Lease liabilities more than 1 year 900 - 900
Deferred tax liability 654 8,357 9,011
Total non-current liabilities 1,554 8,357 9,911
Current liabilities
Trade and other payables 10,919 - 10,919
Lease liabilities more than 1 year 380 - 380
Total current liabilities 11,299 - 11,299
Total liabilities 12,853 8,357 21,210
Net assets acquired 13,746 14,281 28,027
Values have been translated at the closing exchange rates as at the
acquisition date.
Acquisitions in prior years:
Acquisition of Laica
The Group acquired 100% of the issued share capital of LAICA S.p.A. in October
2020. The total consideration transferred for the acquisition was £24.4m
(€26.9m), made up of £11.7m (€13.0m) paid in cash, the issue of 3,192,236
Strix Group plc ordinary shares of £0.01 each with a total fair value of
£7.3m (€8.0m), and a further contingent consideration with a fair value of
£5.4m (€5.9m) representing an amount payable in cash subject to certain
conditions being met, including threshold financial targets for the financial
years ending 31 December 2021 and 2022. Based on a post year-end arbitration
process which was finalised in February 2023 and the financial results of
LAICA S.p.A. for the year ended 31 December 2022, the actual fair value of the
estimated contingent consideration payable to the vendor shareholders has been
recorded at £4.9m (€5.6m) (2021: estimated fair value (2021: £5.8m
(€6.9m)).
In addition, a supplemental consulting arrangement was entered into with the
vendor shareholders of LAICA under which total costs amounting to £4.4m
(€4.9m) were payable in the financial years ending 31 December 2021 and
2022, relating to compensation for post-combination services contingent on the
vendors remaining in service. These costs have been accrued as the services
are rendered to LAICA. As at 31 December 2022, £2.6m (€2.9m) (2021: £1.7m
(€2.0m)) was accrued for services rendered to date.
The accruals relating to both the contingent consideration and the
compensation for the supplemental consulting agreement are reflected as
current liabilities as at 31 December 2022.
15. INVENTORIES
2022 2021
£000s £000s
Raw materials and consumables 11,242 12,139
Finished goods and goods in transit 16,460 7,883
27,702 20,022
The cost of inventories recognised as an expense and included in cost of sales
amounted to £44,241,000 (2021: £52,396,000). The provision for impaired
inventories is £1,034,000 (2021: £2,063,000). There were no inventory
write-downs in 2022 (2021: £246,000).
16. TRADE AND OTHER RECEIVABLES AND CURRENT INCOME TAX RECEIVABLES
2022 2021
£000s £000s
Amounts falling due within one year:
Trade receivables - current 15,967 10,958
Trade receivables - past due 3,580 2,493
Trade receivables - gross 19,547 13,451
Loss allowance (158) (104)
Trade receivables - net 19,389 13,347
Prepayments 2,335 496
Advance purchase of commodities 2,344 5,389
VAT receivable 1,279 5,261
Tax receivable 497 -
Other receivables 4,444 1,018
30,288 25,511
Trade and other receivables carrying values are considered to be equivalent to
their fair values. The amount of trade receivables impaired at 31 December
2022 is equal to the loss allowance provision (2021: same).
The advance purchase of commodities relates to a payment or payments in
advance to secure the purchase of key commodities at an agreed price to
mitigate the commodity price risk.
Other receivables include receivables from licencing income recognised in the
current year of £1,191,000 (2021: nil) and £2,184,000 (2021: nil) rebates
receivable from suppliers from procurements made in prior years. Settlement of
the rebates receivable from suppliers will be via net cash settlement of
future purchases.
Deferred tax assets as at year end were £313,000 (2021: £258,000).
Government grants due amounted to £nil (2021: £300,000). There were no
unfulfilled conditions in relation to these grants at the year end, although
if the Group ceases to operate or leaves the Isle of Man within 10 years from
the date of the last grant payment, funds may be reclaimed.
The Group's trade and other receivables are denominated in the following
currencies:
2022 2021
£000s £000s
Pound Sterling 7,773 5,471
Chinese Yuan 2,520 9,465
US Dollar 3,993 1,478
Euro 8,401 8,668
Hong Kong Dollar 120 118
Australian Dollar 6,839 -
New Zealand Dollar 512 -
Taiwan Dollar 130 311
30,288 25,511
Movements on the Group's provision for impairment of trade receivables and the
inputs and estimation technique used to calculate expected credit losses have
not been disclosed on the basis the amounts are not material. The provision at
31 December 2022 was £158,000 (2021: £104,000).
17. CASH AND CASH EQUIVALENTS
The carrying amounts of the cash and cash equivalents are denominated in the
following currencies:
2022 2021
£000s £000s
Pound Sterling 15,155 4,424
Chinese Yuan 2,506 3,622
US Dollar 6,959 8,183
Euro 4,471 2,584
Hong Kong Dollar 211 207
Australian Dollar 616 -
New Zealand Dollar 159 -
Taiwan Dollar 366 650
30,443 19,670
18. TRADE AND OTHER PAYABLES AND CURRENT INCOME TAX LIABILITIES
2022 2021
£000s £000s
Trade payables 10,010 11,060
Current income tax liabilities 444 1,631
Social security and other taxes 368 352
Customer rebates provisions 745 2,152
Capital creditors 2,848 2,256
VAT liabilities 546 130
Other liabilities 7,308 3,204
Payments in advance from customers 2,270 1,936
Accrued expenses 5,868 4,796
30,407 27,517
The fair value of financial liabilities approximates their carrying value due
to short maturities. Other liabilities include goods received not invoiced
amounts of £1,189,000 (2021: £2,123,000), and an accrual of costs incurred
as part of the Billi acquisition of £3,356,000 (2021: nil). Deferred
government grants amounted to £nil (2021: £583,000). There were no
unfulfilled conditions in relation to these grants at the year end. Movement
in payments in advance from customers were all driven by normal trading, with
the full amounts due at beginning of the year released to revenues in the
current year.
The carrying amounts of the Group's trade and other payables are denominated
in the following currencies:
2022 2021
£000s £000s
Pound Sterling 10,069 13,604
Chinese Yuan 7,228 7,249
US Dollar 1,051 1,951
Euro 4,461 4,030
Hong Kong Dollar 198 253
Australian Dollar 6,408 -
New Zealand Dollar 881 -
Taiwan Dollar 111 430
30,407 27,517
19. BORROWINGS
2022 2021
£000s £000s
Total current borrowings 14,734 1,064
Total non-current borrowings 103,092 69,782
Current bank borrowings comprise small individual short-term arrangements for
financing purchases and optimising cash flows within the Italian subsidiary
and were entered into by LAICA S.p.A. prior to acquisition by the Group.
Current and non-current borrowings are shown net of loan arrangement fees of
£956,000 (2021: £181,000) and £1,770,000 (2021: £513,000), respectively.
Term and debt repayment schedule for long term borrowings
Currency Interest rate Maturity date 31 December 2022 31 December 2021
Revolving Credit Facility GBP SONIA + 2.15% to 4% 25-Oct-25 80,000 70,000
Term loan GBP SONIA + 2.15% to 4% 30-Nov-25 39,000 -
Unicredit facility EUR EURIBOR 6M + 1,2% 28-Jun-24 133 210
Banco BPM EUR 1.45% 30-Nov-23 167 329
BNP Paribas EUR 0.7945% 03-Feb-23 436 -
Credito Emiliano EUR 1.10% 04-Jan-23 221 -
Banco BPM EUR 1.69% 03-Jan-23 112 -
Banco BPM EUR 0.01692 03-Jan-23 54 -
Banco BPM EUR 1.00% 28-Feb-23 432 -
BNP Paribas EUR 0.18% 30-Apr-22 - 172
Banca Monte dei Paschi di Siena EUR 0.19% 31-Jan-22 - 414
Banco BPM EUR 0.19% 31-Mar-22 - 404
Hedging EUR (3) 11
120,552 71,540
In the current year, the existing revolving credit facility ('RCF') agreement
was further refinanced and amended on 25 October 2022 as follows:
New lenders - Barclays Bank Plc and HSBC Bank Plc came on board as new lenders
under the restated agreement.
Revolving credit facility - This relates to the RCF of £80,000,000. The
termination date has been revised to three years after the fourth restatement
date, 25 October 2025, with an option to extend the term initially by twelve
months and a further twelve months thereafter. The purpose of the extended
facility was to finance the acquisition of Laica as well as other significant
capital projects including the new factory in China and ongoing working
capital needs of the Group. Under the amended agreement, the purpose of the
RCF remains the same. As at 31 December 2022, the total facility available is
£80,000,000 (2021: £80,000,000).
Term loan - The Company obtained further funding on 30 November 2022 in the
form of a three-year term loan of £49,000,000 payable initially by a lump sum
of £10,000,000 followed by eleven fixed repayments thereafter with the first
quarterly repayment of £3,545,000 due and payable on 31 March 2023. The
purpose of the term loan was to finance the acquisition of Billi. The £10m
repayment was made towards the term loan on 30 November 2022. As at 31
December 2022, the outstanding balance on the term loan is £39,000,000 (2021:
£nil).
Interest applied to the revolving credit facility and term loan is calculated
as the sum of the margin and SONIA. The margin under the amended agreement
shall be 3.5% until 31 March 2023, and then 2.85% from 1 April 2023 to 30 June
2023, and thereafter margin will be dependent on the net leverage of the
Group.
All amounts become immediately repayable and undrawn amounts cease to be
available for drawdown in the event of a third-party gaining control of the
Company. The Company and its material subsidiaries have entered into the
agreement as guarantors, guaranteeing the obligations of the borrowers under
the agreement (2021: same).
Transactions costs amounting to £2,324,000 (2021: £875,000) incurred as part
of refinancing and amending the RCF agreement were capitalised and are being
amortised over the period of three years.
The various agreements contain representations and warranties which are usual
for an agreement of this nature. The agreement also provides for the payment
of a commitment fee, agency fee and arrangement fee, contains certain
undertakings, guarantees and covenants (including financial covenants) and
provides for certain events of default. During 2022, the Group has not
breached any of the financial covenants contained within the agreements - see
note 22(d) for further details. (2021: same)
The fair values of the borrowings are not materially different from their
carrying amounts, since the interest payable on those borrowings is either
close to current market rates or the borrowings are of a short-term nature.
20. CAPITAL COMMITMENTS
2022 2021
£000s £000s
Contracted for but not provided in the consolidated financial statements - 695 2,001
Property, plant and equipment
The above commitments include capital expenditure of £547,000 (2021:
£1,639,000) relating to plant and machinery and production equipment for the
factory in China.
21. CONTINGENT ASSETS AND CONTINGENT LIABILITIES
There continues a number of ongoing intellectual property infringement cases
initiated by the Group, as well as patent validation challenges brought by the
defendants. All of these cases are still subject to due legal process in the
countries in which the matters have been raised. As a result, no contingent
assets have been recognised at 31 December 2022 (2021: same), as any receipts
are dependent on the final outcome of each case. There are also no
corresponding contingent liabilities at 31 December 2022 (2021: same).
22. FINANCIAL RISK MANAGEMENT
The Group's activities expose it to a variety of financial risks: market risk
(including currency risk, interest rate risk and commodity price risk), credit
risk, liquidity risk and capital management risk.
Risk management is carried out by the Directors. The Group uses financial
instruments where required to provide flexibility regarding its working
capital requirements and to enable it to manage specific financial risks to
which it is exposed. Transactions are only undertaken if they relate to actual
underlying exposures and hence cannot be viewed as speculative.
(a) Market risk
(i) Foreign exchange risk
The Group operates predominantly in the IOM, UK, EU, US, Australia, New
Zealand and China and is therefore exposed to foreign exchange risk. Foreign
exchange risk arises on sales and purchases made in foreign currencies and on
recognised assets and liabilities and net investments in foreign operations.
The Group monitors its exposure to currency fluctuations on an ongoing basis.
The Group uses foreign currency bank accounts to reduce its exposure to
foreign currency translation risk, and the Group is naturally hedged against
foreign exchange risk as it both generates revenues and incurs costs in the
major currencies with which it deals. The major currencies the Group transacts
in are:
• British Pounds (GBP)
• Chinese Yuan (CNY)
• United States Dollar (USD)
• Euro (EUR)
• Hong Kong Dollar (HKD)
• Australian Dollar (AUD)
• New Zealand Dollar (NZD)
• Taiwan Dollar (TWD)
In December 2022, the Group entered into USD/GBP and USD/EUR forward exchange
rate contracts to sell the notional amount of US$8,500,000 and hence mitigate
the risk and impact of volatile exchange rate movements seen during the year
on group profits. The fair value of these contracts at year-end is considered
not material.
Exposure by currency is analysed in notes 16, 17 and 18.
(ii) Interest rate risk
The Group is exposed to interest rate risk on its long-term borrowings, being
the revolving credit facility term loan and other borrowings disclosed in note
19. The interest rates on the revolving credit facility are variable, based on
SONIA and certain other conditions dependent on the financial condition of the
Group, which exposes the Group to cash flow interest rate risk which is
partially offset by cash held at variable rates. Other borrowings are made up
of both fixed rate loans and variable loans based on EURIBOR.
(iii) Price risk
The Group is exposed to price risk, principally in relation to commodity
prices of raw materials. The Group enters into forward commodity contracts or
makes payments in advance in order to mitigate the impact of price movements
on its gross margin. The Group has not designated any of these contracts as
hedging instruments in either 2022 or 2021 as they relate to physical
commodities being purchased for the Group own use. At 31 December 2022 and
2021, payments were made in advance to buy certain commodities at fixed
prices, as disclosed in note 16.
(iv) Sensitivity analysis
· Foreign exchange risk: The Group is primarily exposed to exchange
rate fluctuations between GBP and USD, CNY, HKD, EUR, TWD, AUD and NZD.
Assuming a reasonably possible change in FX rates of +10% (2021: +10%), the
impact on profit would be a decrease of £319,000 (2021: a decrease of
£751,000), and the impact on equity would be a decrease of £738,000 (2021:
decrease of £1,877,000). A -10% change (2021: -10%) in FX rates would cause
an increase in profit of £390,000 (2021: an increase in profit of £918,000)
and a £902,000 increase in equity (2021: £1,603,000 increase in equity).
This has been calculated by taking the profit generated by each currency and
recalculating a comparable figure on a constant currency basis, and by
retranslating the amounts in the consolidated balance sheet to calculate the
effect on equity.
· Interest rate risk: The Group is exposed to interest rate
fluctuations on its non-current borrowings, as disclosed in note 19. Assuming
a reasonably possible change in the SONIA/EURIBOR rate of ±0.5% (2021:
±0.5%), the impact on profit would be an increase/decrease of £476,000
(2021: £313,000), and the impact on equity would be an increase/decrease of
£72,000 (2021: £138,000). This has been calculated by recalculating the loan
interest using the revised rate to calculate the impact on profit, and
recalculating the year end loan interest balance payable using the same rate.
· Commodity price risk: The Group is exposed to commodity price
fluctuations, primarily in relation to copper and silver. Assuming a
reasonably possible change in commodity prices of ±13% for silver (2021:
±14%) and ±15% for copper (2021: ±14%) based on volatility analysis for the
past year, the impact on profit would be an increase/decrease of £1,346,000
(2021: £3,766,000). The Group does not hold significant quantities of copper
and silver inventory, therefore the impact on equity would be the same as the
profit or loss impact disclosed (2021: same). This has been calculated by
taking the average purchase price of these commodities during the year in
purchase currency and recalculating the cost of the purchases with the price
sensitivity applied.
(b) Credit risk
The Group has policies in place to ensure that sales of goods are made to
clients with an appropriate credit history. The Group uses letters of credit
and advance payments to minimise credit risk. Management believe there is no
further credit risk provision required in excess of the normal provision for
doubtful receivables, as disclosed in note 16. The amount of trade and other
receivables written off during the year amounted to less than 0.07% of revenue
(2021: less than 0.08% of revenue).
Cash and cash equivalents are held with reputable institutions. All material
cash amounts are deposited with financial institutions whose credit rating is
at least B based on credit ratings according to Standard & Poor's. At
year-end, £19,456,000 (2021: £11,490,000) was held with one financial
institution with a credit rating of BBB. The following table shows the
external credit ratings of the institutions with whom the Group has cash
deposits:
2022 2021
£000s £000s
AA 797 -
A 4,132 3,989
BBB 25,450 15,633
B 27 11
n/a 37 37
30,443 19,670
(c) Liquidity risk
The Group maintained significant cash balances throughout the period and hence
suffers minimal liquidity risk. Cash flow forecasting is performed for the
Group by the finance function, which monitors rolling forecasts of the Group's
liquidity requirements to ensure it has sufficient cash to meet operational
needs and so that the Group minimises the risk of breaching borrowing limits
or covenants on any of its borrowing facilities. The Group has revolving
credit facilities to provide access to cash for various purposes. The
facilities were fully utilised as at 31 December 2022 (2021: headroom of
£10,000,000).
The table below analyses the group's financial liabilities as at 31 December
2022 into relevant maturity groupings based on their contractual maturities
for all non-derivative financial liabilities. There are no derivative
financial liabilities. The amounts disclosed in the table are the contractual
undiscounted cash flows. Balances due within 12 months equal their carrying
balances as the impact of discounting is not significant.
Less than 6 months 6 - 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Carrying amount (assets) / liabilities
£000s £000s £000s £000s £000s £000s £000s
Trade and other payables 30,407 - - - - 30,407 30,407
Borrowings 8,478 7,212 14,226 90,636 - 120,552 117,826
Lease liabilities 535 534 1,247 1,645 - 3,961 3,888
Contingent consideration 7,532 - - - - 7,532 7,532
Total financial liabilities 46,952 7,746 15,473 92,281 - 162,452 159,653
The table below analyses the respective financial liabilities as at 31
December 2021 (the prior year):
Less than 6 - 12 Between Between Over Total Carrying
6 months
months
1 and 2
2 and 5
5 years
contractual
amount
years
years
cash flows
(assets) /
liabilities
£000s £000s £000s £000s £000s £000s £000s
Trade and other payables 27,517 - - - - 27,517 27,517
Borrowings 2,540 1,551 1,666 70,635 - 76,392 70,846
Lease liabilities 548 533 963 2,427 293 4,764 3,371
Contingent consideration 6,081 - 3,994 - - 10,075 7,464
Total financial liabilities 36,686 2,084 6,623 73,062 293 118,748 109,198
(d) Capital risk management
The Group manages its capital to ensure its ability to continue as a going
concern and to maintain an optimal capital structure to reduce the cost of
capital. The aim of the Group is to maintain sufficient funds to enable it to
make suitable capital investments whilst minimising recourse to bankers and/or
shareholders. In order to maintain or adjust capital, the Group may adjust the
amount of cash distributed to shareholders, return capital to shareholders,
issue new shares or raise debt through its access to the AIM market.
Capital is monitored by the Group on a monthly basis by the finance function.
This includes the monitoring of the Group's gearing ratios and monitoring the
terms of the financial covenants related to the revolving credit facilities as
disclosed in note 19. These ratios are formally reported on a quarterly basis.
The financial covenants were complied with throughout the period. At 31
December 2022 these ratios were as follows:
· Debt Service Cover ratio (DSCR): circa 7.00x (2021: n/a) - minimum per
facility terms is 1.1x; and
· Leverage ratio: 2.24x (2021: 1.31x) - maximum per facility terms is 3.5x.
(e) Fair value hierarchy
This section explains the judgements and estimates made in determining the
fair values of the financial instruments that are recognised and measured at
fair value in the financial statements. To provide an indication about the
reliability of the inputs used in determining fair value, the group has
classified its financial instruments into the three levels prescribed under
the accounting standards. An explanation of each level is 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. The quoted market price used for
financial assets held by the group is the current bid price. These instruments
are included in level 1.
Level 2: The fair value of financial instruments that are not traded in an active
market (for example, over-the-counter derivatives) is determined using
valuation techniques which 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.
As part of the consideration for the acquisition of Laica S.p.A. which
occurred in October 2020, the Group agreed to pay a contingent consideration
of up to £6.4m (€7.1m) subject to certain conditions being met, including
threshold financial targets for the financial years ending 31 December 2021
and 2022. Based on a post year-end arbitration process which was finalised in
February 2023, the actual fair value of the contingent consideration payable
to the vendor shareholders was set at £4,968,000 (€5,619,000) (2021:
estimated fair value of £5,785,000). In the previous year and prior to this
final arbitration, the fair value was estimated by calculating the present
value of future probability weighted cashflows using a discount rate of 12.7%.
The accrual for the contingent consideration as at year end reflects the final
amount payable which is considered to be the fair value. The contingent
consideration has been classified as Level 3 (2021: same).
There have been no movements into or out of any levels during the year.
The carrying amounts reflected in these financial statements for cash and cash
equivalents, current trade and other receivables/payables and the fixed and
floating rate bank borrowings approximate their fair values.
23. SHARE BASED PAYMENTS
Long term incentive plan terms
As part of the admission to trading on AIM in August 2017, the Group granted a
number of share options to employees of the Group. All of the shares granted
are subject to service conditions, being continued employment with the Group
until the end of the vesting period. The shares granted to the executive
Directors and senior staff also include certain performance conditions which
must be met, based on predetermined earnings per share, dividend pay-out, or
share price targets for the three financial years from grant date. Further
awards have been made since August 2017 under the same scheme on similar
terms, with additional ESG-related performance conditions added on for certain
senior members of management.
During 2020, the Group amended the terms of the Isle of Man share options to
conditional share awards.
Participation in the plan is at the discretion of the Board and no individual
has a contractual right to participate in the plan or to receive any
guaranteed benefits. Where the employee is entitled to share options, these
remain exercisable until the ten-year anniversary of the award date. Where the
employee is entitled to conditional share awards, these are exercised on the
vesting date.
The dividends that would be paid on a share in the period between grant and
vesting reduce the fair value of the award if, in not owning the underlying
shares, a participant does not receive the dividend income on these shares
during the vesting period.
All of the options and conditional share awards are granted under the plan for
nil consideration and carry no voting rights. A summary of the options and
conditional share awards is shown in the table below:
2022 2021
Number of Shares Number of Shares
At 1 January 3,054,161 3,590,383
Granted during the year 600,131 1,095,107
Exercised during the year (734,608) (925,651)
Forfeited during the year (1,265,017) (705,678)
As at 31 December 1,654,667 3,054,161
The Group has recognised a total gain of £491,000 (2021: expense of
£1,549,000) in respect of equity-settled share-based payment transactions in
the year ended 31 December 2022.
For each of the tranches, the first day of the exercise period is the vesting
date and the last day of the exercise period is the expiry date, as listed in
the valuation model input table below. The weighted average contractual life
of options and conditional share awards outstanding at 31 December 2022 was
8.7 years (2021: 8.4 years).
Valuation model inputs
The key inputs to the Black-Scholes-Merton model for the purposes of
estimating the fair values of the share options outstanding at the end of the
year are as follows:
Grant date Share price on grant date Expiry date Weighted average probability of meeting performance criteria Share options outstanding at Share options outstanding at
(p)
31 December 2022
31 December 2021
20 May 2019 157.80 20 May 2029 36.8% - 525,602
06 April 2020 170.00 06 April 2030 100.0% - 310,867
01 May 2020 183.40 01 May 2030 0.0% - 502,495
06 May 2020 181.00 06 May 2030 0.0% - 36,364
21 April 2021 290.00 21 April 2031 0.0% 803,919 820,285
01 January 2022 303.50 01 January 2032 100.0% 9,164 -
21 April 2022 208.50 21 April 2032 0.0% 382,359 -
Total Share Options 1,195,442 2,195,613
The key inputs to the Black-Scholes-Merton model for the purposes of
estimating the fair values of the conditional share awards outstanding at the
end of the year are as follows:
Grant date Share price on grant date (p) Vesting date Weighted average probability of meeting performance criteria Conditional share awards outstanding at Conditional share awards outstanding at
31 December 2022
31 December 2021
20 May 2019 157.80 01 April 2022 36.8% - 304,254
19 August 2019 158.00 01 April 2022 28.0% - 4,250
24 February 2020 179.80 24 April 2022 100.0% - 10,772
06 April 2020 170.00 06 April 2022 100.0% - 90,104
01 May 2020 183.40 31 December 2022 0.0% - 165,759
06 May 2020 181.00 31 December 2022 100.0% - 28,481
21 April 2021 290.00 31 December 2023 29.0% 225,204 229,515
06 December 2021 296.50 31 December 2023 0.0% 16,090 16,090
06 December 2021 296.50 31 December 2024 0.0% 9,323 9,323
21 April 2022 208.50 31 December 2024 0.0% 208,608 -
Total conditional share awards 459,225 858,548
Total share options and conditional share awards 1,654,667 3,054,161
The reduction in the fair value of the awards as a consequence of not being
entitled to dividends reduced the charge for the options granted during the
year by £nil (2021: £nil) and the expected charge over the life of the
options by a total of £nil (2021: £nil).
The other factors in the Black-Scholes-Merton model do not affect the
calculation and have not been disclosed, as the share options were issued for
nil consideration and do not have an exercise price. The weighted average fair
value of the options outstanding at the period end was £2.5719 (2021:
£2.1217).
The movement within the share-based payments reserve during the period is as
follows:
2022 2021
£000s
£000s
Shared-based payments reserves as at 1 January 2,039 1,913
Share based payments transactions (note 5(a)) (491) 1,549
Other share-based payments (136) (174)
Share based payments transferred to other reserves upon exercise/vesting (1,210) (1,249)
Shared-based payments reserves as at 31 December 202 2,039
Other movements
Other transactions recognised directly in equity include the settlement of
dividend entitlements previously accrued as part of the LTIP programme and
employer contributions to national insurance for vested LTIPs.
24. SHARE CAPITAL AND SHARE PREMIUM
Number of shares Par value Share premium Total
(000s) £000s £000s £000s
Allotted and fully paid: ordinary shares of 1p each
Balance at 1 January 2022 206,672 2,066 11,073 13,139
Shares issues during the year 11,304 113 12,887 13,000
Transaction costs - - (2,285) (2,285)
Share options exercised during the year (note 23) 735 7 - 7
Balance at 31 December 2022 218,711 2,186 21,675 23,861
Under the Isle of Man Companies Act 2006, the Company is not required to have
an authorised share capital.
The shares issued during the year consist of 11,304,347 shares issued to
finance the acquisition of the Billi entities as noted in note 14 and the
remaining shares relate to employee share-based payments as noted in note 23.
£13,000,000 was raised on the share issue to finance the acquisition of Billi
with £113,000 recognised in share capital and £12,887,000 recognised as
share premium. Associated transaction costs recognised directly in share
premium amounted to £2,285,000.
The holders of ordinary shares are entitled to receive dividends as declared
from time to time and are entitled to one vote per share at meetings of the
Company. All shares rank pari passu in all respects including voting rights
and dividend entitlement.
See note 23 for further information regarding share-based payments which may
impact the share capital in future periods.
25. DIVIDENDS
The following amounts were recognised as distributions in the year:
2022 2021
£000s £000s
Interim 2022 dividend of 2.75p per share (2021: 2.75p) 5,699 5,679
Final 2021 dividend of 5.6p per share (2020: 5.25p) 11,601 10,831
Total dividends recognised in the year 17,300 16,510
In addition to the above dividends, since year end the Directors have proposed
the payment of a final dividend of 3.25p per share (2021: 5.6p). The aggregate
amount of the proposed final dividend expected to be paid on 11 August 2023
out of retained earnings at 31 December 2022, but not recognised as a
liability at year end, is shown in the table below. The payment of this
dividend will not have any tax consequences for the Group.
2022 2021
£000s £000s
Final 2022 dividend of 3.25p per share (2021: 5.6p) 7,108 11,574
Total dividends proposed but not recognised in the year, and estimated to be 7,108 11,574
recognised in the following year.
26. LEASES
a) Amounts recognised in the consolidated statement of financial position
The consolidated statement of financial position shows the following amounts
relating to leases:
2022 2021
£000s £000s
Right-of-use assets
Land and buildings 3,625 3,247
Total right-of-use assets 3,625 3,247
Current future lease liabilities (due within 12 months) 1,069 773
Non-current future lease liabilities (due in more than 12 months) 2,819 2,598
Total future lease liabilities 3,888 3,371
Additions to the right-of-use liabilities during the 2022 financial year were
£505,000 (2021: £1,474,000). Disposals of right-of-use liabilities during
the current year were £586,000 (2021: £735,000)
Short-term leases and leases of low values were recognised directly in the
consolidated statement of comprehensive income, amounting to £106,000 (2021:
£209,000).
Total cash outflows relating to all lease payments, including short-term
leases and leases of low values were £939,000 (2021: £1,771,000).
The movement in lease liabilities is as follows:
2022 2021
£000s £000s
Balance as at 1 January 3,371 4,100
Additions 505 1,474
Disposals (586) (735)
Adjustments due to lease modifications - 35
Acquisition of Billi entities (note 14) 1,284 -
Repayments (833) (1,562)
Interest expense (included in finance cost) 92 105
Sub-lease income - (40)
Foreign exchange differences 55 (6)
Balance as at 31 December 3,888 3,371
b) Amounts recognised in the consolidated statement of comprehensive income
The statement of consolidated comprehensive income shows the following amounts
relating to leases:
2022 2021
£000s £000s
Depreciation of right-of-use assets (920) (1,396)
Short-term and low value leases (106) (209)
Interest expense (included in finance cost) (92) (105)
Foreign exchange gains - 6
Total cost relating to leases (1,118) (1,704)
27. STATEMENT OF CASH FLOWS NOTES
a) Cash generated from operations
2022 2021
Note £000s £000s
Cash flows from operating activities
Operating profit 19,916 23,720
Adjustments for:
Depreciation of property, plant and equipment 12 3,281 3,173
Depreciation of right-of-use assets 12 920 1,396
Amortisation of intangible assets 11 2,063 2,310
Share of losses from joint ventures 18 50
Loss on disposal of property, plant and equipment 12 - 1,679
Other non-cash flow items 1,275 1,703
Share based payment transactions 23 (491) 1,400
Net exchange differences 6(a) 188 186
27,170 35,617
Changes in working capital:
Increase in inventories (1,213) (5,320)
Decrease / (increase) in trade and other receivables 3,159 (6,649)
(Decrease) / increase in trade and other payables (4,549) 558
Cash generated from operations 24,567 24,206
Other non-cash flow items include accrual of amounts relating to compensation
for post-combination services, which were accrued part of the acquisition of
LAICA as the services were rendered (see note 14).
Share-based payment transactions include other transactions recognised
directly in equity included in the statement of changes of equity.
b) Movement in net debt
Non-cash movements
At Cash flows Currency movements Other movements At
01 January 2022 31 December 2022
£000s £000s £000s £000s £000s
Borrowings, net of loan arrangement fees (70,846) (46,487) (292) (201) (117,826)
Lease liabilities (3,371) 833 (55) (1,295) (3,888)
Total liabilities from financing activities (74,217) (45,654) (347) (1,496) (121,714)
Cash and cash equivalents 19,670 11,340 (567) - 30,443
Net debt (54,547) (34,314) (914) (1,496) (91,271)
28. ULTIMATE BENEFICIAL OWNER
There is not considered to be any ultimate beneficial owner, as the Company is
listed on AIM. No single shareholder beneficially owns more than 25% of the
Company's share capital.
29. RELATED PARTY TRANSACTIONS
(a) Identity of related parties
Related parties include all of the companies within the Group, however, these
transactions and balances are eliminated on consolidation within the
consolidated financial statements and are not disclosed, except for related
party balances held with Joint Ventures which are not eliminated.
The Group also operates a defined contribution pension scheme which is
considered a related party.
(b) Related party balances
Trading balances
Balance due from Balance due to
2022 2021 2022 2021
£000s £000s £000s £000s
Related party
Foshan Yilai Life Electric Appliances Co. Limited - 165 - -
LAICA Brand House Limited 26 25 - -
(c) Related party transactions
The following transactions with related parties occurred during the year:
2022 2021
Name of related party £000s £000s
Transactions with related parties
Revenue earned from Foshan Yilai Life Electric Appliances Co. Limited 261 298
Revenue earned from LAICA Brand House Limited 3 3
Contributions paid to The Strix Limited Retirement Fund (note 5(c)(i)) (782) (684)
Further information is given on the related party balances and transactions
below:
· Key management compensation is disclosed in note 5(b).
· Information about the pension schemes operated by the Group is disclosed in
note 5(c), and transactions with the pension schemes operated by the Group
relate to contributions made to those schemes on behalf of Group employees.
· Information on dividends paid to shareholders is given in note 25.
30. POST BALANCE SHEET EVENTS
The Group does not have any material events after the reporting period to
disclose.
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