REG - Strix Group PLC - Final Results
18 March 2020
Strix Group Plc
("Strix", the "Group" or the "Company")
Results for the year ended 31 December 2019
Strix Group Plc (AIM: KETL), the global leader in the design, manufacture and supply of kettle safety controls and other complementary water products used in temperature control, steam management and water filtration, is pleased to announce its audited results for the year ended 31 December 2019 which are in line with the market expectations.
Financial summary
Adjusted results1
2019
2018
Change
£m
£m
%5
Revenue
96.9
93.8
+3.3%
Revenue - constant currency basis2
95.4
93.8
+1.8%
EBITDA3
36.9
36.4
+1.5%
Gross profit
39.6
38.9
+1.8%
Operating profit
31.5
30.9
+2.2%
Operating profit - excluding the acquisition of HaloSource
33.4
30.9
+8.3%
Profit before tax
30.2
29.2
+3.4%
Profit after tax
28.9
28.3
+2.1%
Total comprehensive income
28.8
28.3
+1.7%
Net debt4
26.3
27.5
+4.1%
Basic earnings per share
15.2p
14.9p
+2.1%
Total dividend per share
7.7p
7.0p
+10.0%
1. Adjusted results exclude exceptional items, which include share based payment transactions 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. Revenue - constant currency basis, which is defined as 2019 revenue restated at the exchange rates prevailing in 2018, is a non-GAAP metric used by management and is not an IFRS disclosure.
3. 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.
4. Net debt excludes the impact of IFRS 16 lease liabilities. This standard was adopted from 1 January 2019.
5. Figures are calculated from the full numbers as presented in the consolidated financial statements.
Financial highlights
· Solid performance during 2019 including a 3.3% growth in revenue driven by maintaining market value share in the regulated and less regulated markets at c.73% (2018: c.73%) and c.34% (2018: c.34%) respectively and growth in the Chinese domestic market at c.49% (2018: c.45%).
· Adjusted gross profit margin excluding the effect of HaloSource increased to 42.3% (2018: 41.5%).
· Adjusted profit before tax increased by 9.9% to £32.1m (2018: £29.2m) and adjusted EBITDA increased 5.5% to £38.3m (2018: 36.4m), excluding the newly acquired HaloSource business.
· Adjusted total comprehensive losses from the HaloSource acquisition were in line with expectations at £2.0m resulting in a 1.7% increase in Group adjusted total comprehensive income.
· Despite the capital investments made, net debt (excluding the impact of IFRS 16 lease liabilities) reduced to £26.3m, a 4.1% improvement since 31 December 2018 (£27.5m).
· The Group has available liquidity, consisting of cash and undrawn facilities, of £22.7m.
· The Group has improved its net debt (excluding the impact of IFRS 16 lease liabilities) to adjusted EBITDA ratio to 0.7x (2018: 0.8x).
· Proposed final dividend of 5.1p, resulting in total dividends of 7.7p for the full year (2018: 7.0p).
Operational highlights
· Production efficiency of core kettle products improved by 5% to 98% through the continued introduction of automation and lean initiatives.
· The U9 series continues to show strong growth with over 15 million controls sold. The new U90 automation line achieved 80% labour and 85% machine efficiency, in line with original projections.
· Intertek has awarded the Group's Isle of Man facility a 'Benchmark' score for all ISO categories, the highest standard available within the scoring system which very few audited companies achieve.
· Focus on continuous improvement, automation and refinement of existing processes has delivered a 29% improvement in customer quality ppm (parts per million).
Strategic highlights
· Maintained global market value share of the kettle controls market at c.54%.
· Acquisition of specific assets from HaloSource Corporation successfully completed on 7 March 2019, adding significant R&D capabilities and commercial opportunities to the Water Category.
· Construction contract for the new factory within Zengcheng district, China, signed on the 2 September 2019 for £13.9m. Total factory project is on target to be fully operational by August 2021 and remains on budget at the previously guided £20m.
· Appointment of Richard Sells as a Non-Executive Director effective 18 March 2020. Richard brings a wealth of commercial experience to the Board which will support the Group's growth ambitions.
· Continued focus on both safety and intellectual property actions resulting in seventeen kettles being removed from online sale and nine unsafe competitor kettles being recalled globally.
Mark Bartlett, CEO of Strix, commented:
"Following on from our successful results in 2018, we are pleased to report another year of solid trading performance in 2019. We continue to focus on our strategic priorities which has enabled us to retain our c.54% global market value share amidst a challenging geo-political climate.
"During the year, we have continued to execute on our organic and inorganic strategy for growth through the acquisition of HaloSource in March 2019 and the construction of a new factory in China, where we have signed a £13.9m construction contract and commenced construction.
"We remain committed to consumer safety where we continue to initiate regulatory enforcement actions to remove unsafe and poor quality products from the market. Defence of intellectual property remains a core function of our business which is important in achieving the Group's growth potential.
"We have maintained our focus on manufacturing and production quality which has led to a 29% improvement in customer quality parts per million. The Group continues to invest in automation and lean initiatives which will further enhance production efficiency and quality.
"The Group's high ROCE and high proportion of cash in advance payment terms limit the risk of non-payment and working capital fluctuations. This along with a robust balance sheet provide the Board with continued confidence in the Group's future growth prospects.
"The Board are delighted to announce a proposed final dividend of 5.1p, resulting in a total dividend of 7.7p per share for 2019.
"We have been extremely proud of the response of our leaders to the unprecedented situation as a result of COVID-19, with minimal impact to date. The Group's manufacturing operations in China have recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand. The Group will continue to focus on a prudent allocation of capital and be vigilant about the broader implications of COVID-19 which will include daily monitoring of consumer and brand demand. As a result, the Group is working on several strategic initiatives, including new products and efficiency measures, to minimise the impact to full year forecasts."
For further enquiries, please contact:
Strix Group Plc
Mark Bartlett, CEO
Raudres Wong, CFO
Zeus Capital Limited (Nominated Advisor and Joint Broker)
+44 (0) 1624 829829
+44 (0) 20 3829 5000
Nick Cowles / Jamie Peel / Jordan Warburton (Corporate Finance)
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 is admitted to trading on the AIM Market of the London Stock Exchange (AIM: KETL).
Chairman's statement
Introduction
I am pleased to announce that through the Group's stable business model and global presence, it has achieved another year of growth and profitability, despite the effects of continuing geo-political events. In addition, as a result of strong cash generation, and following capital investments made, the Group has improved its net debt position to £26.3m (2018: £27.5m). This excludes the impact of IFRS 16 lease liabilities which was adopted for the first time from 1 January 2019.
The Group continues to execute its strategy for growth through its investment in research and development, automation, the construction of a new factory in China and through the strategic acquisition of HaloSource in March 2019. The Board are pleased with the integration and development of the acquired assets from HaloSource which have performed in line with expectation.
The Group promotes a culture of innovation which along with the manufacture of safe, reliable and high-quality products continues to make Strix renowned within the industry.
Kettle control market performance
I am pleased to report that the global kettle control market displayed value growth of c.3% inclusive of Chinese multi-cooker appliances. This is pleasing when compared to the c.2% average annual value growth experienced since 2016.
In conjunction with the growth in the global market, Strix maintained its value share in both the Regulated and Less Regulated markets at c.73% and c.34% respectively, while the Group's value share in the China domestic market increased to c.49%.
Financial performance
Revenue for the year reached £96.9m, a 3.3% growth on 2018 (1.8% growth on a constant currency basis) and I am pleased to report a 2.1% growth in adjusted profit after tax to £28.9m (2018: £28.3m). The Group presented a 1.8% increase in adjusted gross profit to £39.6m (2018: £38.9m) primarily as a result of the newly acquired HaloSource business which contributed an adjusted gross loss of £1.1m. Adjusted EBITDA increased 1.5% to £36.9m (2018: £36.4m).
Cash generation remains strong, with £34.4m net cash generated from operating activities, compared with £35.0m in 2018.
Impact of COVID-19
The board is closely monitoring the development of COVID-19 and has put in place a number of preventative measures within the Guangzhou manufacturing facility. In order to provide a safe and healthy working environment for our employees, the Group has made medical supplies such as face masks, thermometers and sterilisers readily available. We have also used our newly acquired HaloSource product within the sterilisation zone at the factory entrance to enhance our preventative measures. Globally, the Group is adhering to the latest travel advice provided by the World Health Organisation.
The impact on Strix has thus far been limited with our Guangzhou manufacturing now operating at 96% resource levels, having only been closed for one extra week in line with government imposed policy to extend the mandatory Chinese New Year holiday. All of our top 20 largest OEM customers have resumed production and are continuing to increase capacity.
We expect the kettle control market to be resilient but we are closely following the effect on global consumer demand.
Dividend policy
The Board is proposing a final dividend of 5.1p per share following the 2.6p interim dividend paid in October 2019. This will bring the full year dividend to 7.7p, as indicated within the interim results announcement. The final dividend will be paid on 3 June 2020 to shareholders on the register at 11 May 2020 and the shares will trade ex-dividend from 7 May 2020. The Board has previously communicated its dividend policy, which is to increase the dividend in line with future underlying earnings, from a base of 7.7p for the 2019 financial year.
Board composition
I am delighted that, as of 18 March 2020, Richard Sells is appointed as a Non-Executive Director. Richard brings a wealth of advisory, operational and board experience developed over 30 years' working across multinational corporations, public companies, entrepreneur-led SME enterprises and private-equity backed businesses.
Annual General Meeting
The Group will host its Annual General Meeting on 23 May 2020 at 09:00 at our registered office at Forrest House on the Isle of Man, to which I welcome all of our shareholders.
Gary Lamb
Chairman
Chief Executive Officer's statement
Introduction
Strix has continued to deliver on its strategic plans during 2019 which has strengthened the Group's position across its three product categories; kettle controls, water, and appliances. The Group has maintained its market leading c.54% value share of the global kettle controls market whilst acquiring certain assets from HaloSource in March. In addition construction of a new manufacturing facility in China has commenced and remains on target to be fully operational by August 2021.
Financial performance
The Group has delivered another solid performance driven by a 3.3% increase in revenue (1.8% on a constant currency basis) and a reduction in net debt ahead of market expectations. Excluding the newly acquired HaloSource business, adjusted profit before tax increased by 9.9% to £32.1m and adjusted EBITDA increased by 5.5% to £38.3m. The HaloSource business contributed an adjusted total comprehensive loss of £2.0m, which is in line with the Group's expectations at the time of acquisition.
The Group continues to demonstrate strong cash generation which has supported the payment of an increased dividend for 2019, a £1.0m reduction in the balance of the Group's revolving credit facility, and an increase of £8.9m in cash used in investing activities. This reflects the Group's commitment to undertake strategic projects that will drive future growth and profitability.
Kettle control category
Strix continues to hold a strong value share of the global kettle control market at c.54%, posting growth in the China Market segment and holding a stable position in the Regulated and Less Regulated segments. It is estimated that the value of the global kettle control market grew c.3% to c.£160m in 2019. It exhibits continued growth potential as global penetration of electric kettles increased to c.38% of households.
The overall value of the Regulated kettle control market was estimated to grow by c.2% to c.£70m. The key driver behind Regulated market growth was recovering performance in European (excluding UK) markets and ongoing growth in North America where both markets posted growth of more than 5%. Sector performance was held back by poor UK performance adversely impacted by market uncertainty resulting from Brexit. Strix maintained its value share at c.73% in the Regulated market.
In the Less Regulated market, Strix estimates that in 2019 the value of the kettle control market grew by c.4% to c.£59m, slightly ahead of the medium term average annual growth rate. The key drivers behind Less Regulated market growth were CIS and Central Africa which both experienced growth of over 10%, whilst South Africa and Middle East posted flat/negative growth.
In the Chinese market, Strix estimates that in 2019 the value of the kettle control market grew by c.2% to c.£31m, slightly lower than the c.3% medium term average annual growth rate. The higher priced multi-cooker appliances continue to gain value share to c.26%, and Strix's share of this sector has grown to greater than c.35% (2018: c.18%) following successful commercial actions in the last two years.
New product development
We have continued to focus product development on opportunities within the Regulated, Less Regulated and China markets that will strengthen Strix's position and support our market share aspirations.
To achieve this we have expanded our range of products within the successful U9 platform, and developed a variant of the new electric kettle connector. This allows the Group to access the growing glass powerbase segment of multi-function kettles in both China and the rest of the world. In addition, we have developed variants of our P72 Adaptor, one targeted at the heavy-duty iron market and the other at lower-power milk frothers. We have also been engaging customers, primarily with products aimed at the Regulated market, to use Aqua Optima filters within their appliances, including one which will offer both boiling and chilled water. Finally we have been working on developments to extend the performance of the astrea filter.
We continue to use our strong relationships with key OEMs, brands and retailers, coupled with consumer research, to increase the focus on innovative products that will support our market share aspirations across all the product categories.
Throughout 2020, in line with our growth ambitions, we have fourteen intended new product launches. The most notable impact being within our Water category, which across the three brands, will account for half of our launches. A further two range expansions are planned within kettle controls and five products will be launched within our appliance category.
Water category
The Group's water category has been further strengthened during 2019 through the acquisition of certain assets from HaloSource which now incorporates the Aqua Optima, astrea and HaloPure brands. The water category reported a 6.1% growth in revenue in 2019 which incorporates a 1.1% growth within the Aqua Optima brand which out-performed the 0.7% value growth in the UK filter and jug market.
The category is well placed to take advantage of its world-class R&D knowledge, which was further strengthened through the acquisition of HaloSource, to bring innovative and sustainable products to the market. The introduction of a category management team has strengthened the commercialisation of new technologies to ensure Strix obtains the greatest value out of its research & development activities.
The Aqua Optima brand is strategically positioned to take advantage of the market shift towards trade-brand filters through its product portfolio and partnership with a number of UK and global brands. The brand has concluded a number of sales and partnership initiatives in 2019 which are expected to lead to expanded distribution opportunities into new markets.
The astrea brand acquired from HaloSource in March 2019 delivers safe drinking water to consumers through certified lead reductions. During 2019, the astrea team has worked with a number of leading retailers within the USA and completed a successful collaboration with AquaShield Health Technology Company Ltd to launch a new Philips co-branded water bottle globally outside of North America during 2020. In addition to our co-branded bottle, we intend to launch a further two products under the astrea brand during 2020, the next generation astrea ONE bottle filter and a plastic astrea bottle.
The HaloPure brand also acquired from HaloSource, delivers safer water through patented bromine-based polystyrene beads that kill bacteria and viruses. During 2019, the HaloPure team has focussed on new business development related to the sterilisation industry. The brand has achieved positive testing results and strong interest from customers on the application of its products within the farming and medical sectors. The Group is currently seeking government approval for a sterilisation product license within China that will support the long term growth of this technology.
Appliance category
Strix has developed a portfolio of water, temperature and steam management technologies which have been commercialised in adjacent products and markets. The appliance category reported a 25.9% growth in revenue in 2019 and continues to be focussed on delivering product innovation within the appliance market, with a particular focus on baby care and "hot water on demand".
• The latest version of Tommee Tippee's appliance was awarded the Mother & Baby gold award for "innovation of the year 2019", its volumes have now exceeded one million since the original product was launched.
• We signed a development agreement to launch two new products in 2020 with a leading Asian mother and baby brand.
• We launched the Zwilling Water Dispenser in April 2019 which uses our patented instant flow heater "IFH" technology. This product has been developed with one of our OEM partners and is being sold under the Zwilling brand across China as a hot and warm multi-function drinking water appliance. The benefit is that it can heat water to different temperatures, for different drinks.
• In Q3 2019, we launched the Mr. Coffee HotCup unit, designed as a pod-free single-serve brewer. The unit features Strix patented kettle-heating technology to heat water to the optimal brewing temperature and a water flow system and cone-style filtration to extract flavours.
We continue to use our strong relationships with key OEMs, brands and retailers, coupled with consumer research, to increase the focus on innovative products for the future.
Operations review
Lean and continuous improvement initiatives have continued to be a key focus for Strix and as a result we have secured a 29% reduction to our customer quality ppm (parts per million) rate which includes a 4% reduction to our kettle control customer quality ppm, achieving another record low for the Group. The Group's culture of lean initiatives has achieved £0.2m of savings in 2019 from a total of 17 projects.
During 2019, 521 million parts were manufactured at our factory in Ramsey by a team of only 37 people. Total Quality Assurance Provider, Intertek, has awarded this facility, along with our Ronaldsway head office a 'Benchmark' score within all ISO categories. This represents the highest standards available within the scoring system which very few audited companies achieve. Our larger Guangzhou manufacturing facility also received exceptional results where four out of the six criteria were 'benchmark' and the remainder 'mature' which is considered a top industry ranking for this size of facility.
We have continued to invest in production automation with further automated lines being specified and installed during 2019, with investment planned for 2020 to automate an additional five lines (out of 18 in total). This will allow us to increase our production volume, quality control and reliability whilst managing to control costs, in particular rising wage costs in China. The value of our investment in automation is demonstrated through an improvement in the production efficiency of core kettle products by 5% to 98%.
The Group has made significant progress during 2019 in its plans to relocate the manufacturing operations in China to Guangzhou's Zengcheng district. The Group has completed and received government approval for the detailed designs of the factory and has signed a construction contract with Shanghai Installation Engineering Group Co. Ltd for £13.9m. During October, Strix senior management attended the foundation stone laying ceremony with the foundation pile driving process being completed by the end of December.
The relocation of our manufacturing facilities in China will support the future growth ambitions of the business and enable the Group to maximise the economic benefit of our investment in automation. The Board is pleased to re-confirm that the construction project is on schedule to meet the August 2021 completion with costs in line with expectations.
Defence of intellectual property
We remain committed to consumer safety where we continue to initiate regulatory enforcement actions to remove unsafe and poor quality products from the market. Such actions have again been undertaken in 2019 resulting in product recalls and withdrawal of kettles from sale in Chile, Bulgaria, Sweden and Germany incorporating four European Rapid Exchange of Information (RAPEX) alerts - an all-time high. We continue to actively monitor the markets in which we operate for violation of our intellectual property rights and have again taken action to limit online sales in Europe of products that infringe our IP culminating in the taking down of seventeen electronic kettles. Defence of intellectual property and regulatory enforcement remain core activities of our business and are vital in achieving the Group's growth potential.
Senior management team
During April 2019, we appointed Harry Kyriacou into the new role of Chief Commercial Officer. He brings a wealth of experience in commercialising and marketing new products that will support the next phase of growth within the business, particularly within the water and appliance categories. Strix has since introduced a category management team that will strengthen the commercialisation of our existing and new technologies.
Acquisition strategy
Strix is actively seeking opportunities that will add value across the Group through niche acquisitions or technologies. Acquisitions are subject to strict financial criteria and consistent with the Group's capital allocation priorities, to further enhance the Group's growth potential within the water and appliance categories.
COVID-19
Strix has continued to closely monitor the situation with regards to COVID-19. The Group's manufacturing operations in China resumed production on 10 February (in line with Government policy for an extended Chinese New Year holiday) and have since reached 96% resource levels. In addition, all of the Company's 20 largest OEM customers have now resumed production. We are extremely pleased by the performance of the team through a challenging situation and with minimal disruption to our production. The welfare of all Strix's employees remains the primary concern and pre-cautionary measures will continue for the foreseeable future in order to ensure we can continue to serve our customers.
As COVID-19 has spread globally, Strix has been closely monitoring the potential effect on demand. Strix's products have historically had limited correlation with short term consumer confidence with kettles being seen by many as a household essential and repeat purchase. However, in the event of a fall in demand, the board believes Strix has an appropriate balance sheet and procedures in place to capitalise and continue to serve its customers in the long term.
Trading and Outlook
The Board continues to work with the Group's management teams to deliver on our strategy to create value for our shareholders. In spite of continuing global volatility during the period driven by Brexit and USA/China trade tensions, the Group has delivered a solid performance in 2019 which demonstrates the strength of Strix's core business model.
In 2020 we will continue to focus on our key strategic objectives which include the construction of the new factory in China, implementation of a new 'ERP' system and commercialisation of new products across all three categories.
Whilst there are a number of geopolitical and economic headwinds which could make 2020 challenging including Brexit, the impact of COVID-19, and the continued US/China trade tensions, the Board believe they have taken appropriate preparatory steps to mitigate the risk presented by these challenges. At present we expect that the majority of the impact will occur in H1, mainly attributable to interruptions in global supply chains. Our profitability model strategically targets the second half of 2020, and as such is expected to provide some resilience against this uncertain backdrop.
The Group's manufacturing operations in China have recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand. The Board recognise that although we are entering unprecedented times, the Group's stable, recurring and resilient business model will help support the Group through the COVID-19 pandemic. The Group will continue to focus on a prudent allocation of capital and be vigilant about the broader implications of COVID-19 which will include daily monitoring of consumer and brand demand. As a result, the Group is working on several strategic self-help initiatives, including new products and efficiencies, to minimize the impact to the full year.
We will strive to maintain our market-leading share of kettle safety controls, and to grow our revenue streams within the water and appliance categories further diversifying our revenue base. Whilst this will require continued investment in automation, infrastructure, people and facilities, we believe that the benefits of these investments will drive the creation of increased value for our shareholders.
I would like to take this opportunity to thank all our employees across the globe for their commitment and hard work during another busy year for the Group and I look forward to their support and encouragement for the year ahead.
Mark Bartlett
Chief Executive Officer
Chief Financial Officer's review
Adjusted results1
Reported results
2019
2018
Change
2019
2018
Change
£m
£m
%5
£m
£m
%5
Revenue
96.9
93.8
+3.3%
96.9
93.8
+3.3%
Revenue - constant currency basis2
95.4
93.8
+1.8%
95.4
93.8
+1.8%
EBITDA3
36.9
36.4
+1.5%
29.6
31.3
-5.4%
Gross profit
39.6
38.9
+1.8%
39.4
38.9
+1.4%
Operating profit
31.5
30.9
+2.2%
24.2
25.8
-6.1%
Operating profit - excluding the acquisition of HaloSource
33.4
30.9
+8.3%
26.3
25.8
+2.0%
Profit before tax
30.2
29.2
+3.4%
22.9
24.1
-5.2%
Profit after tax
28.9
28.3
+2.1%
21.5
23.2
-7.1%
Total comprehensive income
28.8
28.3
+1.7%
21.4
23.2
-7.7%
Net debt4
26.3
27.5
+4.1%
26.3
27.5
+4.1%
Net cash generated from operating activities
34.4
35.0
-1.7%
34.4
35.0
-1.7%
Basic earnings per share
15.2p
14.9p
+2.1%
11.3p
12.2p
-7.1%
Total dividend per share
7.7p
7.0p
+10.0%
7.7p
7.0p
+10.0%
1. Adjusted results exclude exceptional items, which include share based payment transactions and other reorganisation and strategic project costs. Adjusted results are non-GAAP metrics used by management and are not an IFRS disclosure.
2. Revenue - constant currency basis, which is defined as 2019 revenue restated at the exchange rates prevailing in 2018, is a non-GAAP metric used by management and is not an IFRS disclosure.
3. 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.
4. Net debt excludes the impact of IFRS 16 lease liabilities. This standard was adopted from 1 January 2019.
5. Figures are calculated from the full numbers as presented in the consolidated financial statements.
Financial Performance
Revenue for 2019 has risen by 3.3% to £96.9m as a result of maintaining market value share in a growing market, the acquisition of HaloSource in March 2019 which contributed £0.5m of revenue, and the weakening of sterling against the dollar. As a consequence, revenue growth on a constant currency basis was 1.8% and gross profit has increased by £0.5m (+1.4%). This incorporates a gross loss of £1.2m relating to the acquisition of HaloSource. Gross profit margin has further increased from 41.5% to 42.1% excluding the acquisition of HaloSource.
Adjusted EBITDA increased to £36.9m from £36.4m, representing a 1.5% increase. Excluding the acquisition of HaloSource, adjusted EBITDA increased 5.5% to £38.3m. Adjusted EBITDA is defined as profit before depreciation, amortisation, finance costs, finance income, taxation, and exceptional items including share based payments.
Adjusted operating profit showed an increase of 2.2% to £31.5m (2018: £30.9m) due to lower amortisation being reported (2019: £1.3m; 2018: £2.3m). This has been offset by an increase in fixed salary costs partially driven by the acquisition of HaloSource during the year.
The Group's reported operating profit was £24.2m (2018: £25.8m) which represents a decrease of 6.1%, primarily due to incurring an operating loss of £2.1m in relation to the newly acquired HaloSource business offset by a £0.5m increase in gross profit for the remaining business.
Adjusted profit before tax increased to £30.2m (2018: £29.2m). Excluding the newly acquired HaloSource business the adjusted profit before tax increased by 9.9% to £32.1m. Interest on the revolving credit facility decreased by £0.4m to £0.9m following a reduction in the facility amount from £41.0m to £40.0m and a reduction in the applicable interest rate. The Group's reported profit before tax was £22.9m (2018: £24.1m).
Adjusted profit after tax increased to £28.9m (2018: £28.3m), an increase of 2.1%, as a result of an increased tax charge representing an effective tax rate of 4.4% (2018: 3.2%) of the Group's adjusted profit before tax. This is following a change in tax basis from contract processing to an import processing model in China during 2019. The Group's reported profit after tax was £21.5m (2018: £23.2m).
Adjusted diluted earnings per share and reported diluted earnings per share were 14.2p (2018: 14.2p) and 10.6p (2018: 11.6p) respectively. This is a result of the weighted average number of diluted shares increasing during 2019. Basic earnings per share were reported at 11.3p (2018: 12.2p), and adjusted for exceptional costs were 15.2p (2018: 14.9p).
Capital expenditure and capitalised development costs
Tangible assets had additions to net book value of £18.8m in 2019, compared to £5.0m in 2018. This includes £6.7m (2018: £0.2m) of capital expenditure under construction, £5.7m (2018: £nil) of right of use assets following the adoption of IFRS 16 on 1 January 2019, £2.7m (2018: £2.7m) of plant and machinery, £2.0m (2018: £nil) of land, £0.9m (2018: £1.4m) of production tools and £0.8m (2018: £0.6m) of fixtures and fittings. This demonstrates Strix's continued investment in its manufacturing and development assets to support our strategic growth objectives.
Intangible assets had additions to net book value of £3.2m (excluding goodwill) in 2019, compared to £1.9m in 2018. This includes £2.4m (2018: £1.8m) of capitalised development costs relating to our R&D investment, £0.3m (2018: £0.1m) of software and £0.5m (2018: £nil) of intellectual property rights which have been separated into a new asset class in 2019.
Share based payments
The total charge incurred in the consolidated statement of comprehensive income in 2019 for share based payments was £5.9m (2018: £4.9m). The charge will reduce in 2020, once the tranche of IPO share options have vested. Some additional share awards were also granted during 2019 to incentivise and retain the Directors and other employees whom the Board consider critical to the achievement of the Group's strategic objectives.
Foreign Exchange
The Group is broadly naturally hedged against movements in USD and RMB as it both generates revenues and incurs costs in these currencies. The impact of foreign exchange in 2019 is a loss of £0.3m (2018: gain of £0.1m). Despite significant currency fluctuations in 2019, the foreign exchange loss is equivalent to only 0.3% (2018: 0.1%) of revenue.
Taxation
The effective tax rate for the year is equivalent to 4.4% (2018: 3.2%) of the Group's adjusted profit before tax. During the year, in order to mitigate the risk of higher tax charges in the future, the Group has changed its tax basis in China from the contract processing to the import processing basis.
Balance Sheet
Property, plant and equipment increased to £25.5m (2018: £11.1m). Capital additions include £6.0m of assets and land use rights relating to the new factory in Guangzhou (2018: £nil), £5.7m of right of use assets following the adoption of IFRS 16 on 1 January 2019, and £4.4m of plant and equipment (2018: £4.8m). Depreciation increased to £4.2m (2018: £3.2m) as a result of the adoption of IFRS 16 which incurred £1.3m of right of use asset depreciation. Net intangible assets (comprising capitalised development costs, goodwill, software and intellectual property rights) increased by £2.3m (2018: decreased by £0.4m) driven by a £1.3m increase in capitalised development costs in line with the Group's strategic growth objectives.
Current assets increased to £32.5m compared to £31.3m in 2018 primarily due to a £1.3m increase in trade debtors at year end following an increase in December sales and a £0.7m increase in advances to suppliers. Inventory decreased by £1.0m following increased demand in the second half of the year. Cash and cash equivalents were broadly unchanged at £13.7m (2018: £13.5m).
Current liabilities increased to £21.2m (2018: £18.4m) primarily due to a £1.5m increase in future lease liabilities following the introduction of IFRS 16 on 1 January 2019. Trade and other payables increased by £1.0m to £17.8m (2018: 16.8m).
Cash flow and net debt
The net increase in cash and cash equivalents over the year was £0.6m (2018: £3.2m). This was primarily a result of an increase in dividend payments from £8.0m to £13.9m and an increase in the purchase of property, plant and equipment from £5.7m to £12.6m. Net cash generated from operating activities were down £0.6m in 2019 to £34.4m (2018: £35.0m) with net cash used in investing activities up £8.9m to £16.4m (2018: £7.5m) due to the acquisition of HaloSource; and the increased investment in both tangible and intangible assets.
Net debt (excluding the impact of IFRS 16 lease liabilities) has decreased from £27.5m in 2018 to £26.3m despite the acquisition of HaloSource and higher investment in capital expenditure. We expect the Group's net debt and leverage to increase due to continued investment in capital expenditure including the construction of the new factory in China. Including the impact of IFRS 16 lease liabilities, which was adopted from 1 January 2019, net debt has decreased to £30.8m.
The Group still has in place a revolving credit facility of £49.0m (2018: £53.0m) of which £40.0m (2018: £41.0m) remains drawn on the facility as at 31 December 2019. The Net debt (excluding the impact of IFRS 16 lease liabilities) to adjusted EBITDA ratio as at 31 December 2019 was 0.7x (2018: 0.8x).
Raudres Wong
Chief Financial Officer
Consolidated statement of comprehensive income
for the year ended 31 December 2019
Note
2019
£000s
2018
£000s
Revenue
7
96,876
93,769
Cost of sales - before exceptional items
(57,259)
(54,851)
Cost of sales - exceptional items
6
(171)
-
Cost of sales
(57,430)
(54,851)
Gross profit
39,446
38,918
Distribution costs
(5,287)
(5,344)
Administrative expenses - before exceptional items
(3,385)
(3,083)
Administrative expenses - exceptional items
6
(7,152)
(5,072)
Administrative expenses
(10,537)
(8,155)
Other operating income
587
370
Operating profit
24,209
25,789
Analysed as:
Adjusted EBITDA(1)
36,904
36,351
Amortisation
11
(1,256)
(2,292)
Depreciation
12
(2,903)
(3,198)
Right of use depreciation
12
(1,323)
-
Exchange differences on translation of foreign operations
110
-
Other exceptional items
6
(7,323)
(5,072)
Operating profit
24,209
25,789
Finance costs
8
(1,351)
(1,672)
Finance income
19
17
Profit before taxation
22,877
24,134
Income tax expense
9
(1,339)
(947)
Profit for the year
21,538
23,187
Other comprehensive income/(expense)
Items that may be reclassified to profit or loss:
Exchange differences on translation of foreign operations
(110)
-
Items that will never be reclassified to profit or loss:
Re-measurement of pension scheme obligations
5(c)
-
19
Total comprehensive income for the year
21,428
23,206
Earnings per share (pence)
Basic
10
11.3
12.2
Diluted
10
10.6
11.6
Note 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 balance sheet
as at 31 December 2019
ASSETS
Note
2019
£000s
2018
£000s
Non-current assets
Intangible assets
11
7,068
4,804
Property, plant and equipment
12
25,525
11,093
Total non-current assets
32,593
15,897
Current assets
Inventories
15
9,497
10,518
Trade and other receivables
16
9,333
7,254
Cash and cash equivalents
17
13,658
13,521
Total current assets
32,488
31,293
Total assets
65,081
47,190
EQUITY AND LIABILITIES
Equity
Share capital
24
1,900
1,900
Share based payment reserve
23
13,063
6,904
Retained deficit
(14,052)
(21,180)
Total equity / (deficit)
911
(12,376)
Current liabilities
Trade and other payables
18
17,773
16,824
Future lease liabilities
26
1,508
-
Current income tax liabilities
18
1,929
1,575
Total current liabilities
21,210
18,399
Non-current liabilities
Future lease liabilities
26
2,960
-
Borrowings
19
40,000
41,000
Post-employment benefits
5(c)
-
167
Total non-current liabilities
42,960
41,167
Total liabilities
64,170
59,566
Total equity and liabilities
65,081
47,190
Consolidated statement of changes in equity
for the year ended 31 December 2019
Share
capital
Share based payment reserve
Retained (deficit)/ earnings
Total (deficit)/ equity
£000s
£000s
£000s
£000s
Balance at 1 January 2018
1,900
2,042
(36,406)
(32,464)
Profit for the year
-
-
23,187
23,187
Other comprehensive income
-
-
19
19
Total comprehensive income for the year
-
-
23,206
23,206
Dividends paid (note 25)
-
-
(7,980)
(7,980)
Share based payment transactions (note 23)
-
4,862
-
4,862
Total transactions with owners recognised directly in equity
-
4,862
(7,980)
(3,118)
Balance at 31 December 2018
1,900
6,904
(21,180)
(12,376)
Balance at 1 January 2019
1,900
6,904
(21,180)
(12,376)
Transition to IFRS 16 (note 2)
-
-
(270)
(270)
Balance at 1 January 2019 (as adjusted)
1,900
6,904
(21,450)
(12,646)
Profit for the year
-
-
21,538
21,538
Other comprehensive expense
-
-
(110)
(110)
Total comprehensive income for the year
-
-
21,428
21,428
Dividends paid (note 25)
-
-
(13,870)
(13,870)
Share based payment transactions (note 23)
-
6,159
(238)
5,921
Total transactions with owners recognised directly in equity
-
6,159
(14,108)
(7,949)
Post-employment benefit transactions (note 5(c))
-
-
78
78
Other transactions recognised directly in equity
-
-
78
78
Balance at 31 December 2019
1,900
13,063
(14,052)
911
Consolidated cash flow statement
for the year ended 31 December 2019
Note
2019
£000s
2018
£000s
Cash flows from operating activities
Cash generated from operations
27
35,345
35,431
Tax paid
(985)
(475)
Net cash generated from operating activities
34,360
34,956
Cash flows from investing activities
Purchase of property, plant and equipment
(12,565)
(5,703)
Capitalised development costs
11
(2,358)
(1,849)
Purchase of HaloSource Inc assets net of cash acquired
14
(953)
-
Purchase of intangibles
11
(518)
(68)
Proceeds on sale of property, plant and equipment
4
135
Finance income
19
17
Net cash used in investing activities
(16,371)
(7,468)
Cash flows from financing activities
Drawdowns under credit facility
19
9,000
-
Repayment of non-current borrowings
19
(10,000)
(15,000)
Finance costs paid
(1,198)
(1,305)
Principal elements of lease payments
26
(1,301)
-
Dividends paid
25
(13,870)
(7,980)
Net cash used in financing activities
(17,369)
(24,285)
Net increase in cash and cash equivalents
620
3,203
Cash and cash equivalents at the beginning of the year
13,521
10,111
Effects of foreign exchange on cash and cash equivalents
(483)
207
Cash and cash equivalents at the end of the year
13,658
13,521
Notes to the consolidated financial statements
for the year ended 31 December 2019
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 name Steam Plc and with the registered number 014963V. The Company changed its name to Strix Group Plc on 24 July 2017. 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 and water filtration.
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 Group financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and interpretations issued by the IFRS Interpretations Committee ("IFRS IC") as adopted by the European Union. The financial statements comply with IFRS as issued by the International Accounting Standards Board (IASB). The financial statements have been prepared on the going concern basis and on the historical cost basis.
The preparation of Group 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.
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.
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 a subsidiary 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.
Transaction costs that the Group incurs in connection with a business combination are expensed as incurred.
The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets.
Going concern
These Group 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 they have considered:
· the strong historic trading performance of the Group;
· budgets and cash flow forecasts for the period to December 2022;
· the current financial position of the Group, including its cash and cash equivalents balances of £13.7m;
· the availability of further funding should this be required (including the headroom of £9.0m on the revolving credit facility and the access to the AIM market afforded by the Company's admission to AIM);
· the low liquidity risk the Group is exposed to; and
· the fact that the Group operates within a sector that is experiencing relatively stable demand for its products.
Based on these considerations, the Directors have concluded that there is a reasonable expectation that the Group have 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 annual financial statements.
Foreign currency translation
Functional and presentation 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 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.
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 and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, 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 the consolidated statement of comprehensive income.
New standards, amendments and interpretations
The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2019:
· IFRS 16 Leases
· IFRIC 23 - Uncertainty over Income Tax Treatments
The Group had to change its accounting policies as a result of adopting IFRS 16. The Group elected to adopt the new rules retrospectively recognising the cumulative effect of initially applying the new standard on 1 January 2019. The impact of the adoption of the leasing standard and the new accounting policies are disclosed below in this note.
Other amendments to IFRSs effective for the financial period ended 31 December 2019 have not had a material impact on the Group.
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 2019 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.
Adoption of IFRS 16 'Leases'
This section explains the impact of the adoption of IFRS 16 'Leases' on the Group's financial statements. The Group has adopted IFRS 16 retrospectively from 1 January 2019, and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.
Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 'Leases'. These liabilities were measured at the present value of the future lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 2.7%.
£000s
Operating lease commitments as disclosed at 31 December 2018
3,922
Discounted using the lessee's incremental borrowing rate
(272)
Other adjustments
(37)
Lease liability recognised as at 1 January 2019
3,613
The following table reconciles the difference between the operating lease commitments disclosure in the 2018 Annual Report and the future lease liability recognition on 1 January 2019:
The Group has no leases which were previously classified as finance leases under IAS 17 'Leases'.
The right-of-use assets for property leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to those leases recognised in the balance sheet at 31 December 2018. Other right-of-use assets for one lease were measured on a retrospective basis as if the new rules had always been applied. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.
£000s
Property, plant and equipment (right-of-use assets)
3,343
Future lease liabilities
(3,613)
Retained earnings
270
The recognised right-of-use assets all relate to building leases. The change in accounting policy affected the following items on the consolidated balance sheet as at 1 January 2019:
Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
· the use of a single discount rate to a portfolio of leases with reasonably similar characteristics
· the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases
· the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and
· the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
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. The carrying value of the replaced part is derecognised. All other 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 as follows:
· Plant and machinery 3 - 10 years
· Fixtures, fittings and equipment 2 - 5 years
· Motor vehicles 3 - 5 years
· Production tools 1 - 5 years
· Right of use assets 2 - 8 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.
Fixtures, fittings and other equipment includes computer hardware.
The assets' residual values and useful lives are reviewed at the end of each reporting period.
The land right of use asset acquired by Strix (China) Limited (see note 13) has been included within 'Land and Buildings' in note 12.
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, patents 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 ("CGU's") expected to benefit from the business combination in which the goodwill arose. Goodwill is measured at cost less any accumulated impairment losses. The CGU's represent the lowest level within the Group at which goodwill is monitored for internal management purposes. Goodwill is subject to impairment testing on an annual basis and at any time during the year if an indicator of impairment exists. Where the recoverable amount of a cash generating unit is less than the carrying amount, an impairment loss is recognised. Impairment losses arising in respect of goodwill are not reversed once recognised. 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.
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.
Patent costs are 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.
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 over the following periods:
· Capitalised development costs 2 - 5 years
· Patents Lower of useful or legal life
· Technology and software 2 - 10 years
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.
Impairment
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
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.
Leases
Leases in which a significant portion of the risks and rewards of ownership were not transferred to the Group as lessee were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to the statement of comprehensive income on a straight-line basis over the period of the lease.
From 1 January 2019, the Group has changed its accounting policy for leases to apply IFRS 16. The new policy is described below with the impact of the change disclosed above in this note:
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.
Until the 2018 financial year, leases of property, plant and equipment (including buildings) were classified as operating leases. Payments made under operating leases (net of any lease incentives received from the lessor) were charged to the statement of comprehensive income on a straight-line basis over the period of the lease. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.
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 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 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 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 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
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.
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.
Borrowings, including option-type arrangements, are recognised initially at fair value. Option-type borrowing arrangements are subsequently measured at amortised cost. Fees paid on the establishment of such option-type arrangements are recognised as a 'right to borrow' asset, and are capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which the fees relate.
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
A subsidiary company operates both a defined contribution scheme and a defined benefit scheme for the benefit of its 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 balance sheet in respect of the defined benefit scheme is the present value of the defined benefit obligation at the balance sheet 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 annually 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 on the face of the consolidated balance sheet 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 options or conditional share awards is recognised as an expense.
The total amount to be expensed is determined by reference to the fair value of the options or conditional share awards 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 or conditional share awards 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 first in, first out ("FIFO") method. Cost comprises expenditure which has been incurred in the normal course of business in bringing the products to their present location and condition, 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.
Revenue
The Group primarily recognises revenue from the sales of goods to its customers. The amount of revenue relating to the provision of services is minimal and the Group does not undertake any significant long-term contracts with its customers where revenue is recognised over time.
The transaction price is based on the sales agreement with the customer. Revenue is reported net of estimated sales rebates, which are based on a certain volume of purchases by a customer within a given period. Other than sales rebates, there is no variable consideration. Accumulated experience is used to estimate and provide for discounts and rebates using the expected value method, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. No element of financing is deemed present because the sales are made under normal credit terms, which is consistent with market practice.
The performance obligation is the delivery of goods to customers, and revenue is recognised on despatch for most revenue transactions. Otherwise, revenue 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. There are a very small number of revenue transactions where different performance obligations and/or recognition patterns occur. All of the amounts recognised as revenue are based on contracts with customers.
The Group does not create any contract assets or contract liabilities and all amounts are recognised as trade receivables as there are no performance conditions other than the passage of time. Payment terms for the majority of customers are to pay cash in advance of the goods being delivered. The Group recognises these balances within trade and other payables on the consolidated balance sheet 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 other customers payment is normally due within 45 days from the date of sale.
Some assets are recognised from the costs to obtain contracts with customers, but the total costs in the year are less than 0.25% of revenue (2018: 0.25%) therefore further disclosures have not been made.
Due to the simple nature of the Group's revenue no significant judgments have been made in the application of IFRS 15, aside from the amount of sales rebates the Group expects to incur. These judgements are explained in note 3.
All revenue is derived from the principal activities of the Group.
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 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.
Exceptional items
Items that are material in size, unusual or infrequent in nature are included within operating profit and disclosed separately as exceptional items in the consolidated statement of comprehensive income. The separate reporting of exceptional items helps provide an indication of the Group's underlying performance, and includes restructuring costs, exit costs, share based payment transaction costs and costs relating to certain strategic projects.
Research and development
Research expenditure is written off to the consolidated statement of comprehensive income 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 balance sheet as a capitalised development cost.
Finance costs
Finance costs comprise interest charges on pension liabilities, interest on non-current borrowings, interest on future lease liabilities and finance charges relating to letters of credit. Finance costs are recognised when the right to make a payment is established.
Finance income
Finance income comprises bank interest receivable on funds invested. Finance income is recognised when the right to receive a payment is established.
Income tax
Income tax for the years presented comprises current tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date in the countries where the Group companies operate and generate taxable income, and any adjustment to tax payable in respect of previous years.
Share capital
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.
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 and capital 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.
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 performance measures
Earnings before Interest, Taxation, Depreciation and Amortisation ("EBITDA") and adjusted EBITDA are non-GAAP measures used by management to assess the operating performance of the Group.
EBITDA is defined as earnings before finance costs, tax, depreciation and amortisation. Exceptional items charges are excluded from EBITDA to calculate adjusted EBITDA.
The Directors primarily use the adjusted EBITDA measure when making decisions about the Group's activities. As these are non-GAAP measures, EBITDA and adjusted EBITDA measures used by other entities may not be calculated in the same way and hence are not directly comparable.
3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of the Group's financial statements under IFRS requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
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 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 and HaloSource Water Purification Technology (Shanghai) Co. Ltd which has a Chinese Yuan functional currency. The functional currency of Strix Guangzhou Ltd has been determined as sterling. 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.
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below.
Rebates
Allowances for rebates are recognised based on recent historical experience and management's best estimates. Actual cash outflows may differ from these estimates, for example, if volumes sold in order to claim a volume rebate are not met. Rebates during the year were approximately 2.6% of gross turnover (2018: 4.2%).
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 jugs and filters, primarily to OEMs based in China. It is managed as one entity and management have consequently determined that there is only one operating segment.
Products and services
Revenue is generated by the Group on the sale of thermostatic controls, cordless interfaces, and other products such as water jugs and filters. Whilst under IFRS 8 there is only one segment, the information used to prepare the consolidated financial statements is disaggregated into three product families, being 'Kettle', 'Water category' and 'Appliances'. 'Appliances' relates to new technology products and other appliances which do not fit in either 'Kettle' or the 'Water category'. An analysis of revenue by product family is provided in note 7.
Geographical
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.
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, where one of the Group's principle subsidiaries is domiciled.
2019
2018
£000s
£000s
Country of domicile
Intangible assets
6,137
4,629
Property, plant and equipment
3,381
2,002
Total country of domicile non-current assets
9,518
6,631
Foreign countries
Intangible assets
931
175
Property, plant and equipment
22,144
9,091
Total foreign non-current assets
23,075
9,266
Total non-current assets
32,593
15,897
Major customers
In 2019 there were two major customers that individually accounted for at least 10% of total revenues (2018: two customers). The revenues relating to these customers in 2019 were £20,816,000 and £11,064,000 (2018: £17,223,000 and £11,869,000).
5. EMPLOYEES AND DIRECTORS
(a) Employee benefit expenses
2019
2018
£000s
£000s
Wages and salaries
17,981
15,957
Defined contribution pension cost (note 5(c))
646
381
Non-exceptional employee benefit expenses
18,627
16,338
Share based payment transactions (note 23)
5,944
4,862
Total employee benefit expenses
24,571
21,200
(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 Trading Board, representing members of the senior management team from all key departments of the Group.
2019
2018
£000s
£000s
Salaries and other short-term employee benefits
1,787
1,639
Post-employment benefits
160
172
Termination benefits
100
-
Share based payment transactions
4,525
4,521
6,572
6,332
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 £646,000 (2018: £381,000).
(ii) The Strix Limited (1978) Retirement Fund
The Strix Limited (1978) Retirement Fund is a defined benefit scheme providing benefits based on final pensionable pay. The assets of the scheme are held separately from those of the Group. The trustees of the pension fund are required by law to act in the interest of the fund and of all relevant stakeholders in the scheme. The trustees are responsible for the investment policy with regard to the assets of the fund.
The scheme is closed to new members and future accruals. During 2019, all retirement benefit plan obligations relating to the defined benefit scheme were transferred to Aviva.
At 31 December 2019 the market value of the scheme assets was £nil (2018: £226,000) and the present value of the scheme liabilities were £nil (2018: £393,000). The net post-employment obligation at 31 December 2019 is £nil (2018: £167,000). The total charge recognised in the consolidated statement of comprehensive income was £nil (2018: £5,000). On the transfer of retirement benefit plan obligations to Aviva, income of £78,000 was recognised directly into equity.
The actuarial gain recognised in the consolidated statement of comprehensive income was £nil (2018: actuarial gain of £19,000).
The remainder of the disclosures required by IAS 19 have not been included in these financial statements as the scheme is not material to the Group.
6. EXPENSES
(a) Expenses by nature
2019
2018
£000s
£000s
Employee benefit expense
18,627
16,338
Depreciation charges
2,903
3,198
Right of use depreciation charges
1,323
-
Operating lease payments
-
1,144
Amortisation and impairment charges
1,298
2,292
Exceptional items - reorganisation/exit costs
171
4
- strategic projects
1,208
206
- share based payment transactions
5,944
4,862
Foreign exchange (gains)/losses
266
(78)
Research and development expenditure totalled £4,439,000 (2018: £3,820,000), with £2,358,000 (2018: £1,849,000) of these costs being capitalised during the year.
(b) Exceptional items
Strategic project costs relates to certain projects being undertaken to support the achievement of the Group's strategic plans including the acquisition of HaloSource and the implementation of a new global Enterprise resource planning system.
The share based payment transactions relate to options and conditional share awards issued to certain employees and Directors. Further details are provided in note 23.
(c) Auditor's remuneration
During the year the Group (including its subsidiaries) obtained the following services from the Company's auditor as detailed below:
2019
2018
£000s
£000s
Fees payable to Company's auditor and its associates for the audit of Consolidated financial statements
124
114
Fees payable to Company's auditor and its associates for other services:
- the audit of Company's subsidiaries
4
4
- other assurance services
9
9
- tax compliance
5
9
142
136
7. REVENUE
The following table shows a disaggregation of revenue into categories by product line:
2019
2018
£000s
£000s
Kettle controls
85,799
83,514
Water category
9,829
9,263
Appliances
1,248
992
Total revenue
96,876
93,769
8. FINANCE COSTS
2019
2018
£000s
£000s
Letter of credit charges
65
68
Pension scheme interest
-
1
Right of use lease interest
110
-
Borrowing costs
1,176
1,603
Total finance costs
1,351
1,672
9. TAXATION
Analysis of charge in year
2019
2018
£000s
£000s
Current tax (overseas)
Current tax on overseas profits for the year
1,265
960
Adjustments in respect of prior years - overseas
74
(13)
Total tax charge
1,339
947
Overseas tax relates primarily to tax payable by the Group's subsidiary in China. During 2016, the Group's Chinese subsidiary paid additional tax of £1.1m following a benchmarking assessment by the Chinese tax authorities relating to contract processing businesses in the years 2009 to 2014. The potential additional liabilities for 2015 to 2018 calculated on the same basis of £1.2m (2018: £1.3m) are included within the current tax liability balance in the consolidated balance sheet, in line with the basis of the tax enquiry. During 2019, following a formal taxation review, Strix converted its contract processing model to an import processing model.
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 of tax for the Group. The tax assessed for the year is higher than the standard rate of income tax in the Isle of Man of 0% (2018: 0%). The differences are explained below.
2019
2018
£000s
£000s
Profit on ordinary activities before tax
22,877
24,134
Profit on ordinary activities multiplied by the rate of income tax in the Isle of Man of 0% (2018: 0%)
-
-
Impact of higher overseas tax rate
1,265
960
Adjustments in respect of prior years - overseas
74
(13)
Total taxation charge
1,339
947
The Company is subject to Isle of Man income tax on profits at the rate of 0% (2018: 0%). Based on the Company's current activities, the Company is not expected to have any future Isle of Man tax liability.
10. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is based on the following data.
2019
2018
Earnings (£000s)
Earnings for the purposes of basic and diluted earnings per share
21,538
23,187
Number of shares (000s)
Weighted average number of shares for the purposes of basic earnings per share
190,000
190,000
Weighted average dilutive effect of share awards (note 23)
12,845
9,326
Weighted average number of shares for the purposes of diluted earnings per share
202,845
199,326
Earnings per ordinary share (pence)
Basic earnings per ordinary share
11.3
12.2
Diluted earnings per ordinary share
10.6
11.6
Adjusted earnings per ordinary share (pence) (1)
Basic adjusted earnings per ordinary share (1)
15.2
14.9
Diluted adjusted earnings per ordinary share (1)
14.2
14.2
The calculation of basic and diluted adjusted earnings per share is based on the following data:
2019
£000s
2018
£000s
Profit for the year
21,538
23,187
Add back:
Reorganisation/exit costs
171
4
Strategic project costs
1,208
206
Share based payment transactions
5,944
4,862
Adjusted earnings (1)
28,861
28,259
1 Adjusted results exclude exceptional items, which include share based payment transactions and other reorganisation and 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 diluted adjusted earnings per share are the same as those shown above for both basic and diluted earnings per share.
11. INTANGIBLE ASSETS
2019
Development costs
Software
Intellectual Property
Goodwill
Total
£000s
£000s
£000s
£000s
£000s
At 1 January
Cost
12,886
579
-
-
13,465
Accumulated amortisation and impairment
(8,324)
(337)
-
-
(8,661)
Net book value
4,562
242
-
-
4,804
Year ended 31 December
Additions
2,358
343
175
-
2,876
HaloSource acquisition
-
-
316
384
700
Impairment
(42)
-
-
-
(42)
Amortisation charges
(1,036)
(202)
(18)
-
(1,256)
Exchange differences
(11)
(1)
(2)
-
(14)
Closing net book value
5,831
382
471
384
7,068
At 31 December
Cost
9,837
922
488
384
11,631
Accumulated amortisation and impairment
(4,006)
(540)
(17)
-
(4,563)
Net book value
5,831
382
471
384
7,068
Amortisation charges have been treated as an expense, and are allocated to cost of sales (£1,153,000), distribution costs £nil, and administrative expenses (£103,000) in the consolidated statement of comprehensive income.
During the year, £5,396,000 (2018: £1,679,000) of assets with a net book value of £42,000 (2018: £nil) were derecognised in line with the derecognition policy disclosed in note 2.
2018
Development costs
Software
Total
£000s
£000s
£000s
At 1 January
Cost
12,716
511
13,227
Accumulated amortisation and impairment
(7,877)
(171)
(8,048)
Net book value
4,839
340
5,179
Year ended 31 December
Additions
1,849
68
1,917
Amortisation charges
(2,126)
(166)
(2,292)
Closing net book value
4,562
242
4,804
At 31 December
Cost
12,886
579
13,465
Accumulated amortisation and impairment
(8,324)
(337)
(8,661)
Net book value
4,562
242
4,804
Amortisation charges have been treated as an expense, and are allocated to cost of sales (£2,189,000), distribution costs (£2,000), and administrative expenses (£101,000) in the consolidated statement of comprehensive income.
There were no reversals of prior year impairments during the year (2018: same).
12. PROPERTY, PLANT AND EQUIPMENT
2019
Plant & machinery
Fixtures, fittings & equipment
Motor vehicles
Production tools
Land & Buildings
Right-of-use assets (note 26)
Assets under construction
Total
£000s
£000s
£000s
£000s
£000s
£000s
£000s
£000s
At 1 January
Cost
20,624
3,673
141
13,484
-
-
1,889
39,811
Opening balance at adoption of IFRS 16
-
-
-
-
-
3,343
-
3,343
Accumulated depreciation
(14,695)
(2,595)
(51)
(11,377)
-
-
-
(28,718)
Net book value
5,929
1,078
90
2,107
-
3,343
1,889
14,436
Year ended 31 December
Additions
-
743
-
-
1,996
2,344
10,041
15,124
HaloSource acquisition
135
93
1
49
-
-
23
301
Transfers
2,545
-
-
819
-
-
(3,364)
-
Disposals
(9)
-
-
-
-
-
-
(9)
Depreciation charge
(1,119)
(758)
(27)
(966)
(33)
(1,323)
-
(4,226)
Exchange differences
(1)
35
-
(2)
-
(113)
(20)
(101)
Closing net book value
7,480
1,191
64
2,007
1,963
4,251
8,569
25,525
At 31 December
Cost
21,924
4,126
130
13,298
1,996
5,386
8,569
55,429
Accumulated depreciation
(14,444)
(2,935)
(66)
(11,291)
(33)
(1,135)
-
(29,904)
Net book value
7,480
1,191
64
2,007
1,963
4,251
8,569
25,525
Depreciation charges are allocated to cost of sales (£3,453,000), distribution costs (£355,000), and administrative expenses (£418,000) in the consolidated statement of comprehensive income.
During the year, £3,070,000 (2018: £5,029,000) of assets with a net book value of £nil (2018: £nil) were derecognised in line with the derecognition policy disclosed in note 2.
2018
Plant & machinery
Fixtures, fittings & equipment
Motor vehicles
Production tools
Assets under construction
Total
£000s
£000s
£000s
£000s
£000s
£000s
At 1 January
Cost
19,440
5,037
104
13,678
1,668
39,927
Accumulated depreciation
(14,552)
(4,078)
(35)
(11,884)
-
(30,549)
Net book value
4,888
959
69
1,794
1,668
9,378
Year ended 31 December
Additions
-
684
60
-
4,290
5,034
Transfers
2,730
(53)
(23)
1,415
(4,069)
-
Disposals
(115)
-
-
(6)
-
(121)
Depreciation charge
(1,575)
(511)
(16)
(1,096)
-
(3,198)
Closing net book value
5,928
1,079
90
2,107
1,889
11,093
At 31 December
Cost
20,623
3,674
141
13,484
1,889
39,811
Accumulated depreciation
(14,695)
(2,595)
(51)
(11,377)
-
(28,718)
Net book value
5,928
1,079
90
2,107
1,889
11,093
Depreciation charges are allocated to cost of sales (£2,490,000), distribution costs (£551,000), and administrative expenses (£157,000) in the consolidated statement of comprehensive income.
13. PRINCIPAL SUBSIDIARY UNDERTAKINGS OF THE GROUP
A list of all subsidiary undertakings controlled by the Group, which are all included in the consolidated financial statements, is set out below.
Subsidiary
Nature of business
Country of incorporation
% of ordinary shares held by the Group
%
Sula Limited
Holding company
IOM
100
Strix Limited
Manufacture and sale of products
IOM
100
Strix Guangzhou Ltd
Manufacture and sale of products
China
100
Strix (U.K.) Limited
Group's sale and distribution centre
UK
100
Strix Hong Kong Ltd
Sale and distribution of products
Hong Kong
100
Strix (China) Limited
Construction of manufacturing facility
China
100
HaloSource Water Purification Technology (Shanghai) Co. Ltd
Manufacturing and sales of products
China
100
Strix (USA), Inc
Research and development, sales, and distribution of products
USA
100
Acquisition of specified assets from HaloSource
On 7 March 2019, the Group completed the acquisition of specified assets from HaloSource Corporation, the details of which are disclosed below. HaloSource Water Purification Technology (Shanghai) Co. Ltd was acquired by the Group as part of this transaction and is a wholly owned subsidiary of Strix (Hong Kong) Ltd.
Incorporation of Strix (USA), Inc
On 14 February 2019 Strix (USA), Inc was incorporated in the state of Washington, United States of America. Strix (USA), Inc is a wholly owned subsidiary of Strix (U.K.) Limited. The US-based assets acquired as part of the acquisition of specified assets from HaloSource were transferred into this entity.
Incorporation of Strix (China) Limited
On 20 February 2019, Strix (China) Limited was granted a business licence. Strix (China) Limited, a company incorporated in China, is a wholly owned subsidiary of Strix (Hong Kong) Ltd. Strix (China) Limited owns the land use right acquired by the Group in the Zengcheng District of Guangzhou, China in respect of the site of the new manufacturing facility.
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 assets included within the consolidated financial statements to which these restrictions apply is £2,300,000 (2018: £1,222,000)
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 except as disclosed in note 17.
14. ACQUISITION OF SPECIFIED ASSETS FROM HALOSOURCE
On 7 March 2019, the Group completed the acquisition of specified assets from HaloSource Corporation ("HaloSource"), following approval by HaloSource shareholders at a general meeting held on 26 February 2019. The Group entered into an asset purchase agreement with HaloSource, pursuant to which it has acquired specified assets relating to HaloSource's HaloPure division and its astrea product, for total consideration of US$1.33 million (£1.01m) payable in cash.
The Board of Strix considered that the acquisition represented an opportunity to acquire extensively developed technology, which complemented its Water Category, at an attractive price, as well as gaining access to skilled research and development resource in the USA. Strix will continue the process of commercialising the technology and products that it has acquired, leveraging its experience of operating in the water filtration sector and bringing to market new consumer products.
The fair value of the assets and liabilities acquired were as follows:
£000s
Non-current assets
Intangible assets
316
Property, plant and equipment
301
Total non-current assets
617
Current assets
Inventories
251
Trade and other receivables
448
Other assets
100
Cash and cash equivalents
61
Total current assets
860
Total assets
1,477
Current liabilities
Trade and other payables
(847)
Total current liabilities
(847)
Net assets acquired
630
The fair value of the intangibles assets was calculated using a discounted cash flow model, based on the expected future income the patents and brand names acquired will generate. The discount rate applied was the Group's Weighted Average Cost of Capital, and a growth rate of 5.0% was assumed in perpetuity, based on the CAGR the Group has experienced with similar products in the same sector over the past few years.
Acquisition costs included within 'Administration expenses - exceptional items' in the consolidated statement of comprehensive income amounted to £1.2m. This included £0.4m of bridging loans made available to HaloSource to ensure the company continued to operate during the due diligence period. These have been designated as 'separate transaction' per IFRS 3 and therefore not included as part of the purchase consideration. The bridging loans did not constitute effective settlement of a pre-existing relationship.
The acquired business contributed revenues of £464,000 and an adjusted total comprehensive loss of £1,953,000 to the Group for the period from 7 March 2019 to 31 December 2019. The Group revenues and profit if the acquisition had occurred on 1 January 2019 has not been calculated as the supporting information is not available given the status of the acquired assets at the date of acquisition. The Directors believe the amount would be insignificant to the Group as due to a shortage of funds under the previous ownership, it is unlikely the assets would generate any significant revenues, profit or loss prior to the acquisition date.
The goodwill of £384,000, calculated as the purchase consideration of £1,014,000 less the fair value of the net assets acquired of £630,000 is attributable to the cumulative skills and knowledge of the members of staff who became employees of the Group at the date of acquisition, together with the synergies expected to be generated by the Group following the acquisition, particularly within the Water Category.
15. INVENTORIES
2019
2018
£000s
£000s
Raw materials and consumables
5,071
5,993
Finished goods and goods in transit
4,426
4,525
9,497
10,518
The cost of inventories recognised as an expense and included in cost of sales amounted to £35,037,000 (2018: £33,895,000). The charge for impaired inventories was £302,000 (2018: £52,000). There were no reversals of previous inventory write-downs.
16. TRADE AND OTHER RECEIVABLES
2019
2018
£000s
£000s
Amounts falling due within one year:
Trade receivables
4,286
3,336
Trade receivables past due
502
131
Loss allowance
(50)
(26)
Trade receivables - net
4,738
3,441
Prepayments
1,042
987
Advance purchase of commodities
2,174
1,483
Other receivables
1,379
1,343
9,333
7,254
Trade and other receivables are all current and any fair value difference is not material.
The amount of trade receivables past due is not material, therefore an aging analysis has not been presented (2018: same). The amount of trade receivables impaired at 31 December 2019 is equal to the loss allowance provision (2018: same).
The advance purchase of commodities relates to payments in advance to secure the purchase of key commodities at an agreed price to mitigate the commodity price risk.
£822,000 of prepayments were capitalised in 2017 relating to transaction costs for the non-current borrowings put in place as part of the Group reorganisation and admission to trading on AIM. At 31 December 2019, £423,000 (2018: £587,000) of these transaction costs are included within prepayments.
Other receivables includes government grants due of £392,000 (2018: £355,000). 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:
2019
2018
£000s
£000s
British Pound
3,430
4,017
Chinese Yuan
2,952
1,721
United States Dollar
2,464
1,184
Euro
344
191
Hong Kong Dollar
123
122
Other
20
19
9,333
7,254
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 2019 was £50,000 (2018: £26,000).
The creation and release of a provision for impaired receivables is allocated to cost of sales in the consolidated statement of comprehensive income. For the year ended 31 December 2019, the amount allocated to cost of sales was £24,000 (2018: £9,000). Amounts charged to the allowance account are written off when there is no expectation of recovering additional cash.
17. CASH AND CASH EQUIVALENTS
2019
2018
£000s
£000s
Cash and cash equivalents
Cash at bank and in hand
13,658
13,521
The carrying amounts of the Group's cash and cash equivalents are denominated in the following currencies:
2019
2018
£000s
£000s
British Pound
4,712
6,709
Chinese Yuan
1,409
868
United States Dollar
7,091
5,217
Hong Kong Dollar
247
357
Euro
199
370
13,658
13,521
Cash and cash equivalents includes £380,000 (2018: £nil) of cash deposits held as a guarantee to China SuiDong Customs office which expires on the 30th May 2020.
18. TRADE AND OTHER PAYABLES
2019
2018
£000s
£000s
Trade payables
6,779
4,881
Current income tax liabilities
1,929
1,575
Social security and other taxes
98
108
Other liabilities
5,620
5,737
Payments in advance from customers
1,286
1,961
Accrued expenses
3,990
4,137
19,702
18,399
The fair value of financial liabilities approximates their carrying value due to short maturities.
Other liabilities includes deferred government grants of £333,000 (2018: £nil). There were no unfulfilled conditions in relation to these grants at the year end.
The carrying amounts of the Group's trade and other payables are denominated in the following currencies:
2019
2018
£000s
£000s
British Pound
6,025
6,726
Chinese Yuan
10,216
6,849
United States Dollar
2,669
4,167
Hong Kong Dollar
364
354
Euro
427
303
Other
1
-
19,702
18,399
19. BORROWINGS
2019
2018
£000s
£000s
Non-current bank loans
40,000
41,000
Term and debt repayment schedule
Currency
Interest rate
Maturity date
2019 carrying value (£000s)
Revolving credit facility
GBP
LIBOR +
1.50% - 2.50%
27 July 2022
40,000
On 27 July 2017, the Company entered into an agreement with The Royal Bank of Scotland Plc (as agent), and the Royal Bank of Scotland International Limited and HSBC Bank Plc (as original lenders) in respect of a revolving credit facility of £70,000,000.
The proceeds of the first drawdown of £60,774,000 were used to (among other things) repay previously existing banking facilities prior to the Group reorganisation and admission to trading on AIM, to pay fees, costs and expenses in relation to the process and to fund distributions paid to former Group company related parties. Additional amounts may be drawn under the agreement for financing working capital and for general corporate purposes 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 subsidiaries, Strix Limited, Sula Limited, have entered into the agreement as guarantors, guaranteeing the obligations of the borrowers under the agreement.
Transaction costs incurred as part of the debt financing amounting to £822,000 were capitalised in 2017 and are being amortised over the period of the facility (see note 16).
The agreement contains 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 2019, the Group has not breached any of the financial covenants contained within the agreement - see note 22(d) for further details.
On 30 June 2018, the total facility available reduced by £5,000,000, and has continued to reduce by a further £2,000,000 every 6 months thereafter. The Group voluntarily cancelled £10,000,000 of the facility on 19 June 2018. As at 31 December 2019 the total facility available is £49,000,000 (2018: £53,000,000).
Interest applied to the loan is calculated as the sum of the margin and LIBOR (or EURIBOR for any loan denominated in Euros). The margin is a calculated based on the Group's leverage as follows:
Leverage
Annualised margin %
Greater than or equal to 2.0x
2.5%
Less than 2.0x but greater than or equal to 1.5x
2.2%
Less than 1.5x but greater than or equal to 1.0x
2.0%
Less than 1.0x
1.5%
At 31 December 2019 the margin applied was 1.5% (2018: 1.5%).
20. COMMITMENTS
Capital commitments
2019
2018
£000s
£000s
Contracted for but not provided in the consolidated financial statements - Property, plant and equipment
12,559
1,005
Construction of new factory
The above commitments include capital expenditure of £10,472,000 (2018: nil) relating to the construction of a new factory in Zengcheng district, China. Strix (China) Limited entered into a contract with Shanghai Installation Engineering Group Co. on 2 September 2019 for RMB 128m, equating to £13.9m.
21. CONTINGENT ASSETS AND CONTINGENT LIABILITIES
The Group has a number of ongoing legal intellectual property cases, including legal actions initiated by the Group, as well as invalidation challenges brought by the defendants. The invalidation actions have all been successfully defended to date. The Directors believe that a favourable outcome on these cases is probable, having made appropriate legal consultations. However, a number of these cases are still in the process of going through the due legal process in the countries in which the matters have been raised. As a result, no contingent assets have been recognised as receivable at 31 December 2019, as any receipts are dependent on the final outcome of the ongoing legal processes in each case. There are no contingent liabilities at 31 December 2019 (2018: 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 and liquidity 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 UK 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
· Chinese Yuan
· United States Dollar
· Hong Kong Dollar
· Euro
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 disclosed in note 19. The interest rate on the borrowings is variable, based on LIBOR 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. This exposure is not considered by the Directors to be significant.
(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 2019 or 2018.
At 31 December 2019 and 2018, 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, RMB, HKD, and EUR. Assuming a reasonably possible change in FX rates of +10% (2018: +10%), the impact on profit would be a decrease of £361,000 (2018: a decrease of £406,000), and the impact on equity would be an increase of £2,230,000 (2018: a decrease of £555,000). A -10% change (2018: -10%) in FX rates would cause an increase in profit of £442,000 (2018: an increase in profit of £496,000) and a £2,726,000 decrease in equity (2018: £679,000 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 LIBOR rate of ±0.5% (2018: ±0.5%), the impact on profit would be an increase/decrease of £204,000 (2018: £242,000), and the impact on equity would be an increase/decrease of £125,000 (2018: £165,000). 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, based on volatility analysis for the past year, of ±15.5% for silver (2018: ±8.2%) and ±4.4% for copper (2018: ±15.8%). The impact on profit would be an increase/decrease of £1,043,000 (2018: £1,068,000). 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 (2018: 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 no external concentrations of 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 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 0.05% of revenue (2018: less than 0.05% 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 BBB based on credit ratings according to Standard & Poor's. The following table shows the external credit ratings of the institutions with whom the Group has cash deposits:
2019
2018
£000s
£000s
AA
636
588
A
2,169
1,252
BBB
10,824
11,658
n/a
29
23
13,658
13,521
(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 put into place a revolving credit facility to provide access to cash for various purposes, and headroom of £9,000,000 (2018: £12,000,000) remains available on this facility at 31 December 2019.
The Group's non-derivative financial liabilities (represented by trade and other payables) substantially all have a contractual maturity date of less than 3 months. The Group's borrowings are represented by a revolving credit facility which has no contractual maturity other than the maturity date of the entire facility, which is 27 July 2022 and hence between 2 and 5 years.
For the maturity of the Group's leases see note 26.
(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 the reduce 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 facility as disclosed in note 19. These ratios are formally reported on a quarterly basis. At 31 December 2019 these ratios were as follows:
· Interest cover ratio: 26.7x (2018: 22.0x); and
· Leverage ratio: 0.7x (2018: 0.8x)
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, and share price targets for the three financial years 2017 to 2019. Further awards have been made since August 2017 under the same scheme on similar terms.
During 2019, 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 movement in options and conditional share awards is shown in the table below:
2019
2018
Number of shares
Number of shares
At 1 January
10,295,525
9,110,181
Granted during the year
1,189,813
1,428,892
Exercised during the year
-
-
Forfeited during the year
(311,816)
(243,548)
As at 31 December
11,173,522
10,295,525
Vested and exercisable at 31 December
-
-
The Group has recognised an expense of £5,944,000 (2018: £4,862,000) in respect of equity-settled share based payment transactions with employees and Directors in the year ended 31 December 2019. No share options or conditional share awards were exercised during the year (2018: none) as none can be exercised before 3 January 2020. There is no exercise price attached to any of the options or conditional share awards granted.
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 2019 was 6.7 years (2018: 8.8 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 (p)
Expiry date
Weighted average probability of meeting performance criteria
Share options outstanding at
31 December 2019
Share options outstanding at
31 December 2018
15 August 2017
133.38
15 August 2027
100.0%
7,862,873
8,897,133
12 February 2018
138.00
12 February 2028
100.0%
35,336
108,762
1 November 2018
146.80
1 November 2028
60.0%
755,344
1,278,870
26 November 2018
136.00
26 November 2028
100.0%
10,760
10,760
4 March 2019
155.00
4 March 2029
100.0%
215,651
-
20 May 2019
157.80
20 May 2029
62.5%
544,140
-
21 August 2019
161.80
21 August 2029
100.0%
7,288
-
Total share options
9,431,392
10,295,525
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
31 December 2019
Conditional share awards outstanding at
31 December 2018
15 August 2017
133.38
3 January 2020
100.0%
985,143
-
12 February 2018
138.00
3 January 2020
100.0%
29,000
-
12 February 2018
138.00
1 January 2021
100.0%
60,500
-
1 November 2018
146.80
1 January 2021
49.3%
348,233
-
20 May 2019
157.80
1 April 2022
62.5%
304,254
-
19 August 2019
158.00
1 April 2022
100.0%
15,000
-
Total conditional share awards
1,742,130
-
Total share options and conditional share awards
11,173,522
10,295,525
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 £30,000 (2018: £78,000) and the expected charge over the life of the options by a total of £427,000 (2018: £245,000).
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 £1.3180 (2018: £1.3508).
The movement within the share based payment reserve during the period is as follows:
2019
2018
£000s
£000s
Share based payment transactions (note 5(a))
5,944
4,862
Other share based payment transactions
215
-
Total share based payment transactions
6,159
4,862
Zeus warrant
As part of the admission to trading on AIM in August 2017, the Group granted Zeus Capital Limited a warrant for 3,800,000 ordinary shares at an exercise price of £1.00. The warrant is not reliant on any service conditions and can be exercised between 8 August 2019 and 8 August 2027. The fair value of the warrant was calculated as £238,000 and has been reflected in equity as part of issuance costs.
Valuation model inputs
The key inputs to the Black-Scholes model for the purposes of estimating the fair value of the warrant include an admission share price of £1.00, a risk free rate of 0.23% equivalent to the price of a 2 year United Kingdom Gilt, a 2 year vesting period, and volatility based on the share price of a selection of peer companies for the 2 years prior to admission equating to 10.74%.
24. SHARE CAPITAL
Number
of shares
(000s)
Par Value
£000s
Total
£000s
Allotted and fully paid: ordinary shares of 1p each
Balance at 1 January 2018 and 31 December 2018
190,000
1,900
1,900
Balance at 31 December 2019
190,000
1,900
1,900
Under the Isle of Man Companies Act 2006, the Company is not required to have an authorised share capital.
The Company's share capital consists of 190,000,000 ordinary shares of £0.01 each which were issued for consideration of £190,000,000. The balance net of issuance costs was recorded as share premium and subsequently transferred to retained earnings/(deficit) as part of a capital reduction.
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:
2019
2018
£000s
£000s
Interim 2019 dividend of 2.6p per share (2018: 2.3p)
4,940
4,370
Final 2018 dividend of 4.7p per share (2018: 1.9p)
8,930
3,610
Total dividends recognised in the year
13,870
7,980
In addition to the above dividends, since year end the Directors have proposed the payment of a final dividend of 5.1p per share (2018: 4.7p). The aggregate amount of the proposed final dividend expected to be paid on 3 June 2020 out of retained earnings at 31 December 2019, 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.
2019
2018
£000s
£000s
Final 2019 dividend of 5.1p per share (2018: 4.7p)
9,725
8,930
Total dividends proposed but not recognised in the year
9,725
8,930
26. LEASES
The Group has adopted IFRS 16 from 1 January 2019. The rationale and impact of the transition is explained more fully in note 2 to the financial statements.
a) Amounts recognised in the balance sheet
The balance sheet shows the following amounts relating to leases:
2019
2018
Right-of-use assets
£000s
£000s
Offices and warehouses
4,251
-
Total Right-of-use assets
4,251
-
Current future lease liabilities (due within 12 months)
1,508
-
Non-current future lease liabilities (due in more than 12 months)
2,960
-
Total Future Lease Liabilities payable
4,468
-
Additions to the right-of-use assets during the 2019 financial year were £2,338,000.
The movement in lease liabilities is as follows:
2019
2018
£000s
£000s
Balance as at 1 January
-
-
Opening balance at adoption of IFRS 16
3,613
-
Balance as at 1 January (as adjusted)
3,613
-
Additions
2,338
-
Repayments
(1,301)
-
Interest expense (included in finance cost)
110
-
Sub-lease income
(121)
Foreign exchange gains
(171)
-
Balance as at 31 December
4,468
-
b) Amounts recognised in the statement of comprehensive income
The statement of comprehensive income shows the following amounts relating to leases:
2019
2018
£000s
£000s
Depreciation of right of use assets
(1,323)
-
Interest expense (included in finance cost)
(110)
-
Foreign exchange gains
171
Total cost relating to leases
(1,262)
-
c) At 31 December 2018, commitments for minimum lease payments in relation to non-cancellable operating leases were £1,012,000 within one year, £2,104,000 later than one year and less than five years and £806,000 after five years.
27. CASH FLOW STATEMENT NOTES
a) Cash generated from operations
Note
2019
£000s
2018
£000s
Cash flows from operating activities
Operating profit
24,209
25,789
Adjustments for:
Depreciation of property, plant and equipment
12
2,903
3,198
Depreciation of right of use assets
12
1,323
-
Amortisation of intangible assets
11
1,256
2,292
Impairment of intangible assets
11
42
-
Loss/(Profit) on disposal of property, plant and equipment
5
(14)
Government grants relating to capital expenditure
(40)
-
Pension contributions made
(89)
(40)
Share based payment transactions
23
5,944
4,862
Net exchange differences
6(a)
156
(78)
35,709
36,009
Changes in working capital:
Decrease/(increase) in inventories
1,318
(1,396)
Increase in trade and other receivables
(1,750)
(266)
Increase in trade and other payables
68
1,084
Cash generated from operations
35,345
35,431
b) Movement in net debt
Non-cash movements
At 1 January 2019
Cash flows
Currency movements
Other movements
At 31 December 2019
£000s
£000s
£000s
£000s
£000s
Non-current borrowings
(41,000)
1,000
-
-
(40,000)
Lease liabilities (arising at 1 January 2019 on adoption of IFRS 16)
(3,613)
1,301
171
(2,327)
(4,468)
Total liabilities from financing activities
(44,613)
2,301
171
(2,327)
(44,468)
Cash and cash equivalents
13,521
620
(483)
-
13,658
Net debt
(31,092)
2,921
(312)
(2,448)
(30,810)
28. ULTIMATE BENEFICIAL OWNER
There is not considered to be any ultimate beneficial owner, as the Group is listed on AIM and no single shareholder beneficially owns more than 25% of the Group'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 Group financial statements and are not disclosed.
The Group also operates a defined contribution pension scheme, The Strix Limited Retirement Fund, which is considered a related party. (2018: The Group operated a defined benefit pension scheme, The Strix Limited (1978) Retirement Fund which was considered a related party)
(b) Related party balances
Trading balances
Balance due from
Balance due to
Related party
2019
2018
2019
2018
£000s
£000s
£000s
£000s
The Strix Limited Retirement Fund
-
-
(66)
(37)
(c) Related party transactions
The following transactions with related parties occurred during the year:
Name of related party
2019
2018
£000s
£000s
Transactions with other related parties
Contributions to post-employment benefit schemes
(735)
(421)
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.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR GPUBCWUPUPUM
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