REG - Volex PLC - Preliminary results for year ended 30 March 2014 <Origin Href="QuoteRef">VLX.L</Origin> - Part 1
06/09/2014 02:15
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Volex PLC
12 June 2014
12 June 2014
VOLEX plc
Preliminary Announcement of the Group Results
for the Financial Year ended 30 March 2014
'The Volex Transformation Plan is beginning to deliver results'
Volex plc ('Volex'), the global provider of power and data cabling solutions,
today announces its preliminary results for the 52 weeks ended 30 March 2014
('FY2014').
Financial Highlights 52 weeks to 30 March 2014 52 weeks to 31 March 2013
Revenue $400.2m $473.2m
Underlying* operating profit $4.5m $12.3m
Statutory operating profit / (loss) ($4.8m) $4.2m
Underlying* profit before tax $1.2m $10.1m
Basic earnings / (loss) per share (23.7c) (1.6c)
Underlying diluted earnings / (loss) per share (9.0c) 11.2c
Net debt $32.2m $19.5m
$19.5m
* Before non-recurring items and share-based payments credit / charge
Summary
· The Volex Transformation Plan ('VTP'), announced in November 2013, now
delivering growth and margins ahead of expectation;
· New two divisional structure (Power & Data), ensuring accountability,
embedded throughout the Group;
· Revenue decreased due to reduced allocations from customers throughout
the Power division and completion of certain infrastructure projects within
the Data division;
· Underlying operating profit of $4.5 million (FY2013: $12.3 million) with
underlying operating costs reduced by $11.0m or 15% year on year;
· Net debt increased to $32.2 million primarily due to a change in
supplier payment profiles following the decision to move to a multi-sourcing
supplier model to improve the Group's cost competitiveness. This increase was
partially off-set by $11.1 million raised in December 2013 through an issue of
shares and the sale of treasury shares; and
· Proposed $30.3 million share issue announced separately today to reduce
leverage, facilitate the Group refinancing and to enable the business to
complete its transformation plan. 75% of these shares will be underwritten
with the remaining 25% taken up by the Group's largest shareholder and certain
Directors.
Outlook
Encouraging progress has been made with the VTP which is delivering revenue
growth and is expected to deliver additional cost savings in FY2015. This has
been evidenced by:
· Revenue in the first two months of the new financial year is 13 per cent
higher than the same period in the previous year;
· Factory loading for the first quarter indicates that revenue for the
quarter will be 10 per cent ahead of prior year and 4 per cent ahead of the
previous quarter; and
· Gross margins in the first month of the new financial year are better
than expected and the order intake in the higher margin product areas provides
confidence that this will continue, especially as volumes increase and factory
utilisation improves.
The Group expects to be cash generative in the current year after interest,
tax and exceptional costs.
The Chairman of Volex, Karen Slatford, commented:
'The Volex Transformation Plan, which was announced in November 2013, is
working. The increased focus on delivering to our customers' needs has had a
positive impact on our order intake. At the same time, progress that is being
made with our supplier base and productivity improvements are leading to
margins ahead of our expectations.
The combination of the proposed share issue and associated refinancing of the
Group's debt facility is expected to reduce leverage, secure longer term
financial flexibility and enable the business to complete its transformation
plan.
Whilst there remains much to do, we are confident that we have the right
strategy to make good progress in the current financial year providing the
Group with a firm foundation for future growth'.
The Company will be presenting its full year results at 09.30 on Thursday 12
June 2014.
For further information please contact:
Volex plc
Karen Slatford, Chairman
+44 20 3370 8830
Christoph Eisenhardt, Group Chief Executive Officer +44
20 3370 8830
Nick Parker, Group Chief Financial Officer
+44 20 3370 8830
Tulchan
Christian Cowley / James Macey White
+44 20 7353 4200
Forward looking statements
Certain statements in this announcement are forward-looking statements which
are based on Volex's expectations, intentions and projections regarding its
future operating performance and objectives, anticipated events or trends and
other matters that are not historical facts. Forward-looking statements are
sometimes, but not always, identified by their use of a date in the future or
such words as 'anticipates', 'aims', 'could', 'may', 'should', 'expects',
'believes', 'intends', 'plans', 'targets', 'goal' or 'estimates'. By their
very nature forward-looking statements are inherently unpredictable,
speculative and involve risk and uncertainty because they relate to events and
depend on circumstances that will occur in the future. There are a number of
factors that could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking statements. Factors
that could cause or contribute to such differences include, by way of example
only and not limited to, general economic conditions, currency fluctuations,
competitive factors, the loss of one of our major competitors, failure of one
or more major suppliers and changes in raw materials or labour costs among
other risks. Given these risks and uncertainties, prospective investors are
cautioned not to place undue reliance on forward-looking statements.
Forward-looking statements speak only as of the date of such statements and,
except as required by applicable law, Volex undertakes no obligation to update
or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Chairman's Statement
As anticipated, the results for the year to 30 March 2014 are disappointing as
we undertook a process of fundamental renewal. We have rebuilt the senior
management team and the Board. Christoph Eisenhardt, CEO of Volex, and his
new executive team have developed a clear vision for the business and are
firmly positioning the Group on a renewed growth trajectory.
Financial performance
Revenue reduced by 15.4% from $473.2 million to $400.2 million while
underlying operating profit fell to $4.5 million (FY2013: $12.3 million). This
downturn is largely attributed to a failure to adapt our strategy to meet the
requirements of our core customers within the power cord market. Whilst our
customers were anticipating us continuously improving our supply chain to
remain cost competitive, we were looking to achieve improved operating margins
through higher customer pricing. As a result, we suffered from reduced
business allocations.
The new executive team has realigned our strategy in accordance with the very
specific expectations of our Power and Data customers whilst looking to
leverage Volex's market differentiating strengths such as its high quality and
reliability standards, its global sales and manufacturing footprint and its
strong brand recognition. Our sales, engineering, manufacturing and
purchasing teams are working together to ensure that we better meet customer
product specifications through implementation of a rigorous and increasing
localised "design-to-cost" methodology. It is pleasing to report that the new
strategy is having an immediate effect with revenues for the second half of
FY2014 up 3.6% on the first half, contrary to the historic seasonality of the
business.
The transformation of the business has necessitated a wider-ranging
restructuring of the Group than envisaged which has resulted in higher
exceptional costs than initially expected. In FY2014 we have incurred $8.6
million (FY2013: $7.2 million) of non-recurring restructuring spend. Included
within the $8.6 million are the severance packages for the outgoing executive
management, recruitment fees for the new senior management team, right-sizing
costs of certain sites, other targeted redundancies and associated costs plus
a retention bonus of $1.0m payable to high performing operational staff
necessary for the completion of the VTP. We expect further restructuring
costs in FY2015, albeit at a greatly reduced level.
Additionally we have incurred $1.6 million (FY2013: $nil) of exceptional
professional fees and banking costs in relation to financing. During the
year, the Group has explored a number of alternate financing opportunities to
ensure that sufficient funds are available to complete the transformation plan
and return the Group to growth. Further exceptional provisions have been
charged in the year in relation to sales tax disputes in our emerging markets
and onerous lease charges. Off-setting these costs is a $0.6 million (FY2013:
$nil) non-recurring refund of finance costs.
As a result of the disappointing trading performance in the year coupled with
the high level of exceptional expenditure, the loss before tax for the year is
$7.6 million (FY2013: profit of $1.9 million). Following a tax charge of $6.6
million (FY2013: $2.8 million), arising principally from the write-off of
deferred tax assets, the loss after tax for the year is $14.2 million (FY2013:
$0.9 million). This has resulted in a statutory loss per share of 23.7 cents
(FY2013: 1.6 cents).
During the year, we raised $6.3 million from the sale of treasury shares and
$4.8 million from a share placing. Off-setting this inflow was a $21.4
million free cash outflow (FY2013: $20.7 million) due not only to the
exceptional, non-recurring spend of $7.5 million (FY2013: $6.9 million) but
also due to a change in supplier payment profiles following a strategic
decision to move to a multi-sourcing supplier model. As a result net debt at
the end of the year was $32.2 million (FY2013: $19.5 million).
Due to the disappointing trading performance and the increased net debt, the
Board has decided that it is prudent not to declare a full year dividend for
the current year.
Post year end the Group will issue 24,067,171 new shares for a gross
consideration of $30.3 million. 75% of the shares will be underwritten with
the remaining 25% being taken up by the Group's largest shareholder and
certain Directors. The issuance of these shares will be subject to approval by
a simple majority of those voting at a general meeting on 1 July 2014. The
Company has irrevocable commitments to vote in favour of the resolutions to
issue the shares at that meeting from shareholders holding 26% of the Group's
share capital.
Board Changes
During the last year the Board has changed significantly. Full details of
these appointments and the involvement of each individual on the various
Committees of the Board have been separately announced.
The whole Board is very closely involved with developing the revised strategy
for the Group and is actively supporting the management team to help to
deliver the enhanced shareholder returns that will result.
I am pleased to announce that Chief Executives have now been appointed to both
divisions with Allan Lam joining us in Singapore as the Power Division CEO and
Matthew Becker joining us in the US as the Data Division CEO. Both bring with
them a wealth of experience and are actively engaged in implementing the new
strategy.
Business Transformation
As previously announced in November 2013, the VTP has been initiated and is
focused upon:
· increasing customer focus with a more customer and market specific
product offering;
· increasing operational efficiency with an emphasis upon design-to-cost
manufacturing; and
· improving supply chain management.
Volex has always worked with Tier 1 Global customers and has built a
reputation for delivering high specification, high quality products. As part
of the VTP, the Group is forming relationships with major new customers and is
winning an increasing share of allocations with existing customers. As a
result, we are seeing revenue growth as we start our new financial year.
People
I would like to take this opportunity to thank all the employees of the Group
for their hard work and dedication during what has been a period of change.
It is gratifying to see that their focus upon delivering customer satisfaction
is leading to tangible results.
OutlookStatement
Encouraging progress has been made with the VTP which is delivering revenue
growth and is expected to deliver additional cost savings in FY2015. This has
been evidenced by:
· Revenue in the first two months of the new financial year is 13 per cent
higher than the same period in the previous year;
· Factory loading for the first quarter indicates that revenue for the
quarter will be 10 per cent ahead of prior year and 4 per cent ahead of the
previous quarter; and
· Gross margins in the first month of the new financial year are better
than expected and the order intake in the higher margin product areas provides
confidence that this will continue, especially as volumes increase and factory
utilisation improves.
The Group expects to be cash generative in the current year after interest,
tax and exceptional costs.
The combination of the proposed share issue and associated refinancing of the
Group's debt facility is expected to reduce leverage, secure longer term
financial flexibility and enable the business to complete its transformation
plan.
Whilst there remains much to do, we are confident that we have the right
strategy to make good progress in the current financial year providing the
Group with a firm foundation for future growth.
Operational Review
$'000 52 weeks ending
1 April2012 31 March 2013 30 March 2014
Revenue
Power 332,636 323,056 265,384
Data 185,133 150,098 134,793
517,769 473,154 400,177
Underlying* gross profit
Power 60,406 48,534 34,453
Data 42,113 36,741 32,026
102,519 85,275 66,479
Underlying* gross margin 19.8% 18.0% 16.6%
Underlying* operating profit
Power 31,818 18,827 7,258
Data 17,110 12,760 12,650
Central costs (16,924) (19,245) (15,376)
32,004 12,342 4,532
Underlying* operating margin 6.2% 2.6% 1.1%
* Before non-recurring items and share-based payments credit / charge
Volex is a leading global supplier of power and data cabling solutions with
sales of $400.2 million in the year (FY2013: $473.2 million). Volex has its
global headquarters in the UK, operates from 9 manufacturing locations and
employs approximately 7,000 people (FY2013: 8,600) across 18 countries. Volex
sells its products through its own global sales force to Original Equipment
Manufacturers (OEMs) and Electronic Manufacturing Services companies.
Following several years of achieving revenue growth through a focus on our
larger customers and their higher margin product requirements, the Group
experienced a significant downturn in demand in the first half of FY2013.
This downturn was due to the Group's failure to identify the intensifying
pricing competition in the power cable market with Volex still seeking the
higher margins it had experienced in the earlier years while at the same time
certain telecoms infrastructure projects, utilising data cables, were drawing
to a conclusion. This downturn coupled with the investment in several
significant capital expenditure programmes resulted in surplus capacity
throughout the Group and a significant fall in operating profits.
To address the declining performance, Volex commenced a restructuring
programme in FY2013 which continued throughout FY2014. One of the key
elements of the programme was a restructuring of the senior management which
was completed in FY2014.
The new executive management team identified that the Group had well
established customer relationships, a unique global manufacturing footprint
and a dedicated workforce but was failing to capitalise on these strengths.
In order to address this, the business was first reorganised into Power and
Data operating divisions. This allowed management to more accurately assess
performance and improve resource allocation. Further a Chief Executive
Officer and a Chief Financial Officer have been appointed to both divisions to
drive accountability.
The executive management team has realigned each division's strategy with the
needs of their customers. The revised strategies can be summarised as:
Power: The market is defined by intense price competition with a relatively
short cycle time between price and volume negotiations. By demonstrating its
commitment to customer service and price competitiveness, Volex intends to
grow its customer allocations. As volumes increase, plant utilisation will
improve thus delivering more benefits that can ultimately be shared with the
customer.
Data: Whilst price is still a consideration, this market is driven by product
innovation and alignment with customer specific technological developments.
This requires close collaboration between Volex and its customers, working
together on project specific customer programmes over the longer term.
To ensure that the revised strategies are embedded throughout the
organisation, the VTP was initiated. The VTP focuses on the following key
elements:
· Increased customer focus: Re-organisation of the sales and engineering
functions at a regional level to improve relationships with our high quality
customer base and to understand better and address evolving customer
requirements.
To this end, the sales teams have been restructured on a regional basis
covering Greater China, Asia Pacific, Europe & Middle East and the Americas.
· Design-to-cost manufacturing: In order to meet the pricing requirements
of our customers (primarily in the power market) whilst maintaining an
acceptable profit margin, the Group has begun a rigorous design-to-cost
pricing and manufacturing methodology. Rather than allowing the engineering
and supply chain functions to lead the new business quotation process, the
sales team is now identifying the required customer-target price and the
engineering team and supply team are identifying ways to engineer the product
at an acceptable cost.
· Supply chain management: To assist in the design-to-cost manufacturing
approach, the Group is significantly changing its supply chain management,
moving to a multi-sourcing, localised model rather than having a small number
of centralised suppliers. By engaging in pro-active supplier management, it
is anticipated that material costs can be significantly reduced.
· Field application engineering: In the Data division, where product
development is key, understanding the needs of our customers is of vital
importance. To this end, the Group is strengthening the number and quality of
customer facing engineers.
Through the successful implementation of the VTP, Volex believes it will be
able to deliver on its new strategy and provide sustainable profitable
growth.
The immediate priorities of the VTP were to improve the relationships with the
customer base and to return the Group to revenue growth. We have already seen
the benefits of the close attention that is being paid to this area by the
global sales team with revenue in the second half of the financial year up
3.6% on the first half, contrary to the historical trend.
The Power and Data divisional performance is discussed on the following pages.
Central costs cover the cost of the Board, the London head office including
associated UK listing costs and other functions such as Finance, IT, Legal and
HR, which support the Group-wide operations. Central costs totalled $15.4
million in FY2014, down $3.8 million on the $19.2 million incurred in FY2013.
This reduction was in part due to the restructuring programme which resulted
in the removal of personnel from the central costs and also in part due to
tight cost control leading to a reduction in the use of external consultants.
Divisional review
Due to the market differences between the power cable and data cable markets,
the Group now operates and reports under a two divisional structure: the Power
Division and the Data Division. This will allow better focus on customer
relationships as well as enhancing the Group's emphasis upon accountability
and profitability.
Power Division
$'000 52 weeks ending
1 April2012 31 March 2013 30 March 2014
Revenue 332,636 323,056 265,384
Underlying* gross profit 60,406 48,534 34,453
Underlying* gross margin 18.2% 15.0% 13.0%
Operating costs (28,588) (29,707) (27,195)
Underlying* operating profit 31,818 18,827 7,258
Underlying* operating margin 9.6% 5.8% 2.7%
* Before non-recurring items and share-based payments credit / charge
Volex designs and manufactures power cords that are sold to manufacturers of a
broad range of electrical and electronic devices and appliances. Volex
products are used in laptops, PCs and tablets, printers, TVs, games consoles,
power tools, kitchen appliances and vacuum cleaners. Volex is the second
largest global power cable supplier with management estimating an 8 per cent
market share in a fragmented market.
The market for power cords is highly competitive with customers implementing
multi-sourcing strategies and demanding productivity improvements and price
reductions over the product lifecycle. In order to compete effectively
suppliers in the market require efficient large scale production facilities in
low cost regions. Volex is ideally positioned to deliver on this requirement
due to its well-invested, global manufacturing footprint.
The Power Division has its divisional head office in Singapore, close to its
customer base and manufacturing facilities. The key manufacturing facilities
are located in South-East China, Indonesia, Mexico, India and also in Brazil.
However, all the Group's facilities throughout the world can be utilised to
manufacture power cable products with facilities not being wholly product
specific.
Revenue for FY2014 was $265.4 million, down 17.9% on the prior year (FY2013:
$323.1 million). This reduction in revenue was due to the challenging market
conditions with significant price competition at a time when the Group's focus
was upon improving operating margins, leading to decreased allocations from
our customers.
In the second half of FY2014, through the implementation of a revised strategy
and the VTP, significant steps have been taken towards re-establishing revenue
growth within our Power Division through improving relations with all our
major customers and potential new customers. This has involved dedicated
sales and engineering teams working alongside the customers on a daily basis
to understand their needs as they arise.
Encouragingly we have already begun to see the benefits of the new strategy
with the second half revenue 6.9% up on the first half. This is in contrast
to the historic seasonality seen in the business in which the stocking up for
the Holiday Season leads to the first half revenues traditionally being
stronger than the second.
The underlying gross margin has reduced from 15.0% in FY2013 to 13.0% in
FY2014. This is in part due to the deleveraging effect of reduced revenues
over a fixed cost of production and in part due to the time lag of raw
material cost reductions arising from the new design-to-cost methodology. As
volumes continue to grow and factory utilisation is increased, we envisage the
gross margin recovering.
Our ongoing cost reduction programme has mitigated some of the gross margin
decline with a number of direct and indirect production personnel removed from
the organisation. This same cost reduction programme has also helped reduce
the Division's underlying operating costs from $29.7m in FY2013 to $27.2m in
FY2014 despite certain manufacturing countries experiencing significant wage
inflation.
Looking forward, we are seeing the benefits of the VTP with significant new
business wins in Brazil and China. In Brazil, the Group has entered into a
service and supply agreement with Cielo, the country's largest credit and
debit card operator. In advance of the World Cup and Olympics, Cielo wanted a
valued partner to support and service their "Point of Sale Card Reading"
machine chargers. With cable failure being one of the most common complaints,
they chose Volex due to its cost competitiveness and reputation for
reliability. In China, we have strengthened our relationship with Xiaomi, one
of China's leading and fastest growing mobile internet companies. Production
and delivery of power cables for its new audio visual product range is due to
commence in FY2015 with the Group beating rival offers due to its reputation
for manufacturing high quality products and supplier reliability.
As we continue to roll-out our design-to-cost manufacturing methodology and
begin to see the benefits from our multi-source supplier arrangements, we will
further improve our price competitiveness, leading to new business through
increased allocations from our customers. The clear emphasis by our customers
on cost reduction and price competitiveness means that any business involved
in this market needs to benefit from economies of scale and Volex is ideally
positioned within its competitive and geographic landscape to deliver on this
advantage. Our high quality, Tier 1 customer base and its products have in
recent years been a driver for growth within Volex and there is no reason why
this should not be the case again in the future.
Data Division
$'000 52 weeks ending
1 April2012 31 March 2013 30 March 2014
Revenue 185,133 150,098 134,793
Underlying* gross profit 42,113 36,741 32,026
Underlying* gross margin 22.7% 24.5% 23.8%
Operating costs (25,003) (23,981) (19,376)
Underlying* operating profit 17,110 12,760 12,650
Underlying* operating margin 9.2% 8.5% 9.4%
* Before non-recurring items and share-based payments credit / charge
Volex designs and manufactures a broad range of cables and connectors (ranging
from high speed copper cables to complex customised optical cable assemblies)
that transfer electronic, radio-frequency and optical data. Volex products
are used in a broad range of applications including data networking equipment,
data centres, wireless base stations and cell site installations, mobile
computing devices, medical equipment, factory automation, vehicle telematics,
agricultural equipment and alternative energy generation.
Volex competes by producing highly engineered, high performance, application
specific data cables, in close collaboration with its customers. Focusing on
this approach leads to products with longer lifecycles and less pricing
pressure when compared to standard power products.
The Data Division is headquartered in the US with manufacturing facilities
supplying product from Mexico, Brazil, Europe, India and China, all within
close proximity to many existing and potential new customers. It operates in
a fragmented market that is growing rapidly and Volex has several strong niche
positions within data centres and the telecoms and healthcare sectors where
customers utilise Volex expertise and manufacturing competencies.
Revenue for FY2014 was $134.8 million (FY2013: $150.1 million), down 10.2% on
the prior year. This was primarily due to a decline in revenue from our key
telecoms customers arising from completion of 4G infrastructure roll out
projects in the US and Japan from which we had benefitted in FY2013, whilst
certain other regional deployments were delayed. Furthermore, we experienced
significant pricing pressure from our European telecoms customers as they
themselves suffered from intense market competition from their Asian
counterparts. Off-setting the decline in telecoms revenue, we saw strong
growth in revenue from our healthcare customers with our largest healthcare
customer's revenue up 21% year on year. This was due to strong MRI cable
sales following a collaborative development project over the past two years.
The leading edge technologies that our customers employ mean that there are
constant uncertainties involved with the speed at which new programmes are
launched. Delivery timescales of new projects such as 4G roll-out and the
above MRI scanner project can have a significant impact upon call off
schedules for our data cable products.
Despite the revenue reduction, the underlying gross profit margin within the
division remained strong at 23.8% (FY2013: 24.5%).
In terms of operating costs, the benefit of the ongoing cost reduction
programme can be evidenced from the reduction in operating costs from $24.0m
in FY2013 to $19.4m in FY2014, a fall of 19.2%.
During FY2014, we have continued to develop our Active Optical Cable ('AOC')
technology. As previously announced, we have encountered certain production
delays. However, we continue to believe that the technology offers the
potential for future profitable growth.
Looking forward we expect the roll-out of 4G mobile phone technology in China
to be a driver of growth. As noted above, in recent years the Group has
established a strong presence as a supplier to the expanding 4G mobile market
as the new standard was introduced in territories such as the US. Volex
supplies data cabling systems for the mobile phone base station masts, each of
which requires up to 70 cables. Strong relationships with the leading OEM
suppliers in China is resulting in an increased order book in preparation of
the roll-out.
The rapidly increasing demand for faster access to more data is driving new
technologies with higher performance and increased scalability. The OEM
customers that Volex serves recognise that the limiting factor for data
throughput is the connectivity within data centres and other high technology
environments. This is leading them towards the critical "design-to-spec"
capabilities that Volex can deliver. Our niche position within this market
means that we can deliver advanced products in line with our customers' price
expectations.
Financial Review
The core operations of the business form a strong foundation for future
growth. Despite the operational setbacks that have been experienced, the
business continues to deliver underlying operating profits and is supported by
a strong customer base which recognises the quality of its products in a
demanding, cost driven environment.
31 March 2013 30 March 2014
Revenue Operating profit / (loss) Revenue Operating profit / (loss)
$'000 $'000 $'000 $'000
Power Division 323,056 18,827 265,384 7,258
Data Division 150,098 12,760 134,793 12,650
Unallocated central costs (19,245) (15,376)
Divisional results 473,154 12,342 400,177 4,532
Non-recurring operating items (7,966) (11,642)
Share-based payments (181) 2,288
Operating profit / (loss) 4,195 (4,822)
Net finance costs (2,269) (2,740)
Profit / (loss) before tax 1,926 (7,562)
Taxation (2,813) (6,613)
Profit / (loss) after tax (887) (14,175)
Basic earnings / (loss) per share:
Statutory (1.6) cents (23.7) cents
Underlying 11.4 cents (9.0) cents
Commentary on the trading performance of the Group is included in the
divisional assessment within the Operational Review, above.
Non-recurring operating items and share-based payments
The Group has incurred non-recurring operating costs of $11.6 million in
FY2014 (FY2013: $8.0 million). In addition a $0.6 million interest refund was
received in FY2014 (FY2013: $nil) in relation to interest overpayments in
earlier periods. This refund has been shown within net finance costs above.
The largest component of the non-recurring operating costs is in relation to
the ongoing restructuring programme. This programme has yielded one-off costs
in FY2014 of $8.6 million (FY2013: $7.2 million). The restructuring programme
can be split into an executive and senior management change element and an
operational element.
The executive and senior management change element includes the change of
Chief Executive Officer, Chief Financial Officer, Company Secretary and
certain non-executive directors, the termination of the Chief Operating
Officer position and the recruitment of the new divisional heads and a new HR
director. In total, this has generated a non-recurring charge of $4.9 million
(FY2013: $1.2 million) which includes joining bonuses of $0.3 million.
The operational element includes the closure of our North America
administrative centre, further reductions in our direct and indirect
manufacturing headcount, the removal of certain middle management roles
throughout the organisation and costs associated with right-sizing certain
operations. In total, this has generated a non-recurring charge of $3.7
million (FY2013: $6.0 million) which also includes a retention bonus for key
operational staff of $1.0 million.
The restructuring programme is expected to continue into FY2015 as the new
executive team seek to implement and further embed their new strategy,
however, at a significantly reduced cost.
During FY2014 the Group has explored a number of alternate financing
opportunities to ensure that sufficient funds are available for it to complete
its transformation plan and return the Group to growth. This has cost the
Group $1.6 million (FY2013: $nil) which includes $0.2 million for bonuses due
to key finance personnel involved in the financing review.
The Group has in addition taken a $0.8 million charge in FY2014 in relation to
penalty claims made against the Group for historic sales tax claims. In
India, the local tax authorities have lodged penalty and interest claims
totalling $0.8 million for alleged errors in the reporting of our sales tax
position in periods to August 2011. Volex disputes these claims and will
appeal against them. However, experience indicates the difficulty in
reclaiming prepaid penalty sums.
The Group has increased its onerous lease provision held against two
properties resulting in an exceptional charge of $0.6 million (FY2013: credit
of $0.4 million). Assumptions made in the calculation of these two provisions
have been updated by our property advisors resulting in the FY2014 charge.
The cash impact of the above non-recurring operating items is $7.5 million
(FY2013: $6.9 million).
Off-setting the non-recurring charges above is a $2.3 million credit (FY2013:
charge of $0.2 million) arising from share-based payments. With a number of
executives, senior management and middle management leaving the Group during
the year, share options held lapsed, resulting in a reversal of the
share-based payment expense accrued in prior periods.
Tax
The Group incurred a tax charge of $6.6 million (FY2013: $2.8 million)
representing an effective tax rate (ETR) of -87%. The underlying tax charge of
$6.6 million (FY2013: $3.6 million) represents an ETR of 533% (FY2013: 36%).
The principal reasons for the increase in ETR is as a result of a $3.7 million
write back of deferred tax assets plus Volex operations in certain territories
being required to recognise a minimum level of profit regardless of overall
Group performance, resulting in a $2.1 million current tax charge.
Due to the reduced level of taxable profits in certain territories there is
less certainty over the future use of carried forward tax losses. This has
resulted in a significant write-back of deferred tax assets in relation to
losses. As at the reporting date the Group has recognised a deferred tax asset
in relation to tax losses of $0.4 million (FY2013: $4.3 million).
Management anticipates future improvements in ETR as the Group's overall
performance improves.
Dividends
At the Volex plc Annual General Meeting held on 22 July 2013, the shareholders
approved the proposed final dividend for FY2013 of 3.0 cents per share. At
the same meeting a Scrip Dividend Scheme was also approved which gave
shareholders the right to elect to receive new ordinary shares in the Company
(credited as fully paid) instead of a cash dividend.
Payment of the final dividend in respect of the year ended 31 March 2013 was
made on 17 October 2013. 59.1% of the shareholder base eligible for dividends
had elected for the Scrip Dividend Scheme resulting in a cash payment of
$732,000 and 566,467 new shares being issued.
No final dividend is proposed in respect of the year ended 30 March 2014.
Cash flow and net debt
Operating cash flow before movements in working capital in FY2014 was an
inflow of $0.5 million (FY2013: $8.8 million) with the $8.3 million reduction
primarily due to the reduced operating profit.
The impact of working capital movements on the cash flow on FY2014 was an
outflow of $8.7 million (FY2013: inflow of $3.2 million). This was
principally due to a change in supplier payment profiles following a strategic
decision to move to a multi-sourcing supplier model that will enable the Group
to become more cost competitive.
After aggregate outflows for tax and interest of $2.9 million (FY2013: $5.6
million), the net cash outflow from operating activities was $11.1 million
(FY2013: net cash generated was $6.4 million). Of this $7.5 million (FY2013:
$6.9 million) had been spent on operating non-recurring items.
Capital expenditure in FY2014 was $8.2 million (FY2013: $24.9 million). The
significant reduction reflected the completion in FY2013 of two large facility
improvement projects in Asia and a further factory upgrade in Brazil. The
current period spend is largely in relation to machinery and tooling
specifically required for new business wins and opportunities.
Expenditure in relation to intangible assets of $2.3 million has been incurred
in FY2014 (FY2013: $2.6 million). Of this $2.0 million is in relation to
Active Optical Cable ('AOC') technologies (FY2013: $1.7 million). In the
prior year $1.5 million was spent on the acquisition of the AOC patents, after
which $0.2 million was spent on developing the technology into commercial
products. During the current year, a further $2.0 million has been spent on
development with samples now available for distribution to customers. The
remaining $0.3 million (FY2013: $0.9 million) was in relation to computer
software purchases with the prior year representing significant spend on
engineering design software.
Transactions in treasury shares generated $6.3 million (FY2013: $0.4 million)
in the year with 3,378,582 treasury shares sold in December 2013. As a result
of the restructuring programme, a large number of share options lapsed during
the year. As a consequence, 3,378,582 treasury shares held were surplus to
requirements. In December 2013, this surplus was sold on the open market.
The final dividend for FY2013 of 3.0 cents per share was paid in the year. A
script dividend alternative had been offered with 59.1% of the shareholder
base eligible for dividends electing for the Scrip Dividend Scheme. As a
result a cash payment of $0.7 million (FY2013: $1.7 million) was made. No
interim dividend for FY2014 was paid (FY2013: $1.1 million).
In December 2013, Volex issued 2,698,009 shares at £1.16 per share. After the
deduction of issue costs, this generated $4.8 million for the Group.
During the year $7.0 million of USD denominated loans were repaid by the Group
under the senior credit facility and replaced with E6.0 million of Euro
denominated loans.
As a result of the above cash flows, the Group incurred a $9.9 million
(FY2013: $17.2 million) cash outflow for the year. As at 30 March 2014, the
Group held net debt of $32.2 million compared with $19.5 million at 31 March
2013.
Banking facilities, covenants and going concern
The Group utilises a $75 million multi-currency combined revolving credit,
overdraft and guarantee facility ('RCF'). This facility is provided by a
syndicate of three banks (Lloyds Banking Group plc, HSBC Bank plc and
Clydesdale plc).
The key terms of the facility are as follows:
- available until 15 June 2015;
- no scheduled facility amortisation; and
- interest cover and net debt:EBITDA leverage covenants.
As at 30 March 2014, amounts drawn under the facility totalled $46.4 million
(FY2013: $45.4 million). After accounting for bonds, guarantees and letters
of credit, the remaining headroom as at 30 March 2014 was $28.2 million
(FY2013: $26.5 million).
Under the terms of the facility, the two covenant tests above must be
performed at each quarter end date. At year end both covenants are met.
Breach of these covenants would have resulted in cancellation of the
facility.
Due to the relatively short period after the year end until expiry of the
facility and also the combination of the high level of non-recurring items
incurred during the year and the lower level of profitability than initially
anticipated, it became necessary during the year and subsequent to year end
for the Group to hold extensive discussions with its bankers. The result of
these discussions was that the financial covenants referred to above were
initially adjusted to allow for the poor trading that the Group was
experiencing at that time. The costs of agreeing these adjustments are
reflected as a non-recurring item in the accounts.
Subsequent to year end, renewed facilities sized at $45.0 million have been
agreed conditional only upon the raising of $25.0 million (net of issue costs)
from the sale of shares as detailed below. This $45.0 million facility
extends through to 15 June 2017. The financial covenants that are associated
with these facilities are based upon the same criteria as the previous
agreement but also reflect the latest financial forecasts for the Group with a
suitable degree of headroom incorporated.
In addition to the extended banking facilities, the Group will issue
24,067,171 new shares for a gross consideration of $30.3 million. 75% of the
shares will be underwritten with the remaining 25% being committed shares
taken up by the Group's largest shareholder and certain directors. The
issuance of these shares will be subject only to approval by a simple majority
of those voting at a general meeting on 1 July 2014. The Company has
irrevocable commitments to vote in favour of the resolutions to issue the
shares at that meeting from shareholders holding 26% of the Group's share
capital.
Given the above, the Group's forecast and projections, taking reasonable
account of possible changes in trading performance, show that the Group should
operate within the level of the proposed facility for the foreseeable future
and should comply with covenants over this period. The Group also has access
to and uses additional uncommitted facilities. Further the Group has a number
of mitigating actions available to it should actual performance fall below the
current financial forecasts. The Directors have the financial controls and
monitoring available to them to put in place those mitigating actions in a
timely fashion if they see the need to do so. The Directors therefore believe
that the Group is well placed to manage its business within its covenants.
The Directors have, at the time of approving the financial statements, a
reasonable expectation that the Company and the Group have adequate resources
to continue in operational existence for at least 12 months from the date of
these accounts. Accordingly, they continue to adopt the going concern basis
in preparing the financial statements.
Consolidated Income Statement
For the 52 weeks ended 30 March 2014 (52 weeks ended 31 March 2013)
2014 2013
Before non-recurring items and share-based payments Non-recurring items and share-based payments Total Before non-recurring items and share-based payments Non-recurring items and share-based payments Total
Notes $'000 $'000 $'000 $'000 $'000 $'000
Revenue 2 400,177 - 400,177 473,154 - 473,154
Cost of sales (333,698) (457) (334,155) (387,879) (2,104) (389,983)
Gross profit 66,479 (457) 66,022 85,275 (2,104) 83,171
Operating expenses (61,947) (8,897) (70,844) (72,933) (6,043) (78,976)
Operating profit / (loss) 2 4,532 (9,354) (4,822) 12,342 (8,147) 4,195
Finance income 100 - 100 141 - 141
Finance costs (3,392) 552 (2,840) (2,410) - (2,410)
Profit / (loss) on ordinary activities before taxation 1,240 (8,802) (7,562) 10,073 (8,147) 1,926
Taxation 4 (6,613) - (6,613) (3,605) 792 (2,813)
Profit / (loss) for the period attributable to the owners of the parent (5,373) (8,802) (14,175) 6,468 (7,355) (887)
Earnings / (loss) per share (cents)
Basic 5 (9.0) (23.7) 11.4 (1.6)
Diluted 5 (9.0) (23.7) 11.2 (1.6)
Consolidated Statement of Comprehensive Income
For the 52 weeks ended 30 March 2014 (52 weeks ended 31 March 2013)
2014$'000 2013 $'000
Profit / (loss) for the period (14,175) (887)
Items that will not be reclassified subsequently to profit or loss
Actuarial gain / (loss) on defined benefit pension schemes 268 (755)
Tax relating to items that will not be reclassified - -
268 (755)
Items that may be reclassified subsequently to profit or loss
Gain / (loss) on hedge of net investment taken to equity 1,855 (2,256)
Gain / (loss) arising on cash flow hedges during the period (554) (1,868)
Exchange gain / (loss) on translation of foreign operations (4,478) 1,823
Tax relating to items that may be reclassified - -
(3,177) (2,301)
Other comprehensive income / (loss) for the period (2,909) (3,056)
Total comprehensive income / (loss) for the period attributable to the owners of the parent (17,084) (3,943)
Consolidated Statement of Financial Position
As at 30 March 2014 (31 March 2013) Notes 2014$'000 2013$'000
Non-current assets
Goodwill 3,210 2,932
Other intangible assets 5,445 4,147
Property, plant and equipment 38,732 39,691
Other receivables 795 605
Deferred tax asset 488 4,732
48,670 52,107
Current assets
Inventories 39,987 43,016
Trade receivables 67,044 73,026
Other receivables 11,138 10,829
Current tax assets 480 1,414
Cash and bank balances 9 13,675 25,044
132,324 153,329
Total assets 180,994 205,436
Current liabilities
Borrowings 9 - 1,255
Trade payables 57,220 73,184
Other payables 22,184 24,880
Current tax liabilities 5,793 5,924
Retirement benefit obligation 659 585
Provisions 10 3,966 2,266
Derivative financial instruments 1,020 399
90,842 108,493
Net current assets / (liabilities) 41,482 44,836
Non-current liabilities
Borrowings 9 45,895 43,289
Other payables 243 575
Deferred tax liabilities 1,995 1,789
Retirement benefit obligation 2,575 3,039
Provisions 10 2,719 2,605
53,427 51,297
Total liabilities 144,269 159,790
Net assets 36,725 45,646
Equity attributable to owners of the parent
Share capital 29,662 28,180
Share premium account 7,122 2,586
Non-distributable reserves 2,455 -
Hedging and translation reserve (9,730) (6,553)
Own shares (1,103) (4,945)
Retained earnings / (losses) 8,319 26,378
Total equity 36,725 45,646
Consolidated Statement of Cash Flows
For the 52 weeks ended 30 March 2014 (52 weeks ended 31 March 2013)
Notes 2014 $'000 2013 $'000
Net cash generated from / (used in) operating activities 8 (11,067) 6,365
Cash flow generated from / (used in) investing activities
Interest received 100 141
Proceeds on disposal of intangible assets, property, plant & equipment 44 263
Purchases of property, plant & equipment (8,157) (24,860)
Purchases of intangible assets
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