TIDMDSCV
RNS Number : 9906A
discoverIE Group plc
04 June 2019
7am, 4 June 2019
discoverIE Group plc
Preliminary results for the year ended 31 March 2019
Strategy delivering further growth
discoverIE Group plc (LSE: DSCV, "discoverIE", the "Group" or
the "Company"), a leading international designer, manufacturer and
supplier of customised electronics to industry, today announces its
results for the year ended 31 March 2019.
FY FY Growth% CER(3)
2018/19 2017/18 Growth%
Revenue GBP438.9m GBP387.9m +13% +14%
Underlying operating
profit(1) GBP30.6m GBP24.5m +25% +26%
---------
Underlying profit before
tax(1) GBP27.2m GBP21.9m +24%
Underlying EPS(1) 27.2p 22.3p +22%
Reported profit before
tax GBP19.3m GBP14.6m(2) +32%
Reported fully diluted
EPS 19.4p 14.2p(2) +37%
Full year dividend
per share 9.55p 9.0p +6%
Highlights
-- Strong financial and operating performance
o Group sales and orders increased by 13% (+14% CER(3) )
o Group organic sales and orders grew by 8%
o D&M organic(4) sales up 10%: now 61% of Group sales (FY
2017/18: 57%)
o Underlying operating profit increased by 25% (+26% CER)
o Underlying earnings per share increased by 22%
o Excellent cash generation with GBP28.6m operating cash flow(5)
, 93% of underlying operating profit
-- Further good progress on key strategic and performance targets
o Underlying operating margin increased to 7.0% (FY 2017/18:
6.3%)
o Sales beyond Europe increased to 21% of total sales (FY
2017/18: 19%)
o Cross-selling revenue of GBP10.6m, up 20% on last year (FY
2017/18: GBP8.8m)
o ROCE(6) of 15.4% (FY 2017/18: 13.7%(2) )
o Full year dividend increased by 6%
-- Three higher margin, international D&M acquisitions completed, two since the year end
o Cursor Controls acquired in October 2018 for GBP19m
o Hobart and Positek acquired in April 2019 for GBP16m
-- Group well positioned for further growth
o Strong growth in new project design wins
o Record year end order book of GBP139m (+15% CER)
o Over-subscribed equity placing in April 2019 raising a net
GBP28m
o Debt facility extended by GBP60m to GBP180m; gearing(7)
reduced to 1.4x (post equity fund raising)
o Further acquisition opportunities developing
o New year trading has started well
Nick Jefferies, Group Chief Executive, commented:
"This year has seen an excellent Group performance with strong
organic growth complemented by the contribution from acquisitions,
resulting in 22% growth in underlying earnings per share.
As a business we are focused on four key structurally growing
markets with66% of Group revenue and 75% of design wins derived
from our target markets of renewable energy, transportation,
medical and industrial & connectivity.
discoverIE is a natural consolidator in a highly fragmented
market, acquiring high-quality Design & Manufacturing
businesses to build the Group's technology capability and extend
our geographic coverage. We have made three acquisitions in the
last eight months - Cursor Controls, Hobart and Positek - all of
which are high quality, higher margin custom design businesses,
selling into international markets, and further build our business
in line with our strategic objectives.
With a record year end order book and a high level of design
wins, we are well positioned for continued progress and excited by
the opportunities that lie ahead as we continue to build a
high-quality, global business."
For further information, please contact:
discoverIE Group plc 01483 544 500
Nick Jefferies - Group Chief Executive
Simon Gibbins - Group Finance Director
Instinctif Partners 020 7457 2020
Mark Garraway
James Gray
Notes:
(1) Underlying Operating Profit', 'Underlying EBITDA',
'Underlying Operating Costs', 'Underlying Profit before Tax' and
'Underlying EPS' are non-IFRS financial measures used by the
Directors to assess the underlying performance of the Group. These
measures exclude acquisition-related costs (amortisation of
acquired intangible assets of GBP5.9m, acquisition costs of
GBP1.8m, the IAS19 pension charge relating to a legacy defined
benefit scheme of GBP0.4m) and exceptional income of GBP0.2m for FY
2018/19. Equivalent underlying adjustments within the FY 2017/18
underlying results totalled GBP7.3m. For further information, see
note 6 of the attached summary financial statements.
(2) Last year's financial statements have been restated as set
out in note 5 of the attached summary financial statements which
has impacted reported profit before tax, reported fully diluted EPS
and ROCE.
(3) Growth rates at constant exchange rates ("CER"). The average
sterling rate of exchange against the Euro was in line with last
year, weakened 1% against the US Dollar and was up 3% on average
against the three Nordic currencies.
(4) Organic growth for the Group is calculated at CER and is
shown excluding the first 12 months of acquisitions. Santon was
acquired last financial year on 1 February 2018 and Cursor Controls
was acquired on 17 October 2018.
(5) Operating cash flow is defined as underlying EBITDA adjusted
for the investment in, or release of, working capital and less the
cash cost of capital expenditure.
(6) Return on capital employed ("ROCE") is defined as underlying
operating profit as a percentage of net assets (including goodwill)
plus net debt.
(7) Group gearing is defined as net debt divided by underlying
EBITDA (annualised for acquisitions).
(8) Unless stated, growth rates refer to the comparable prior year period.
(9) The information contained within this announcement is deemed
by the Group to constitute inside information as stipulated under
the Market Abuse Regulation, Article 7 of EU Regulation 596/2014.
Upon the publication of this announcement via Regulatory
Information Service, this inside information is now considered to
be in the public domain.
Notes to Editors:
About discoverIE Group plc
discoverIE Group plc is an international group of businesses
that designs, manufactures and supplies innovative components for
electronic applications.
The Group provides application-specific components to original
equipment manufacturers ("OEMs") internationally. With in-house
engineering capability, we are able to design components to meet
customer requirements, which are then manufactured and supplied,
usually on a repeating basis, for their ongoing production needs.
This generates a high level of repeating revenue and long term
customer relationships.
By focusing on key markets which are driven by structural growth
and increasing electronic content, namely renewable energy,
transportation, medical and industrial connectivity, the Group aims
to achieve organic growth that is well ahead of GDP and to
supplement that with targeted complementary acquisitions.
The Group employs c.4,400 people and its principal operating
units are located in Continental Europe, the UK, China, India, Sri
Lanka and North America.
The Group is listed on the Main Market of the London Stock
Exchange and is a member of the FTSE Small Cap Index, classified
within the Electrical Components and Equipment subsector, and has
revenue of over GBP400m. Over the last five years, revenue and
underlying earnings per share have both more than doubled.
CHAIRMAN'S STATEMENT
I am pleased to report that the Group has made significant
progress again this year with an excellent set of results
reflecting strong levels of organic growth and operating
efficiency. Progress has been made on all the Group's strategic and
operational objectives towards our mid-term targets with one of
these objectives being upwardly revised for the coming year.
Acquisitions continue to play an important role in building
discoverIE. The most recent acquisitions of the UK based Cursor
Controls and Positek, and Hobart in the US, are all high quality,
higher margin D&M businesses, designing, manufacturing and
supplying custom solutions. Each provides good scope for developing
further, both in our target markets and internationally, with c.70%
of sales from the three businesses being beyond Europe.
Strategy
The Group is an international leader in customised electronics,
focusing on structurally growing markets driven by increasing
electronic content, where there is an essential need for our
products. The Group's product range is highly differentiated, with
the majority being either partly or fully customised for specific
customer applications.
With our key markets being worldwide, management sees the
opportunity to continue expanding beyond Europe (currently 21% of
Group sales), as well as within Europe, as we continue our strategy
of building a global electronics group.
A priority for the year ahead is to deliver further good growth
through a combination of organic performance and value-enhancing
acquisitions.
Group Results
Group sales for the year increased by 13% to GBP438.9m and by
14% at constant exchange rates ("CER").
Underlying operating profit, which excludes acquisition-related
costs and exceptional items, increased by GBP6.1m to GBP30.6m (up
by 25% and up by 26% CER) with underlying profit before tax
increasing by GBP5.3m to GBP27.2m (up 24%). The strong growth in
D&M helped to deliver a 70bps increase in underlying operating
margins to 7.0% (FY 2017/18: 6.3%), despite additional investment
to support future growth and an adverse impact of the weak solar
market at Santon during the year.
Underlying earnings per share for the year increased by 22% to
27.2p (up 4.9p from 22.3p last year). The difference between the
growth of underlying profit before tax and underlying earnings per
share results from a slightly higher underlying tax rate (up
c.1ppt).
After underlying adjustments for acquisition-related costs of
GBP8.1m, offset by exceptional income of GBP0.2m, profit before tax
for the year on a reported basis was GBP19.3m, a 32% increase from
last year (FY 2017/18: GBP14.6m), with fully diluted earnings per
share increasing by 37% to 19.4p (FY 2017/18: 14.2p).
Cash generation was strong, with operating cash flow of GBP28.6m
up 29% on last year (FY 2017/18: GBP22.1m), and representing 93% of
underlying operating profit. Net debt at the year end was GBP63.3m,
resulting in a Group gearing ratio of 1.7 times. We are mindful of
retaining a strong financial position, in order to retain the
flexibility to take advantage of further acquisition opportunities
and are comfortable operating with gearing in the range of 1.5 to
2.0 times. Alongside the acquisitions of Hobart and Positek, in
April 2019, we took the opportunity to strengthen the balance sheet
by way of a well-supported placing which raised net proceeds of
GBP28.2m, reducing proforma year end gearing to 1.4 times. Together
with strong organic cash flows, this provides the Group with an
excellent platform from which to continue to execute its growth
strategy. On behalf of the Board, I would like to thank
shareholders for their support.
As reported in our first half results, we uncovered a fraud at
one of our subsidiary companies through our divisional control
processes. Management's response was swift, decisive and
appropriate. A review of our internal controls and procedures was
undertaken and a number of recommendations were made and
implemented which will further strengthen our controls. The Group
is insured against fraud and management were able to recover the
majority of the loss.
Acquisitions
On 17 October 2018, the Group acquired the Cursor Controls Group
("Cursor Controls"), a designer and manufacturer of human to
machine interface products for an initial consideration of GBP19.0m
on a debt free, cash free basis, and a contingent payment of up to
GBP4.0m, subject to the business achieving certain profit growth
targets during the three-year period ended 31 December 2021. Cursor
Controls is based in the UK and Belgium.
Since the year end, on 16 April 2019, the Group acquired Hobart
Electronics ("Hobart"), a designer and manufacturer of custom
transformers, inductors and magnetic components, for an initial
cash consideration of $15.2m (GBP11.7m) on a debt free, cash free
basis and a contingent payment of up to $4.0m (GBP3.1m), subject to
the achievement of certain growth targets over the three-year
period ended 31 December 2021. Hobart is based in the US with
manufacturing in Mexico.
Also on 16 April 2019, the Group acquired Positek, a designer
and manufacturer of customised rugged, high accuracy sensors for an
initial consideration of GBP4.2m on a debt free, cash free basis
and a further contingent payment of up to GBP0.4m, payable subject
to the achievement of certain integration and profit targets in the
next 18 months. Positek is based in the UK and supplies
international markets.
We are delighted to welcome the employees from all the new
businesses into the Group.
Board Changes
After six years, Henrietta Marsh and Richard Brooman will retire
at the Company's annual general meeting on 25 July 2019. Henrietta
has served as a Non-Executive Director since May 2013 and as Chair
of the Remuneration Committee since October 2014. Richard has
served as a Non-Executive Director since January 2013, Chair of the
Audit and Risk Committee since July 2013 and as Senior Independent
Director since December 2014. We thank them for their significant
contributions to the Company's development and wish them well.
Tracey Graham, who has been on the Board since November 2015,
has succeeded Henrietta as Chair of the Remuneration Committee.
Tracey is also Non-Executive Director and Chair of the Remuneration
Committee at Royal London Mutual Insurance Society and Ibstock plc.
Bruce Thompson, who joined the Board as a Non-Executive Director in
February 2018, will succeed Richard as Senior Independent
Director.
Since the period end, it has been announced that Clive Watson
will join the Board in September 2019 as a Non-Executive Director
and Chair of the Audit & Risk Committee. Clive has recently
retired from Spectris plc after thirteen years as Group Finance
Director and also from Spirax Sarco Engineering plc where he was
Senior Independent Non-Executive Director and Chair of the Audit
and Risk Committee, having joined in 2009.
Dividend
The Board is recommending a 6% (0.4 pence) increase in the final
dividend per share to 6.75 pence per share, giving a full year
dividend per share of 9.55 pence, and representing a cover against
underlying earnings of 2.8 times (FY 2017/18: 2.5 times). The final
dividend is payable on 30 July 2019 to shareholders registered on
14 June 2019. Since 2010, the annual dividend per share has risen
by 88% and the total dividend payment by nearly 350%.
In light of the Group's active and successful acquisition
strategy, the Board believes that maintaining a progressive
dividend policy with a long term dividend cover (over 3 times
underlying earnings) is appropriate to enable both dividend growth
and a higher level of investment from internally generated
resources.
Employees
Including the recent acquisitions of Cursor Controls, Hobart and
Positek, the Group now comprises approximately 4,400 employees in
23 countries around the world. The Board believes that by adopting
an entrepreneurial and decentralised operating environment,
together with rigorous planning, review, support, investment and
controls, the Group is able to continue to foster an ambitious and
successful culture.
On behalf of the Board, I would like to thank everybody at
discoverIE for their commitment and hard work. Their dedication
remains essential in helping us to achieve our goals.
Summary
By focusing on structural growth markets and responding
effectively to complex customer requirements, the Group has evolved
into a higher quality business that is making excellent progress
and delivering strong results.
The market in which we operate remains highly fragmented
offering scope to build the Group's technology capability and
extend its geographic coverage through disciplined acquisitions.
Combined with continued organic growth, the Board and management
continue to be excited by the opportunities ahead to build a global
business, that attracts and retains high quality employees,
delivers value to our customers, and grows returns for our
shareholders.
Malcolm Diamond MBE
Chairman
4 June 2019
OPERATING REVIEW
Overview
Over recent years the Group has pursued a clear strategy,
investing in initiatives that enhance design opportunities for
customised products in targeted growth markets namely: renewable
energy; transportation; medical; and industrial & connectivity.
The benefits of this approach are evident in these results with
strong levels of organic revenue growth throughout the established
business units in the D&M division, driving a 23% increase in
its divisional underlying operating profits. Likewise, in the
Custom Supply division, good organic growth and greater efficiency
has resulted in a 15% increase in its underlying operating
profit.
Group organic sales in the year grew by 8% to GBP439m, driven by
10% organic growth in the D&M division and 5% in Custom Supply.
Together with a 6% contribution from the acquisitions of Santon in
February 2018 and Cursor Controls in October 2018, Group sales
increased by 14% CER. Including the translation impact of a
slightly stronger Sterling on average since last year, reported
Group revenues increased by 13%.
Orders also performed well, growing by 8% organically to GBP454m
and by 14% CER, when including acquisitions, leading to another
record year-end order book at 31 March 2019 of GBP139m (up 12%
organically year-on-year and 15% CER).
Project design wins, a proxy measurement for new business
creation, grew strongly during the year. The estimated lifetime
sales value of design wins during the year was GBP266m, an increase
of 40% compared with last year, with 75% of these wins in our
target markets.
Strong revenue growth has driven a 25% increase in underlying
operating profit, rising by GBP6.1m to GBP30.6m, (26% CER), with
underlying EPS increasing by 22% to 27.2p.
Group Strategy
The Group designs, manufactures and supplies highly
differentiated, innovative components for electronic
applications.
Core to our value proposition is the understanding of our
customers' design challenges and the design and manufacture of
engineered products to meet their needs, that are then supplied
over the life of the customer's production, typically five to seven
years.
In a fragmented market, there exist opportunities to consolidate
certain manufacturers of customised products for the Group's common
customer base, which ranges from mid-sized OEMs (original equipment
manufacturers) to multinational companies operating in multiple
locations. Our four target markets (renewable energy,
transportation, medical, and industrial & connectivity), are
long term, international growth markets driven by excellent
fundamentals where our customers depend upon the Group's
products.
Our strategy comprises four elements:
1. Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets;
2. Move up the value chain by continuing to build revenues in the higher margin D&M division;
3. Acquire businesses with attractive growth prospects and strong operating margins;
4. Further internationalise the business by developing sales in North America and Asia.
The Group's progress with its strategic objectives is measured
through key strategic indicators ("KSIs"), while progress with its
financial performance is measured through key performance
indicators ("KPIs"). Our KSIs and KPIs are mid-term targets over a
three to five-year period from November 2016.
Key Strategic Indicators
FY14 FY15 FY 16 FY 17 FY 18 FY 19 Mid
term
Target(2)
-----
1. Increase share
of Group revenue
from D&M(1) 18% 37% 48% 52% 57% 61% 75%
2. Increase underlying
operating margin 3.4% 4.9% 5.7% 5.9% 6.3% 7.0% 8.5%
3. Build sales
beyond Europe(1) 5% 12% 17% 19% 19% 21% 30%
(1) As a proportion of Group revenue
(2) Mid-term is a three to five-year period starting in Nov
16
The Group made good progress towards its strategic objectives
during the year:
- The D&M division accounts for 61% of Group sales (FY
2017/18: 57%), and 78% of the Group's underlying profit
contribution. Annualised for the acquisitions of Cursor Controls in
October 2018, and Hobart and Positek in April 2019, D&M sales
now represent 62.5% of Group sales. Importantly, customer
concentration remains low with no one customer accounting for more
than 4% of Group sales;
- The growing proportion of the D&M division and the Group's
improving operating efficiencies have increased the Group operating
margin by 0.7ppts over last year to 7.0% (FY 2017/18: 6.3%) despite
additional investment to support future growth and an adverse
impact from the weak solar market at Santon during the year;
- Sales beyond Europe represented 21% of Group revenue (from 19%
in FY 2017/18) improving as a result of the acquisitions of Santon
and Cursor Controls (for which over 50% of sales in the period were
outside Europe). On an annualised basis, including acquisitions,
this would rise to 23%. We continue to seek acquisitions with
international revenues.
Our long term ambition is to increase the share of Group revenue
from D&M to 85% with an overall operating margin of 10% and
sales beyond Europe of 40%.
Key Performance Indicators
FY14 FY15 FY FY FY FY Mid term
16 17 18 19 target
1. Sales growth
Well ahead
CER 17% 36% 14% 6% 11% 14% of GDP
Organic 2% 3% 3% (1)% 6% 8%
2. Increase cross-selling GBP0.3m GBP0.9m GBP3.0m GBP4.6m GBP8.8m GBP10.6m GBP12m p.a.
(was GBP10m
p.a)
3. Underlying EPS
growth 20% 31% 10% 13% 16% 22% >10%
4. Dividend growth 10% 11% 6% 6% 6% 6% Progressive
5. ROCE(1) 15.2% 12.0% 11.6% 13.0% 13.7%(2) 15.4% >15%
>85% of
underlying
6. Operating cash operating
flow(1) 100% 104% 100% 136% 90%(2) 93% profit
(1) Defined in Note 6 of the attached summary financial statements;.
(2) Last year's financial statements have been restated as set
out in note 5 of the attached summary financial statements which
has impacted ROCE and operating cash flow.
The Group has also made good progress with its KPIs this
year:
- Organic sales growth for the year of 8% was well ahead of GDP,
with good growth in both divisions (D&M increasing by 10% and
Custom Supply by 5%) reflecting the sustained focus on higher
growth target markets;
- Cross-selling generated GBP10.6m of Group sales, an increase
of 20% over the prior year, reaching our three year target of
GBP10m p.a. early. Consequently, we have increased our target to
GBP12m p.a. for the coming year;
- Underlying EPS growth for the year was very strong at 22% (FY
2017/18: 16%), with two year growth of 42%. This is well ahead of
our annual target of exceeding 10% and reflects widespread organic
growth, acquisitions and improved operating efficiency;
- Strong growth in underlying operating profit has driven a
1.7ppt increase in return on capital employed to 15.4% (including
the acquisitions of Santon and Cursor Controls) compared with the
return for FY 2017/18 of 13.7%, ahead of our three-year target of
exceeding 15%;
- Over the last year, operating cash flow was 93% of underlying
operating profit, being ahead of our 85% target, despite the
working capital required to support the strong organic sales
growth. Over the last six years, operating cash flow has been
consistently strong.
Divisional Results
Divisional and Group performances for the year ended 31 March
2019 are set out and reviewed below.
FY 2018/19 FY 2017/18 Revenue CER Organic
growth revenue revenue
growth growth
------------------------------
Revenue Underlying Margin Revenue Underlying Margin
GBPm operating GBPm operating
profit profit
(1) (1)
GBPm GBPm
-------- ----------- ------- -------- ----------- -------
Design &
Manufacturing 266.2 29.8 11.2% 222.6 24.2 10.9% 20% 21% 10%
Custom Supply 172.7 8.6 5.0% 165.3 7.5 4.5% 4% 5% 5%
Unallocated
costs (7.8) (7.2)
-------- ----------- ------- -------- ----------- ------- -------- --------- ---------
Total 438.9 30.6 7.0% 387.9 24.5 6.3% 13% 14% 8%
-------- ----------- ------- -------- ----------- ------- -------- --------- ---------
(1) Underlying operating profit excludes acquisition-related
costs and exceptional costs.
With approximately 85% of Group sales in non-Sterling
currencies, the translation of Group results into Sterling has been
slightly impacted by stronger Sterling year-on-year, with Group
revenue growth reducing from 14% CER to 13% on a reported
basis.
Order Book
Orders have continued to grow well with the year end order book
reaching a record high of GBP139m, an increase of 15% CER over last
year. On an organic basis, the Group order book increased by 12%,
with the D&M order book growing by 17% organically and the
Custom Supply order book by 4% organically.
The order book growth is driven by repeating revenues from
existing customer projects and the conversion of customer design
wins from new projects into orders.
Over 80% of the order book is for delivery within twelve months
from the time of order, and it is this conversion into sales which
is driving the continued momentum in sales into FY2019/20.
By working with high quality customers in our focus markets, we
aim to build an order book that leads to long term, repeating
revenues.
Design wins
Project design wins are a proxy measurement for new business
creation and are a key driver of organic sales growth. By working
with customers at an early stage in their project design cycle, we
identify opportunities for custom products.
Design opportunities take on average eighteen months to develop
to conclusion, at which point they become a design win. Once in
production, the design win is expected to create a recurring
revenue stream over a number of years.
Design wins again grew very strongly this year. The estimated
lifetime sales value of design wins during the period was GBP266m,
an increase of 40% over the prior year (FY 2017/18: GBP190m) and on
an estimated annual revenue basis, represent 16% of reported
revenue, up from 12% last year. A portion of design wins are to
replace existing projects as they become end-of-life.
Design & Manufacturing ("D&M") Division
The D&M division designs, manufactures and supplies highly
differentiated, innovative components for electronic applications.
Over 80% of the products are manufactured in-house, the balance
being manufactured by approved third party contractors. The
division's principal manufacturing facilities are in China, India,
Mexico, the Netherlands, Poland, Slovakia, Sri Lanka and
Thailand.
During the year, production ramp up began in our new, larger
production facilities in Bangalore, India for magnetic components;
Bratislava, Slovakia for fibre optic components and Seoul, Korea
for electromagnetic shielding products. Additionally, we commenced
the expansion of our magnetic components production facility in
China which, when complete later this year, will increase Myrra's
production capacity in Asia by around 70%.
The benefit of design wins from previous years generating new
revenue and strong demand from our key target markets helped to
deliver strong organic growth in the division with sales growth of
10% and order growth of 11%. This continued the momentum seen last
year when organic sales and orders grew by 11% and 10%
respectively. Sales growth has been consistently strong across each
of the last 9 quarters, with growth between 9% and 11%, with one
quarter at 14%. Geographically, sales grew by 12% in Asia, Germany
& the Nordic region; by 9% in the Rest of Europe and North
America and 6% in the UK. Revenues beyond Europe were 27% of
D&M revenues (up from 26% last year).
The effect of China / US tariffs is limited. Of GBP32m sales
into the US, GBP4m were manufactured in China and subject to a
tariff (mostly at 25%), with our pass-through policy applying. With
our production operations located internationally, in India,
Sri-Lanka, Thailand and now Mexico, production for the US is being
reduced in China and transferred to other countries where
appropriate. We expect this to continue in the year ahead,
minimising the effects of such tariffs on our customers.
Organic sales growth of 10%, combined with an 11% sales increase
from acquisitions, resulted in overall sales increasing by 21% CER.
Including a 1% reduction in revenue due to the impact of currency
translation, reported divisional revenue increased by 20% to 266.2m
(FY 2017/18: GBP222.6m).
D&M revenue accounted for 61% of Group revenue (FY 2017/18:
57%) representing further progress towards our mid-term target for
D&M to reach 75% of Group revenue, and generated 78% of the
Group's underlying profit contribution, up 2ppts on last year (FY
2017/18: 76%).
Underlying operating profit of GBP29.8m was GBP5.6m (+23%)
higher than last year (FY 2017/18: GBP24.2m) and up GBP5.9m CER
(+25%). The underlying operating margin of 11.2% was 0.3ppts higher
than last year (FY 2017/18: 10.9%), with higher gross margins
partly offset by operational investment to support infrastructure,
for example, local IT systems required for future growth, and was
also partly impacted by the solar market slow down during the
year.
Santon
In February 2018, the Group acquired the Santon Group, a Dutch
based designer and manufacturer of highly differentiated, patented,
direct current ("DC") switches for use in solar, industrial and
transportation markets. The acquisition was consistent with the
Group's strategy of targeting structural growth markets, in this
case renewable energy, transportation and industrial markets,
building on its established position in niche components for solar
power.
Following anticipated changes to Chinese solar tariffs, sales
and orders in Santon's solar business slowed in the first half of
the year as the market adapted. In the second half, orders
recovered strongly such that full year orders were at a similar
level to the prior year, lifting second half sales by 12% over the
first half. The lower solar sales for the year as a whole also had
an adverse impact on divisional margins. The growing order book
bodes well for future organic growth.
The potential for the Chinese tariff reduction and the
subsequent temporary drop in sales was anticipated in the deal
structure at the time of acquisition. As a result, a repayment was
made to the Group by the vendor of the EUR2.5m (GBP2.2m) capital
expenditure contribution made by the Group at the time of
acquisition and the initial contingent payment of up to EUR10m was
not payable.
Sales in Santon's transportation and industrial businesses grew
by 8% during the year and are expected to continue to grow, having
recently won a number of new projects.
The growth prospects for Santon remain excellent. Its high
performance switches are suitable for a number of growth markets,
in particular transportation such as rail, energy storage, solar
energy and industrial markets where it can benefit from access to
the Group's wide customer base and geographic presence. A number of
initiatives are underway, developing these opportunities.
Cursor Controls
In October 2018, the Group acquired the Cursor Controls Group, a
UK based designer and manufacturer of human to machine interface
("HMI") products for medical, industrial and transportation
applications. Its products include trackballs, touchpads and rugged
keyboards, which are custom designed for specific applications, and
are highly complementary to the Group's existing business. The
acquisition is consistent with discoverIE's focus on structural
growth markets with over 60% of its revenues derived from the
medical and industrial sectors. Over 90% of its sales are to
international markets outside the UK, with 40% being into North
America, Asia and other non-EU markets. The business, which is
based in Newark, UK, with manufacturing facilities in the UK and
Belgium, continues to retain its distinct brand identity.
Cursor Controls was acquired for an initial cash consideration
of GBP19.0m on a debt free, cash free basis, before expenses, and
generated revenue of GBP7.9m for its year ended 31 December 2017,
with an underlying operating profit of GBP2.1m. In addition, a
contingent payment of up to GBP4.0m will be payable subject to
Cursor Controls achieving certain profit growth targets during the
three-year period ended 31 December 2021.
Since acquisition, Cursor Controls has performed strongly, with
excellent growth in orders and sales including a large new order
from a major international customer. As with other acquisitions, we
expect the business to benefit from access to discoverIE's broader,
international customer base, to create new revenue opportunities
from cross-selling within the Group.
Hobart Electronics
In April 2019, the Group acquired Hobart Electronics, a US
headquartered business founded in 1969 which designs, manufactures
and supplies customised transformers, inductors and magnetic
components for niche applications. As well as manufacturing sites
in Indiana and Arizona, it has two larger manufacturing sites in
Mexico and employs around 260 people. Over 90% of revenues are
generated from customers in North America. The markets served by
Hobart include energy infrastructure and industrial, which
collectively account for approximately 74% of sales. Following
acquisition, Hobart now operates as part of Noratel's US business
within the D&M division while retaining its distinct brand
identity.
The business was acquired for an initial cash consideration of
$15.2m (GBP11.7m) on a debt free, cash free basis, with a further
contingent cash consideration of up to $4.0m (GBP3.1m) payable
subject to the achievement of certain growth targets over the next
three years.
Revenues for the year ended 31 December 2018 were $13.0m
(GBP10.0m), generating a pre-tax profit of $2.0m (GBP1.5m).
Positek
In April 2019, the Group also acquired Positek, a UK-based
designer and manufacturer of rugged, high accuracy linear, rotary,
tilt and submersible sensors, supplying international markets with
60% of sales into the Industrial sector. Positek, which was founded
in 1992, sells products worldwide that are renowned for their
quality, precision and robustness. Approximately 50% of revenues
are generated from customers in Europe, 20% from customers in North
America, around 15% from customers in Asia Pacific and 15% in the
UK. Following acquisition, Positek now operates as part of the
Variohm business within the D&M division while retaining its
distinct brand identity.
The business was acquired for an initial cash consideration of
GBP4.2m on a debt free, cash free basis, with further contingent
cash consideration of up to GBP0.4m, payable subject to the
achievement of certain integration and profit targets in the 18
months following acquisition. Revenues for the year ended 31 August
2018 were GBP1.5m, generating an underlying EBITDA of GBP0.6m.
Custom Supply Division
The Custom Supply division provides customised electronic,
photonic and medical products for technically demanding
applications in industrial, medical and healthcare markets. The
business operates similarly to the D&M division, but mostly
with products sourced from third party suppliers rather than
manufactured in-house. As such, operating margins are lower than in
D&M. A key element of the division's strategy is to grow the
proportion of cross-sales from products manufactured by the D&M
division in a manner that complements, but does not compete with or
limit growth of our highly valued third party suppliers, thereby
enhancing the Group's overall value proposition to customers and
suppliers.
Given the bespoke nature of the product offering, a high degree
of technical knowledge is required during the sales process with
the division's in-house engineers helping customers to solve their
design challenges. The Group is the only industrial electronics
business which provides such a comprehensive range of
customer-specific products and solutions across Europe. The
division comprises two businesses, Acal BFi and Vertec.
Acal BFi supplies industrial markets and accounts for most of
Custom Supply divisional revenue. It supplies products from a
selected group of manufacturers (including the Group's D&M
businesses) to customers in five technology areas: Communications
& Sensors, Power & Magnetics, Electromechanical &
Cabling, Microsystems, and Imaging & Photonics. The business
operates across Europe, with centralised warehousing, purchasing,
finance, customer contact management and IT systems. Vertec
supplies exclusively-sourced medical imaging and radiotherapy
products into medical and healthcare markets in the UK and South
Africa.
The division's trading performance this year was good,
particularly in Germany, Italy and the Netherlands, driving 5%
overall organic sales growth in the year, with organic growth of 2%
in the first half and 8% in the second half; first half growth
excluding one large order shipment in the prior year was 6%.
Including a 1% reduction due to translation movements, reported
divisional revenue increased by 4% to GBP172.7m (FY 2017/18:
GBP165.3m). Underlying operating profit of GBP8.6m was GBP1.1m
(+15%) higher than last year (FY 2017/18: GBP7.5m) while the
underlying operating margin was 5.0%, 0.5ppts higher than last
year, achieving our mid-term target margin for this division.
Target Markets
The Group focuses on four target markets, which account for
around 71% of D&M turnover and 66% of Group turnover:
transportation, medical, renewable energy and industrial &
connectivity. These target markets are expected to drive the
Group's organic revenue growth well ahead of GDP over the economic
cycle and create acquisition opportunities. Growth in these markets
is driven by the increasing electronic content, connectivity and
communication in products, and by global macro trends such as an
ageing affluent population, an expanding transport infrastructure,
and the increasing need for renewable sources of energy. This year,
organic revenue growth in these target markets was 12%, compared
with 8% for the Group as a whole.
i) Transportation
Transport markets continue to grow internationally. The
electronics content is rising driven by electrification, safety,
automation and convenience. IC Insights, an electronics market
research company, expects integrated circuit sales, a proxy for
electronic content, into the automotive market to rise by a CAGR of
13.4% between 2016 and 2021.
ii) Medical
This market is driven by the increasing use of technology in
diagnosing, monitoring and controlling medical conditions, as well
as an increasingly affluent and ageing global population which now
accounts for the majority of healthcare spending in developed
economies. A report by Research+Markets forecasts the global sales
of medical electronics to grow by a CAGR of 6.8% between 2017 and
2022.
iii) Renewable Energy
The increasing global requirement for clean electricity is
leading to the rapid adoption of sustainable energy generation. So
much so, that according to the World Energy Outlook 2017, two
thirds of global investment in power generation up to 2040 will be
into renewable energy, primarily wind and solar.
iv) Industrial & Connectivity
Technology is creating opportunities for connectivity
everywhere, which is becoming increasingly important in industry. A
report by the research firm Markets-and-Markets, expects the
overall market size for global machine-to-machine connections to
rise by 13.2% CAGR between 2016 and 2021. With the growing adoption
of electronics and connectivity of industrial devices, the
definition of this target market is being broadened to include key,
growth industrial applications, reflecting the increasing
contribution of the D&M division.
Cross-selling
For acquired businesses, cross-selling through our Custom Supply
division or between other D&M businesses provides new customer
and geographic growth opportunities.
It takes typically three years for cross-selling to become
established within a business unit, due to project lead-in cycles,
and then develops into a significant additional source of revenue,
as evidenced by the Group's longer standing acquisitions of MTC and
Myrra, which both now count intra-Group cross-selling as one of
their largest customers. This year, cross-selling revenues which
now account for 2.4% of Group sales, were up 20% to GBP10.6m from
the previous year (FY 2017/18: GBP8.8m), exceeding our 3 year
target set at 31 March 2017 of GBP10m and achieved earlier than
anticipated. We have increased this target for the year ahead to
GBP12m.
Acquisitions
There are numerous opportunities to acquire businesses that will
enhance, strengthen and build the Group. Good acquisitions, at the
right price, which build complementary product and/or geographic
capability and supply common markets and customers, create future
organic growth opportunities and build value for shareholders.
We acquire businesses that are successful, profitable and
growing in our existing and adjacent technology areas, with good
growth prospects and long term growth drivers similar to the
Group's target markets.
Typically, the businesses we acquire are led by entrepreneurial
managers who wish to remain following acquisition. We encourage
this as it helps to retain a decentralised, entrepreneurial
culture.
Our primary acquisition focus is to invest for growth, with
operational efficiency improvement. As such, the D&M division
operates a decentralised structure with business units operating to
pre-agreed business plans. We support growth investment
requirements and develop operational performance according to the
requirements of each business unit. Depending upon the
circumstances, we add value in some or all of the following
areas:
- Internationalising sales channels and expanding the customer
base, including via Group cross-selling initiatives (see
above);
- Developing and expanding the product range;
- Investing in management capability ('scaling up') and succession planning;
- Capital investment in manufacturing & infrastructure;
- Improving manufacturing efficiency;
- Enabling growth with larger customers as a consequence of the stronger Group balance sheet;
- Infrastructure efficiencies, such as warehousing and freight;
- Finance and administrative support, such as treasury, banking,
legal, pension, tax & insurance, risk & control; and
- Expanding the business through further acquisitions.
Acquisition performance
Over the last eight years, 14 businesses have been acquired in
the D&M division at a cost of GBP187m, including two since the
year end, and a further two acquired in the last two years. We
measure acquisition return on investment ("ROI") using the current
year operating profit attributable to each business over the
acquisition costs (including earn outs, expenses of acquisition and
integration costs).
The Group, which has a weighted average cost of capital ("WACC")
of c.9%, targets an acquisition EBIT ROI of 15% within two years.
Overall, the weighted average ROI of the 10 acquired businesses
owned for at least two years was 20%, up from 17% in the prior
year. During the year, of these 10 businesses, seven significantly
exceeded our target ROI with a range of 24% to 115%, mostly the
result of several years' profitable post-acquisition growth from
those businesses. While the smallest business performed below our
WACC, changes to this business are being made which are expected to
improve its profitability in the year ahead.
Group Priorities for the Year Ahead
Our priority for the year ahead is to deliver further good
growth in earnings and operating margins, through:
1. Organic sales growth, including:
-- High quality design wins in target markets;
-- Continued emphasis on cross-selling.
2. Developing new and expanded production facilities.
3. Integrating the Hobart and Positek acquisitions through:
-- Organic growth;
-- Integration into Noratel and Variohm respectively;
-- Establishment of cross-selling.
4. Improving underlying operating margins through:
-- Further growth in the D&M contribution to Group performance;
-- Ongoing efficiency initiatives;
-- Operational gearing benefits;
-- Continued investment in our commercial and manufacturing infrastructure.
5. Further value enhancing acquisitions.
Summary and Outlook
This year has seen an excellent Group performance with strong
organic growth complemented by the contribution from acquisitions,
resulting in 22% growth in underlying earnings per share.
As a business we are focused on four key structurally growing
markets with66% of Group revenue and 75% of design wins derived
from our target markets of renewable energy, transportation,
medical and industrial & connectivity.
discoverIE is a natural consolidator in a highly fragmented
market, acquiring high-quality Design & Manufacturing
businesses to build the Group's technology capability and extend
our geographic coverage. We have made three acquisitions in the
last eight months - Cursor Controls, Hobart and Positek - all of
which are high quality, higher margin custom design businesses,
selling into international markets, and further build our business
in line with our strategic objectives.
With a record year end order book and a high level of design
wins, we are well positioned for continued progress and excited by
the opportunities that lie ahead as we continue to build a
high-quality, global business
Nick Jefferies
Group Chief Executive
4 June 2019
FINANCE REVIEW
Orders, Revenue and Gross Profit
Group revenue for the year increased by 13% over last year to
GBP438.9m, and by 14% CER, the difference reflecting the
translation impact of Sterling strength on average since last year.
Organic revenue increased by 8%, while the acquisitions of Santon
last year, and Cursor Controls this year contributed an additional
6% growth in revenues.
GBPm FY 2018/19 FY 2017/18 %
Reported revenue 438.9 387.9 13%
FX translation impact (3.9)
----------- ----
Underlying revenue (CER) 438.9 384.0 14%
Acquisitions (24.7) -
Organic revenue 414.2 384.0 8%
Group orders also increased by 14% CER with a book to bill ratio
of 1.03 (H1: 1.03, H2: 1.04). Organically, orders were also up 8%
for the year.
With approximately 80% of Group sales in non-Sterling
currencies, the translation of Group results into Sterling was
impacted by its strength on average since last year. While Sterling
was in line with the Euro during the year, it appreciated 3%
against Nordic currencies on average and weakened 1% against the US
dollar.
Gross profit for the year of GBP145.0m increased by 14% over
last year (FY2017/18: GBP126.7m) with gross margin for the year of
33.0% being 0.3ppts ahead of last year (FY 2017/18: 32.7%).
The Group's gross margin has increased by around 7ppts in the
last 10 years, a reflection of the differentiated nature of our
products and the acquisitions of higher margin businesses.
Underlying Operating Costs
Reported costs were up 12% as detailed below. Excluding
underlying adjustments, Group underlying operating costs increased
by 13% CER. Adjusting for the pre-acquisition costs of Santon and
Cursor Controls, underlying operating costs increased by 5%
organically, reflecting investment in D&M businesses to support
strong revenue growth.
As a percentage of sales, underlying operating costs for the
year reduced by 0.4ppts to 26.0% (FY 2017/18: 26.4%), a reflection
of strong sales growth and tight cost control.
GBPm FY 2018/19 FY 2017/18 %
Organic operating costs 106.9 101.4 5%
Acquisition operating
costs 7.5 -
----------- ----
Underlying operating
costs (CER) 114.4 101.4 13%
FX translation 0.8
Underlying adjustments
Acquisition-related
costs 1.8 0.8
Amortisation of acquired
intangibles 5.9 4.9
Exceptional items(1) (0.2) 1.2
IAS 19 pension administration
cost 0.4 0.3
----------- ----
Reported operating
costs 122.3 109.4 12%
----------- ----
GBPm FY 2018/19 FY 2017/18
Selling and distribution
costs 57.7 54.5
Administrative expenses(1) 64.6 54.9
----------- -----------
Reported operating
costs 122.3 109.4
----------- -----------
(1) Last year's exceptional charge within administrative
expenses restated as set out in Note 5 of the attached summary
financial statements.
Selling and distribution costs, and administrative expenses both
include the additional operating costs of the recently acquired
businesses. Underlying adjustments, which are included in the
financial statements within administrative expenses, are discussed
below.
Group Operating Profit and Margin
Group underlying operating profit for the year was GBP30.6m, up
GBP6.1m (+25%) on last year, and up 26% CER, delivering a Group
underlying operating margin of 7.0%, up 0.7ppts on last year.
Reported Group operating profit for the year (after accounting
for the underlying adjustments discussed below) was GBP22.7m, an
increase of GBP5.4m (+31%) compared with last year (FY 2017/18:
GBP17.3m).
GBPm FY 2018/19 FY 2017/18
Operating Finance Profit Operating Finance Profit
profit cost before profit cost before
tax tax
---------- ---------- -------- --------
Underlying 30.6 (3.4) 27.2 24.5 (2.6) 21.9
Underlying adjustments
Acquisition-related
costs (1.8) - (1.8) (0.8) - (0.8)
Amortisation of acquired
intangibles (5.9) - (5.9) (4.9) - (4.9)
Exceptional items (restated) 0.2 - 0.2 (1.2) - (1.2)
IAS 19 pension cost (0.4) - (0.4) (0.3) (0.1) (0.4)
Reported 22.7 (3.4) 19.3 17.3 (2.7) 14.6
Underlying Adjustments
Underlying adjustments for the year comprise:
acquisition-related costs of GBP1.8m (FY 2017/18: GBP0.8m); the
amortisation of acquired intangibles of GBP5.9m (FY 2017/18:
GBP4.9m); and the IAS19 legacy pension cost of GBP0.4m (FY 2017/18:
GBP0.3m). In addition, there was net exceptional income this year
of GBP0.2m, being exceptional income of GBP1.1m related to income
from an insurance policy in respect of a fraud uncovered during the
year (as detailed below), offset by an exceptional charge of
GBP0.9m related to a pension equalisation provision for Guaranteed
Minimum Pensions (GMP) which is covered in more detail in the
pension section below.
During the year, divisional internal control processes
identified a fraud, perpetrated against the Group in a small US
subsidiary. Decisive action was taken to resolve the matter with
new management put in place and tightened Group and local controls.
Of the total fraud cost of GBP4.0m, GBP2.6m has been recovered this
year from insurance after the excess deductible. The fraud was
conducted over a period of four years of which GBP1.5m of the fraud
cost was incurred this year, GBP1.2m last year and a further
GBP1.3m in the previous two years. The exceptional income of
GBP1.1m for this year comprises the insurance receipt of GBP2.6m
offset by the fraud cost incurred this year of GBP1.5m.
Acquisition-related costs of GBP1.8m comprised expenses related
to the acquisition of Cursor Controls in October 2018 of GBP0.9m,
contingent consideration of GBP0.5m paid in relation to earlier
acquisitions and GBP0.4m incurred in relation to the post year-end
acquisitions of Hobart and Positek. The GBP1.0m increase in the
amortisation charge since last year relates to the amortisation of
intangibles identified as part of the acquisitions of Santon last
year and Cursor Controls this year. The total annualised
amortisation cost for next year is expected to be around GBP7.0m,
excluding the impact of the two businesses (Hobart and Positek)
which were acquired after the year end.
Financing Costs
Group finance costs of GBP3.4m (FY 2017/18: GBP2.7m), comprised
underlying finance costs (being interest and facility fees arising
from the Group's banking and pooling facilities), together with an
IAS19 pension finance charge.
Underlying finance costs for the year were GBP3.4m, an increase
of GBP0.8m from last year (FY 2017/18: GBP2.6m), due to higher
average debt balances during the year following the acquisitions of
Santon for GBP24.0m in February 2018 and Cursor Controls for
GBP19.0m in October 2018. Included within finance costs is the
amortisation of the upfront arrangement fees associated with the
Group's syndicated banking facility of approximately GBP0.3m per
annum, rising to GBP0.4m next year.
The IAS19 pension finance cost for the year was nil, compared
with GBP0.1m last year.
Underlying Tax Rate
The underlying effective tax rate for the year was 25%. This was
approximately 1ppt higher than last year due mainly to increased
profitability in higher tax territories.
The overall effective tax rate of 24% was slightly lower than
the underlying effective tax rate mainly due to higher tax credit
available on the amortisation of acquired intangibles.
Profit Before Tax and EPS
Underlying profit before tax for the year was GBP27.2m, an
increase of GBP5.3m (24%) compared with last year. This increase,
resulted in underlying diluted earnings per share for the year of
27.2p, up 22% on last year.
After the underlying adjustments discussed above, reported
profit before tax of GBP19.3m was 32% higher than last year
(FY2017/18: GBP14.6m), with reported fully diluted earnings per
share of 19.4p, an increase of 37% on last year (FY2017/18:
14.2p).
GBPm FY 2018/19 FY 2017/18
PBT EPS PBT EPS
------ ------ ------
Underlying 27.2 27.2p 21.9 22.3p
Underlying adjustments
Acquisition-related
costs (1.8) (0.8)
Amortisation of acquired
intangibles (5.9) (4.9)
Exceptional items (restated) 0.2 (1.2)
IAS 19 pension cost (0.4) (0.4)
Reported 19.3 19.4p 14.6 14.2p
Working Capital
Working capital at 31 March 2019 was GBP67.2m, equivalent to 14%
of annualised final quarter sales at CER. This compares with
working capital of GBP60.6m at 31 March 2018, also at 14% of last
year's annualised final quarter sales at CER. Continued tight
management of working capital has kept this ratio in line with last
year, despite increased sales in the D&M division, which as a
manufacturer, holds raw material and more finished goods than in
Custom Supply, and hence has lower stock turns (3.8 times in
D&M compared with 10.9 times in Custom Supply). This in turn,
results in higher working capital as a percentage of sales in the
D&M division (19% in D&M compared with 10% in Custom
Supply).
Group stock turns were 5.1, 0.2 turns better than last year,
despite the increasing percentage of D&M sales. Group trade
debtor days and trade creditor days outstanding at 31 March 2019
were at 54 days (down 1 day) and 63 days (consistent with last
year) respectively.
ROCE for the year (return on capital employed, as defined in
note 6 to the attached summary financial statements) on our organic
business was 15.4%, up 1.7ppts on last year driven by increased
profitability and operating efficiency. This is ahead of our target
to achieve a ROCE of at least 15%.
Cash Flow
Net debt at 31 March 2019 was GBP63.3m, compared with GBP52.4m
at 31 March 2018. The increase of GBP10.9m results mainly from the
Cursor Controls acquisition in October 2018. Excluding the upfront
costs and expenses related to acquisitions, net debt would have
reduced by GBP13.3m to GBP39.1m.
FY FY
2018/19 2017/18
Net debt at 1 April (52.4) (30.0)
Free cash flow (see table
below) 21.4 15.8
Acquisition-related cash
flow (24.2) (25.4)
Executive Share option exercises (1.6) (1.5)
Equity issuance 0.1 -
Net exceptional receipt/(cost)
(restated) 1.1 (3.0)
Legacy pension (1.7) (1.7)
Dividends (6.7) (6.2)
Foreign exchange impact 0.7 (0.4)
Net debt at 31 March (63.3) (52.4)
Net acquisition cash flows of GBP24.2m comprise a GBP19.0m
upfront cash payment for the acquisition of Cursor Controls in
October 2018, GBP1.5m of acquisition adjustments for acquired cash
and working capital, acquisition costs of GBP1.6m and the cash cost
of earn-out payments made in the year of GBP2.1m. The net cash
receipt in respect of the fraud uncovered during the year (see
underlying adjustments above) totalled GBP1.1m (being insurance
proceeds of GBP2.6m offset by the cash loss incurred in the year of
GBP1.5m). Additionally, GBP1.5m of tax was paid in respect of
executive share options which were exercised during the year.
Dividend payments increased by GBP0.5m to GBP6.7m following the
6% dividend increase last year. The Group will continue to review
the level of future dividend growth in relation to its policy of
long term dividend cover of over 3 times underlying earnings per
share.
Operating cash flow and free cash flow (see definitions in note
6 to the summary financial statements) for the year compared with
last year are shown below.
FY
GBPm 2018/19 FY 2017/18
Underlying profit
before tax 27.2 21.9
Finance costs 3.4 2.6
Non-cash items(1) 6.4 4.8
--------- -----------
Underlying EBITDA 37.0 29.3
Working capital (restated)(2) (3.2) (2.9)
Capital expenditure (5.2) (4.3)
-----------
Operating cash flow 28.6 22.1
Finance costs (3.4) (2.6)
Taxation (3.8) (3.7)
Free cash flow 21.4 15.8
(1) Non-cash items comprise depreciation (GBP4.6m), amortisation
(GBP0.6m) and share based payments (GBP1.2m)
(2) Last year's inventory restated as set out in Note 5 of the
attached summary financial statements.
Underlying EBITDA of GBP37.0m was 26% higher than last year.
GBP3.2m was invested into working capital, to support strong
organic D&M sales growth of 10% (being additional organic
D&M sales of GBP22.3m). This additional working capital equates
to 14% of D&M sales, 5ppts below the 19% average for the
D&M division.
Capital expenditure at GBP5.2m was GBP0.9m higher than last year
with increased investment in the D&M division.
Operating cash flow of GBP28.6m, which was up 29% on last year,
represents 93% of underlying operating profit, ahead of our 85%
conversion target. Free cash flow (after finance costs and
taxation) was GBP21.4m; at 104% of underlying profit after tax,
again ahead of our target of 90%.
Banking Facilities
During February 2019, the Group increased its syndicated banking
facility from GBP120m to GBP180m and extended the remaining term of
the facility by two years out to four years ending in June 2023,
with an option exercisable by the Group to extend the facility by a
further year to June 2024. In addition, the Group has a GBP60m
accordion facility which it can use to extend the total facility up
to GBP240m. The syndicated facility is available both for
acquisitions and for working capital purposes, and now comprises
six lending banks.
With net debt at 31 March 2019 of GBP63.3m, the Group's gearing
ratio was 1.7 times (FY 2017/18: 1.5 times), being defined as net
debt divided by underlying EBITDA (annualised for acquisitions).
Following the placing on 18 April 2019, year-end gearing would have
reduced on a proforma basis to 1.4 times, with our target gearing
range being between 1.5 and 2.0 times.
Balance Sheet
Net assets of GBP134.7m at 31 March 2019 were GBP7.9m higher
than at the end of the last financial year (31 March 2018:
GBP126.8m). The increase primarily relates to the net profit for
the year partly offset by the payment of last year's final
dividend. The movement in net assets is summarised below:
GBPm FY 2018/19
Net assets at 31 March
2018 (restated) 126.8
Net profit after tax 14.6
Dividend paid (6.7)
Currency net assets -
translation impact (1.1)
Gain on defined benefit
scheme 0.1
Equity issuance 0.1
Share based payments
(inc tax) 0.9
Net assets at 31 March
2019 134.7
Defined Benefit Pension Scheme
The Group's IAS19 pension liability, associated with its legacy
defined benefit pension scheme, reduced during the period by
GBP0.5m, from GBP3.0m at 31 March 2018 to GBP2.5m at 31 March 2019.
This mainly results from contributions of GBP1.7m made by Group
partially offset by increased gilt and corporate bond rates during
the year. Annual payments of GBP1.7m remain payable (growing by 3%
each year in accordance with the plan agreed with the pension
trustees in 2009) until March 2022. The triennial valuation of the
scheme is being undertaken based on valuations as at 31 March
2018.
In October 2018, it was ruled that the trustees of Lloyds
Banking Group had a duty to remove inequalities in scheme benefits
that arose under Guaranteed Minimum Pensions (GMPs) being unequal
between men and women. This has affected many UK companies with
defined benefit schemes. As a result of this ruling, the
liabilities of the pension scheme increased by GBP0.9m with a
corresponding exceptional charge being incurred.
Brexit
discoverIE does not anticipate a material direct tariff impact
from Brexit. As an international Group, only 15% of sales are in
the UK. Over 90% of these sales are either manufactured in the UK,
or sourced from the US and Asia. Likewise, most of our UK
businesses sell to UK customers. Where there are sales to Europe,
products are already low or zero rated for WTO purposes, and were
rates to apply, we would seek to apply our customer pass-through
policy. Indirect risk remains in terms of customer demand and also,
the impact from a depreciation of Sterling which would increase
import costs.
Risks and Uncertainties
The principal risks faced by the Group are covered in more
detail in the Group's Annual Report, published later this month.
These risks include, but are not limited to: the economic
environment, particularly within Europe; the impact arising from
the UK's decision to leave the European Union; the performance of
acquired companies; loss of major customers or suppliers;
technological change; major business disruption; cyber security;
inventory obsolescence; product liability; liquidity and debt
covenants; exposure to adverse foreign currency movements;
obligations in respect of a legacy defined benefit pension scheme;
and loss of key personnel.
The Group's risk management processes cover identification,
impact assessment, likely occurrence and mitigation actions. Some
level of risk, however, will always be present. The Group is well
positioned to manage such risks and uncertainties, if they arise,
given its strong balance sheet and committed banking facility of
GBP180m.
Simon Gibbins
Group Finance Director
4 June 2019
Consolidated income statement
for the year ended 31 March 2019
2018
2019 GBPm
notes GBPm Restated*
----------------------------------------------------------- ----- ------- ----------
Revenue 7 438.9 387.9
Cost of sales (293.9) (261.2)
----------------------------------------------------------- ----- ------- ----------
Gross profit 145.0 126.7
Selling and distribution costs (57.7) (54.5)
Administrative expenses (including underlying adjustments) (64.6) (54.9)
----------------------------------------------------------- ----- ------- ----------
Operating profit 22.7 17.3
Finance income 0.5 0.4
Finance costs (3.9) (3.1)
----------------------------------------------------------- ----- ------- ----------
Profit before tax 19.3 14.6
Tax expense (4.7) (4.0)
----------------------------------------------------------- ----- ------- ----------
Profit for the year 14.6 10.6
----------------------------------------------------------- ----- ------- ----------
Earnings per share 10
Basic 20.0p 15.0p
Diluted 19.4p 14.2p
----------------------------------------------------------- ----- ------- ----------
Supplementary income statement information
2018
2019 GBPm
Underlying Performance Measures notes GBPm Restated*
-------------------------------------------------------------------------- ----- ----- ----------
Operating profit 22.7 17.3
Add back: Exceptional items (0.2) 1.2
Acquisition costs 1.8 0.8
Amortisation of acquired intangible assets 5.9 4.9
IAS 19 pension administrative charge 0.4 0.3
-------------------------------------------------------------------------- ----- ----- ----------
Underlying operating profit 8 30.6 24.5
-------------------------------------------------------------------------- ----- ----- ----------
Profit before tax 19.3 14.6
Add back: Exceptional items (0.2) 1.2
Acquisition costs 1.8 0.8
Amortisation of acquired intangible assets 5.9 4.9
Total IAS 19 pension charge 0.4 0.4
-------------------------------------------------------------------------- ----- ----- ----------
Underlying profit before tax 8 27.2 21.9
-------------------------------------------------------------------------- ----- ----- ----------
Underlying earnings per share 10
Basic 28.1p 23.4p
Diluted 27.2p 22.3p
-------------------------------------------------------------------------- ----- ----- ----------
*Refer to note 5 for details on restatement
Consolidated statement of comprehensive income
for the year ended 31 March 2019
2018
2019 GBPm
GBPm Restated*
------------------------------------------------------------ ----- ----------
Profit for the year 14.6 10.6
------------------------------------------------------------- ----- ----------
Other comprehensive income:
Items that will not be subsequently reclassified
to profit or loss:
Actuarial gain on defined benefit pension scheme 0.1 2.1
Deferred tax charge relating to defined benefit pension
scheme - (0.3)
------------------------------------------------------------- ----- ----------
0.1 1.8
------------------------------------------------------------ ----- ----------
Items that may be subsequently reclassified to profit
or loss:
Exchange differences on translation of foreign subsidiaries (1.1) (3.5)
(1.1) (3.5)
------------------------------------------------------------ ----- ----------
Other comprehensive loss for the year, net of tax (1.0) (1.7)
------------------------------------------------------------- ----- ----------
Total comprehensive income for the year, net of tax 13.6 8.9
------------------------------------------------------------- ----- ----------
*Refer to note 5 for details on restatement
Consolidated statement of financial position
as at 31 March 2019
2018 2017
2019 GBPm GBPm
notes GBPm Restated* Restated*
------------------------------ ----- ------- ---------- ----------
Non-current assets
Property, plant and equipment 24.4 23.4 16.0
Intangible assets - goodwill 14 85.3 77.0 72.6
Intangible assets - other 34.4 30.2 28.1
Deferred tax assets 5.1 5.8 5.5
------------------------------ ----- ------- ---------- ----------
149.2 136.4 122.2
------------------------------ ----- ------- ---------- ----------
Current assets
Inventories 66.2 58.1 48.8
Trade and other receivables 88.7 84.6 77.3
Current tax assets 1.3 1.3 -
Cash and cash equivalents 22.9 21.9 21.0
------------------------------ ----- ------- ---------- ----------
179.1 165.9 147.1
------------------------------ ----- ------- ---------- ----------
Total assets 328.3 302.3 269.3
------------------------------ ----- ------- ---------- ----------
Current liabilities
Trade and other payables (87.7) (82.1) (72.3)
Other financial liabilities (1.7) (6.4) (1.0)
Current tax liabilities (5.5) (4.6) (2.6)
Provisions (1.1) (0.9) (2.2)
------------------------------ ----- ------- ---------- ----------
(96.0) (94.0) (78.1)
------------------------------ ----- ------- ---------- ----------
Non-current liabilities
Trade and other payables (0.2) (0.7) (3.3)
Other financial liabilities (84.5) (67.9) (50.0)
Pension liability 16 (2.5) (3.0) (6.4)
Provisions (2.7) (2.8) (2.5)
Deferred tax liabilities (7.7) (7.1) (6.5)
------------------------------ ----- ------- ---------- ----------
(97.6) (81.5) (68.7)
------------------------------ ----- ------- ---------- ----------
Total liabilities (193.6) (175.5) (146.8)
------------------------------ ----- ------- ---------- ----------
Net assets 134.7 126.8 122.5
------------------------------ ----- ------- ---------- ----------
Equity
Share capital 15 3.7 3.6 3.5
Share premium 106.9 106.9 106.0
Merger reserve 2.9 2.9 2.9
Currency translation reserve 2.4 3.5 7.0
Retained earnings 18.8 9.9 3.1
------------------------------ ----- ------- ---------- ----------
Total equity 134.7 126.8 122.5
------------------------------ ----- ------- ---------- ----------
*Refer to note 5 for details of restatement
These financial statements were approved by the Board of
Directors on 4 June 2019 and signed on its behalf by:
Nick Jefferies Simon Gibbins
Group Chief Executive Group Finance Director
Consolidated statement of changes in equity
for the year ended 31 March 2019
Attributable to equity holders of the Company
Currency
Share Merger translation Retained Total
capital Share premium reserve reserve earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- ------------- -------- ------------ --------- -------
At 1 April 2017 (Restated*) 3.5 106.0 2.9 7.0 3.1 122.5
-------------------------------- -------- ------------- -------- ------------ --------- -------
Profit for the year (Restated*) - - - - 10.6 10.6
Other comprehensive loss - - - (3.5) 1.8 (1.7)
-------------------------------- -------- ------------- -------- ------------ --------- -------
Total comprehensive income - - - (3.5) 12.4 8.9
Shares issued (note 15) 0.1 0.9 - - - 1.0
Notional repurchase of share
options - - - - (1.5) (1.5)
Share-based payments including
tax - - - - 2.1 2.1
Dividends (note 9) - - - - (6.2) (6.2)
-------------------------------- -------- ------------- -------- ------------ --------- -------
At 31 March 2018 (Restated*) 3.6 106.9 2.9 3.5 9.9 126.8
-------------------------------- -------- ------------- -------- ------------ --------- -------
Profit for the year - - - - 14.6 14.6
Other comprehensive loss - - - (1.1) 0.1 (1.0)
-------------------------------- -------- ------------- -------- ------------ --------- -------
Total comprehensive income - - - (1.1) 14.7 13.6
Shares issued (note 15) 0.1 - - - - 0.1
Share-based payments including
tax - - - - 0.9 0.9
Dividends (note 9) - - - - (6.7) (6.7)
-------------------------------- -------- ------------- -------- ------------ --------- -------
At 31 March 2019 3.7 106.9 2.9 2.4 18.8 134.7
-------------------------------- -------- ------------- -------- ------------ --------- -------
*Refer to note 5 for details of restatements
Consolidated statement of cash flows
for the year ended 31 March 2019
2019 2018
notes GBPm GBPm
---------------------------------------------------------- ----- ------ ------
Net cash flow from operating activities 13 22.4 15.0
Investing activities
Acquisition of shares in subsidiaries (net of cash/(debt)
acquired) (21.3) (24.6)
Acquisition related contingent consideration (1.3) (0.8)
Purchase of property, plant and equipment (4.2) (3.7)
Purchase of intangible assets - software (1.2) (0.6)
Proceeds from disposal of property, plant and equipment 0.2 -
Interest received 0.4 0.4
---------------------------------------------------------- ----- ------ ------
Net cash used in investing activities (27.4) (29.3)
---------------------------------------------------------- ----- ------ ------
Financing activities 15
Net proceeds from the issue of shares 0.1 -
Proceeds from borrowings 17.2 20.4
Repayment of borrowings (1.2) (1.5)
Dividends paid (6.7) (6.2)
Notional repurchase of share options - (1.5)
---------------------------------------------------------- ----- ------ ------
Net cash generated from financing activities 9.4 11.2
---------------------------------------------------------- ----- ------ ------
Net increase/(decrease) in cash and cash equivalents(1) 4.4 (3.1)
Cash and cash equivalents at 1 April 16.2 19.8
Effect of exchange rate fluctuations 0.2 (0.5)
---------------------------------------------------------- ----- ------ ------
Cash and cash equivalents at 31 March 20.8 16.2
---------------------------------------------------------- ----- ------ ------
Reconciliation to cash and cash equivalents in the
consolidated statement of financial position
Net cash and cash equivalents shown above 20.8 16.2
Add back: bank overdrafts 2.1 5.7
---------------------------------------------------------- ----- ------ ------
Cash and cash equivalents presented in current assets
in the consolidated statement of financial position 22.9 21.9
---------------------------------------------------------- ----- ------ ------
1 Further information on the consolidated statement of cash
flows is provided in notes 12 and 13.
Notes to the Group financial statements
for the year ended 31 March 2019
1. Publication of non-statutory accounts
The preliminary results were authorised for issue by the Board
of Directors on 4 June 2019. The financial information set out
above does not constitute the Company's statutory accounts for the
years ended 31 March 2019 or 2018, but is derived from those
accounts. Statutory accounts for 2018 have been delivered to the
Registrar of Companies whereas those for 2019 will be delivered
following the Company's Annual General Meeting. The auditors have
reported on those accounts; their report was unqualified and did
not contain a statement under section 237 (2) or (3) of the
Companies Act 2006.
2. Basis of preparation
The financial information in this statement is prepared in
accordance with International Financial Reporting Standards (IFRS),
as adopted for use in the European Union and as applied in
accordance with the provisions of the Companies Act 2006.
3. Going concern
The Group's business activities, together with factors which may
adversely impact its future development, performance and position,
are set out in the Operating Review. The financial position of the
Group, its cash flows, liquidity position and borrowing facilities
are described in the Finance Review. The Group has significant
financial resources, well established distribution contracts with a
number of suppliers and a broad and stable customer base. As a
consequence, the Directors believe that the Group is well placed to
manage its principal risks and uncertainties successfully.
The Group's forecasts and projections, taking account of the
sensitivity analysis of changes in trading performance, show that
the Group is well placed to operate within the level of its current
committed facilities for the foreseeable future. After making due
enquiries, the Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in
operational existence for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in preparing the Annual
Report and Accounts.
4. Accounting Policies
The accounting policies adopted are consistent with those of the
previous financial year, subject to the following:
New standards applied:
Effective
International Accounting Standards (IAS/IFRS/IFRIC) date
-------------------------------------------------------------- ---------
IFRS 9 Financial Instruments: Classification and measurement 1 January
2018
IFRS 15 Revenue from Contracts with Customers 1 January
2018
The Group has assessed the impact of the above standards and has
concluded that neither have had a material impact on the Group's
financial statements for the year ended 31 March 2019.
New standards not yet applied
IFRS 16, 'Leases' is effective for annual periods beginning on
or after 1 January 2019 and will impact the Group for the first
time for the financial year ending 31 March 2020. The Group will
not restate prior year comparators when the new standard is
adopted, with lease asset values being set equal to lease
liabilities at the date of transition in line with the 'simplified
approach' under IFRS 16. The Group will apply the standard from 1
April 2019 and expects to recognise right-of-use assets of
approximately GBP19m and lease liabilities of GBP19m. For the year
ending 31 March 2020 the Group expects the impact on net profit
after tax, earnings per share and total cashflow to be
immaterial.
Changes resulting from the adoption of IFRS 16, including
recognition of lease liabilities as financial liabilities, will not
impact the Group's gearing for the purpose of the gearing covenant
and interest covenant within our GBP180m syndicated banking
facility.
5. Prior year restatement
Fraud
During the year, internal control processes identified a fraud,
perpetrated against the Group in a small US subsidiary. Decisive
action was taken to resolve the matter with new management put in
place and tightened Group and local controls. Of the total fraud
cost of GBP4.0m, GBP2.6m has been recovered this year from
insurance after the excess deductible. The fraud was concealed in
inventories and conducted over a period of four years of which
GBP1.5m of the fraud cost was incurred this year, GBP1.2m last year
and a further GBP1.3m in the previous two years. The exceptional
income of GBP1.1m for this year comprises the insurance receipt of
GBP2.6m offset by the fraud cost incurred this year of GBP1.5m. In
accordance with IAS8 2018 and 2017 balance sheets have been
restated.
Santon business combination
In accordance with IFRS3, a measurement period adjustment has
been made to the prior year accounting for the acquisition of
Santon. The Santon acquisition completed on 1 February 2018 and the
provisional accounting for the acquisition was reflected in the
2018 financial statements. During the year, fair values at the
acquisition date have been reassessed in light of information and
circumstances that existed at the acquisition date. The impact of
the reassessment has been to reduce the fair value of the acquired
assets and the fair value of consideration transferred to the
seller by GBP6.8m.
The restatement impact on the consolidated income statement and
consolidated statement of financial position is shown below.
2018 2018
reported Fraud restatement Santon restatement restated
GBPm GBPm GBPm GBPm
Consolidated income statement
Profit before tax 15.8 (1.2) - 14.6
Profit after tax 11.8 (1.2) - 10.6
Consolidated statement of financial
position
Intangible assets - other 33.1 - (2.9) 30.2
Intangible assets - goodwill 81.9 - (4.9) 77.0
Inventories 60.6 (2.5) - 58.1
Trade and other receivables 82.4 - 2.2 84.6
Trade and other payables - current (81.2) - (0.9) (82.1)
Trade and other payables - non
current (6.2) - 5.5 (0.7)
Current tax liabilities (4.9) - 0.3 (4.6)
Deferred tax liabilities (7.8) - 0.7 (7.1)
Retained earnings 12.4 (2.5) - 9.9
------------------------------------- ---------- ------------------ ------------------- ----------
6. Underlying profits and earnings
These financial statements include alternative performance
measures that are not prepared in accordance with IFRS. These
alternative performance measures have been selected by management
to assist them in making operating decisions because they represent
the underlying operating performance of the Group and facilitate
internal comparisons of performance over time.
Alternative performance measures are presented in these
financial statements as management believe they provide investors
with a means of evaluating performance of the Group on a consistent
basis, similar to the way in which management evaluates
performance, that is not otherwise apparent on an IFRS basis, given
that certain strategic non-recurring, infrequent or non-cash items
that management does not believe are indicative of the underlying
operating performance of the Group are included when preparing
financial measures under IFRS. The Directors consider there to be
the following alternative performance measures:
Underlying operating profit
"Underlying operating profit" is defined as operating profit
excluding acquisition related expenditure (namely amortisation of
acquired intangible assets, acquisition costs and the IAS19 pension
administration charge relating to the Group's legacy defined
benefit pension scheme) and exceptional items.
Acquisition costs comprise all attributable costs in connection
with business acquisitions and related integration into the Group,
including contingent consideration where it is treated as an
expense and movement in contingent consideration where it is
treated as purchase price outside of the 12 month measurement
period
Underlying EBITDA
"Underlying EBITDA" is defined as underlying operating profit
with depreciation, amortisation and equity settled share-based
payment expense added back.
Underlying profit before tax
"Underlying profit before tax" is defined as profit before tax
excluding acquisition related expenditure (namely amortisation of
acquired intangible assets, acquisition costs and the total IAS19
pension charge relating to the Group's legacy defined benefit
pension scheme) and exceptional items.
Underlying effective tax rate
"Underlying effective tax rate" is defined as the effective tax
rate on underlying profit before tax.
Underlying earnings per share
"Underlying earnings per share" is calculated as underlying
profit before tax reduced by the underlying effective tax rate,
divided by the weighted average number of ordinary shares (for
diluted earnings per share purposes) in issue during the
period.
Operational cash flow
"Operational cash flow" is defined as Underlying EBITDA adjusted
for the investment in, or release of, working capital and less the
cash cost of capital expenditure.
Free cash flow
"Free cash flow" is defined as net cash flow before exceptional
items, payments to the legacy defined benefit pension scheme,
dividend payments, net proceeds from equity fund raising, the cost
of acquisitions and proceeds from business disposals.
Return On Capital Employed ("ROCE")
"ROCE" is defined as underlying operating profit as a percentage
of net assets (including goodwill) plus net debt.
Organic basis
Reference to 'organic' basis included in the Chairman's
statement, Operating Review and Finance Review of the Strategic
Report means at constant exchange rates ("CER") and excluding the
first 12 months of acquisitions (Santon was acquired last financial
year on 1 February 2018 and Cursor Controls was acquired on 17
October 2018).
7. Operating segment information
The Group organises its businesses into two divisions, Design
& Manufacturing and Custom Supply.
-- The Design & Manufacturing division manufactures custom
electronic products that are uniquely designed or modified from a
standard product for a specific customer requirement. The products
are manufactured at one of our in-house manufacturing facilities
or, in some cases, by third party contractors.
-- The Custom Supply division provides technically demanding,
customised electronic, photonic and medical products to the
industrial, medical and healthcare markets, both from a range of
high-quality, international suppliers (often on an exclusive basis)
and from discoverIE's Design & Manufacturing division.
These two divisions have been assessed as the reportable
operating segments of the Group. Within each reportable operating
segment are aggregated businesses units with similar
characteristics such as the method of acquiring products for sale
(manufacturing versus distribution), the nature of customers and
products, risk profile and economic characteristics.
Management monitors the operating results of its business units
separately for the purpose of making decisions about resource
allocation and performance assessment. Segment performance is
reported and evaluated based on operating profit or loss earned by
each segment without allocation of central administration costs
including directors' salaries, investment revenue and finance
costs, and income tax expense.
Segment revenue and results
Design Custom
& Manufacturing Supply Unallocated Total
2019 GBPm GBPm GBPm GBPm
------------------------------------------- ---------------- ------- ----------- -----
Revenue 266.2 172.7 - 438.9
------------------------------------------- ---------------- ------- ----------- -----
Result
Underlying operating profit/(loss) 29.8 8.6 (7.8) 30.6
Exceptional items 1.1 - (0.9) 0.2
Acquisition costs (1.8) - - (1.8)
Amortisation of acquired intangible assets (5.9) - - (5.9)
IAS 19 pension charge - - (0.4) (0.4)
------------------------------------------- ---------------- ------- ----------- -----
Operating profit/(loss) 23.2 8.6 (9.1) 22.7
------------------------------------------- ---------------- ------- ----------- -----
Design
& Manufacturing Custom Total
GBPm Supply Unallocated GBPm
2018 Restated GBPm GBPm Restated
------------------------------------------- ---------------- ------- ----------- ---------
Revenue 222.6 165.3 - 387.9
------------------------------------------- ---------------- ------- ----------- ---------
Result
Underlying operating profit/(loss) 24.2 7.5 (7.2) 24.5
Exceptional items (1.2) - - (1.2)
Acquisition costs (0.8) - - (0.8)
Amortisation of acquired intangible assets (4.9) - - (4.9)
IAS 19 pension charge - - (0.3) (0.3)
------------------------------------------- ---------------- ------- ----------- ---------
Operating profit/(loss) 17.3 7.5 (7.5) 17.3
------------------------------------------- ---------------- ------- ----------- ---------
8. Underlying profit before tax
2018
2019 GBPm
GBPm Restated
-------------------------------------------------------------------------- ---- ----- ---------
Profit before tax 19.3 14.6
Add back Exceptional Items (a) (0.2) 1.2
Acquisition Costs (b) 1.8 0.8
Amortisation of acquired intangible assets (c) 5.9 4.9
Total IAS 19 pension charge (d) 0.4 0.4
-------------------------------------------------------------------------- ---- ----- ---------
Underlying profit before tax 27.2 21.9
-------------------------------------------------------------------------------- ----- ---------
The tax impact of the underlying profit adjustments above is a
credit of GBP2.0m (2018: GBP1.3m).
a. An exceptional charge of GBP0.9m was incurred in relation to
equalisation of Guaranteed Minimum Pensions (GMPs) in the Sedgemoor
Group Pension Fund. See note 16 for further details
During the year, internal control processes identified a fraud,
perpetrated against the Group in a small US subsidiary. Decisive
action was taken to resolve the matter with new management in place
and tightened Group controls. Of the total fraud cost of GBP4.0m,
GBP2.6m has been recovered this year from insurance after the
excess deductible. The fraud was conducted over a period of four
years of which GBP1.5m of the fraud cost was incurred this year,
GBP1.2m last year and a further GBP1.3m in the previous two years.
The exceptional income of GBP1.1m for this year comprises the
insurance receipt of GBP2.6m offset by the fraud cost incurred this
year of GBP1.5m.
b. In the year there were GBP1.8m of acquisition costs. Costs of
GBP0.9m were incurred in relation to the acquisition of Cursor
Controls. Contingent consideration of GBP0.5m was charged in
relation to past acquisitions. GBP0.4m was incurred in relation to
the post year-end acquisitions of Hobart and Positek.
In the prior year there were GBP1.2m acquisition costs relating
primarily to the acquisition of Santon, and GBP0.3m of acquisition
integration cost relating to the manufacturing integration between
the Plitron and Noratel business. These costs are partially offset
by a GBP0.7m net credit adjustment to contingent consideration for
acquired businesses.
c. Amortisation charge for intangible assets recognised on acquisition.
d. Pension costs related to the Group's legacy defined benefit pension scheme (see note 16).
9. Dividends
Dividends recognised in equity as distributions to equity 2019 2018
holders in the year: GBPm GBPm
------------------------------------------------------------ ------- -------
Equity dividends on ordinary shares:
Final dividend for the year ended 31 March 2018 of 6.35p
(2017: 6.05p) 4.6 4.3
Interim dividend for the year ended 31 March 2019 of 2.80p
(2018: 2.65p) 2.1 1.9
------------------------------------------------------------ ------- -------
Total amounts recognised as equity distributions during
the year 6.7 6.2
------------------------------------------------------------ ------- -------
2019 2018
Proposed for approval at AGM: GBPm GBPm
------------------------------------------------------------ ------- -------
Equity dividends on ordinary shares:
------------------------------------------------------------ ------- -------
Final dividend for the year ended 31 March 2019 of 6.75p
(2018: 6.35p) 5.4 4.5
------------------------------------------------------------ ------- -------
Summary
Dividends per share declared in respect of the year 9.55p 9.0p
Dividends per share paid in the year 9.15p 8.7p
------------------------------------------------------------ ------- -------
Dividends paid in the year GBP6.7m GBP6.2m
------------------------------------------------------------ ------- -------
10. Earnings per share
Basic earnings per share is calculated by dividing the net
profit for the year attributable to ordinary equity holders of the
parent by the weighted average number of ordinary shares
outstanding during the year.
Diluted earnings per share is the basic earnings per share after
allowing for the dilutive effect of the conversion into ordinary
shares of the weighted average number of options outstanding during
the year.
The following reflects the income and share data used in the
basic and diluted earnings per share computations:
2018
2019 GBPm
GBPm Restated
---------------------------------------------------------------- ---------- ----------
Profit for the year attributable to equity holders of the
parent: 14.6 10.6
---------------------------------------------------------------- ---------- ----------
Number Number
---------------------------------------------------------------- ---------- ----------
Weighted average number of shares for basic earnings per
share 72,979,791 70,797,217
Effect of dilution - share options 2,419,122 3,666,253
---------------------------------------------------------------- ---------- ----------
Adjusted weighted average number of shares for diluted earnings
per share 75,398,913 74,463,470
---------------------------------------------------------------- ---------- ----------
Basic earnings per share 20.0p 15.0p
Diluted earnings per share 19.4p 14.2p
---------------------------------------------------------------- ---------- ----------
Underlying earnings per share is calculated as follows:
2018
2019 GBPm
GBPm Restated
---------------------------------------------------------------- ---------- ----------
Net profit for the year 14.6 10.6
Exceptional items (0.2) 1.2
Acquisition costs 1.8 0.8
Amortisation of acquired intangible assets 5.9 4.9
IAS 19 pension charge 0.4 0.4
Tax effect of the above (2.0) (1.3)
---------------------------------------------------------------- ---------- ----------
Underlying earnings 20.5 16.6
---------------------------------------------------------------- ---------- ----------
Number Number
---------------------------------------------------------------- ---------- ----------
Weighted average number of shares for basic earnings per
share 72,979,791 70,797,217
Effect of dilution - share options 2,419,122 3,666,253
---------------------------------------------------------------- ---------- ----------
Adjusted weighted average number of shares for diluted earnings
per share 75,398,913 74,463,470
---------------------------------------------------------------- ---------- ----------
Underlying basic earnings per share 28.1p 23.4p
Underlying diluted earnings per share 27.2p 22.3p
---------------------------------------------------------------- ---------- ----------
At the year end, there were 2,629,935 ordinary share options in
issue that could potentially dilute underlying earnings per share
in the future, of which 2,419,122 are currently dilutive (2018:
4,580,130 in issue and 3,666,253 dilutive).
11. Business combinations
On 16 October 2018, the Group completed the acquisition of
Cursor Controls via the purchase of 100% of the share capital and
voting equity interests of its holding company Cursor Controls
Holdings ("Cursor Controls").
Cursor Controls was acquired for a consideration of GBP19m on a
debt free, cash free basis, before expenses, funded from the
Group's existing debt facilities. The initial cash consideration of
GBP20.8m was adjusted for cash acquired and other net purchase
price adjustments of GBP1.8m. In addition, a contingent payment of
up to GBP4.0m will be payable subject to Cursor Controls achieving
certain profit growth targets during the three year period ended 31
December 2021.
Cursor Controls is a designer and manufacturer of human to
machine interface ("HMI") products for medical, industrial and
transportation applications. Its products comprise trackballs,
touchpads and ruggedised keyboards which are custom designed for
specific applications, and are highly complementary to discoverIE's
existing business. The business, which is based in Newark, UK, with
manufacturing facilities in the UK and Belgium, operates within the
Group's Design & Manufacturing division whilst retaining its
distinct brand identity.
The fair value of the identifiable assets and liabilities of
Cursor Controls at the date of acquisition were as follows.
Provisional
fair value
recognised
at acquisition
GBPm
------------------------------------------------------- -----
Property, plant and equipment 0.9
Intangible assets - customer relationships and patents 9.7
Inventories 1.4
Trade and other receivables 2.0
Net cash 1.4
Trade and other payables (1.5)
Current tax liabilities (0.2)
Deferred tax liabilities (non-current) (1.9)
Total identifiable net assets 11.8
Provisional goodwill arising on acquisition 9.0
-------------------------------------------------------- -----
Total 20.8
-------------------------------------------------------- -----
Discharged by:
Cash 20.8
20.8
-------------------------------------------------------- -----
The fair value of the trade receivables is equal to their gross
amounts. It is expected that the full contractual amounts of the
trade receivables can be collected.
The goodwill of GBP9.0m arising from the acquisition is
attributable to the cross-selling synergies and international
expansion expected to arise from operating as part of the Group.
None of the goodwill recognised is expected to be deductible for
corporate tax purposes.
Net cash outflows in respect of the acquisition comprise:
Total
GBPm
------------------------------------------------------------------------ -----
Cash consideration 20.8
Acquisition costs (included in cash flows from operating activities)(1) 0.9
Net cash acquired (1.4)
------------------------------------------------------------------------ -----
20.3
------------------------------------------------------------------------ -----
1. Acquisition costs of GBP0.9m were expensed as incurred in the
year ended 31 March 2019 and were included within administrative
expenses.
Included in cash flow from investing activities is the cash
consideration of GBP20.8m, the net cash acquired of GBP1.4m and
debt like items of GBP0.1m.
From the date of acquisition to 31 March 2019, Cursor Controls
contributed GBP6.6m to revenue and GBP1.0m to profit after tax of
the Group. If the business combination had taken place at the
beginning of the year, the consolidated profit after tax for the
Group would have been GBP15.2m and the consolidated revenue for the
Group would have been GBP443.8m.
12. Movements in cash and net debt
1 April Non cash 31 March
2018 Cash flow changes 2019
Year to 31 March 2019 GBPm GBPm GBPm GBPm
-------------------------- ------- --------- -------- --------
Cash and cash equivalents 21.9 1.0 - 22.9
Bank overdrafts (5.7) 3.4 0.2 (2.1)
-------------------------- ------- --------- -------- --------
Net cash 16.2 4.4 0.2 20.8
-------------------------- ------- --------- -------- --------
Bank loans under one year (1.0) 1.2 (0.2) -
Bank loans over one year (68.5) (17.2) (0.2) (85.9)
Capitalised debt costs 0.9 - 0.9 1.8
-------------------------- ------- --------- -------- --------
Total loan capital (68.6) (16.0) 0.5 (84.1)
-------------------------- ------- --------- -------- --------
Net debt (52.4) (11.6) 0.7 (63.3)
-------------------------- ------- --------- -------- --------
Bank loans over one year above include GBP83.1m (2018: GBP68.3m)
drawn down against the Group's revolving credit facility.
1 April Non cash 31 March
2017 Cash flow changes 2018
Year to 31 March 2018 GBPm GBPm GBPm GBPm
-------------------------- ------- --------- -------- --------
Cash and cash equivalents 21.0 1.9 (1.0) 21.9
Bank overdrafts (1.2) (5.0) 0.5 (5.7)
-------------------------- ------- --------- -------- --------
Net cash 19.8 (3.1) (0.5) 16.2
-------------------------- ------- --------- -------- --------
Bank loans under one year (0.1) (0.9) - (1.0)
Bank loans over one year (50.9) (18.0) 0.4 (68.5)
Capitalised debt costs 1.2 - (0.3) 0.9
-------------------------- ------- --------- -------- --------
Total loan capital (49.8) (18.9) 0.1 (68.6)
-------------------------- ------- --------- -------- --------
Net debt (30.0) (22.0) (0.4) (52.4)
-------------------------- ------- --------- -------- --------
Supplementary information to the statement of cash flows
2018
2019 GBPm
Underlying Performance Measure GBPm Restated
------------------------------------- ------ ---------
Decrease in net cash (11.6) (22.0)
Add: Business combinations 24.2 25.4
Exceptional cash flow (1.1) 3.0
Executive options issuance 1.6 -
Legacy pension scheme funding 1.7 1.7
Dividends paid 6.7 6.2
Notional repurchase of share options - 1.5
Less: Net proceeds from share issue (0.1) -
------------------------------------- ------ ---------
Free cash flow 21.4 15.8
Net finance costs 3.4 2.6
Taxation 3.8 3.7
------------------------------------- ------ ---------
Operating cash flow 28.6 22.1
------------------------------------- ------ ---------
13. Reconciliation of cash flows from operating activities
2018
2019 GBPm
GBPm Restated
--------------------------------------------------------- ----- ---------
Profit for the year 14.6 10.6
Tax expense 4.7 4.0
Net finance costs 3.4 2.7
Depreciation of property, plant and equipment 4.6 3.5
Amortisation of intangible assets - other 6.5 5.5
Loss on disposal of property, plant and equipment 0.1 -
Acquisition related contingent consideration - -
Change in provisions 0.2 (3.5)
Pension scheme funding (1.7) (1.7)
IAS 19 pension administration charge 1.3 0.3
Impact of equity-settled share-based payment expense and
associated taxes (0.5) 0.7
--------------------------------------------------------- ----- ---------
Operating cash flows before changes in working capital 33.2 22.1
Increase in inventories (6.6) (6.5)
Increase in trade and other receivables (4.9) (0.6)
Increase in trade and other payables 8.3 6.7
--------------------------------------------------------- ----- ---------
Increase in working capital (3.2) (0.4)
--------------------------------------------------------- ----- ---------
Cash generated from operations 30.0 21.7
Interest paid (3.8) (3.0)
Income taxes paid (3.8) (3.7)
--------------------------------------------------------- ----- ---------
Net cash flow from operating activities 22.4 15.0
--------------------------------------------------------- ----- ---------
14. Intangible assets - goodwill
GBPm
Cost Restated
----------------------------------- ---------
At 1 April 2017 109.4
Arising from business combinations 5.3
Exchange adjustments (0.9)
----------------------------------- ---------
At 31 March 2018 113.8
Arising from business combinations 9.0
Exchange adjustments (0.7)
----------------------------------- ---------
At 31 March 2019 122.1
----------------------------------- ---------
Impairment GBPm
----------------------------------- ---------
At 31 March 2018 and 31 March 2019 (36.8)
----------------------------------- ---------
Net book value at 31 March 2019 85.3
----------------------------------- ---------
Net book value at 31 March 2018 77.0
----------------------------------- ---------
The carrying value of goodwill is analysed as follows:
2018
2019 GBPm
GBPm Restated
----------------------- ----- ---------
Custom Supply
Acal BFi 8.4 8.5
Medical 0.6 0.6
Design & Manufacturing
Stortech 3.6 3.6
Hectronic 0.6 0.6
MTC 2.0 2.0
Myrra 5.1 5.2
RSG 1.2 1.3
Noratel 28.7 29.2
Foss 5.6 5.6
Flux 0.6 0.6
Contour 7.7 7.7
Plitron 1.1 1.1
Variohm 6.0 6.0
Santon 5.1 5.0
Cursor Controls 9.0 -
----------------------- ----- ---------
85.3 77.0
----------------------- ----- ---------
The movement in goodwill compared to prior year relates to the
movement in foreign exchange with the exception of Cursor Controls
which was acquired in the year (refer to note 11 for details).
Management has reassessed the continuing interdependence of
cashflows across the Acal BFi businesses and, as a result, has
concluded that Acal BFi is now one CGU. Consequently, Compotron and
Acal BFi UK goodwill have been aggregated into this CGU.
15. Share capital
2019 2019 2018 2018
Allotted, called up and fully paid Number GBPm Number GBPm
------------------------------------- ---------- ----- ---------- -----
Ordinary shares of 5p each 73,358,847 3.7 71,417,857 3.6
------------------------------------- ---------- ----- ---------- -----
During the year to 31 March 2019, employees exercised 1,940,991
share options under the terms of the various share option schemes
(2018: 513,235).
16. Pensions
The pension liability relates to the Sedgemoor Group Pension
Fund, which was brought into the Group on the acquisition of the
Sedgemoor Group in 1999. The fund, which is a defined benefit
scheme, is operated as a 'paid up' pension scheme with only
pensioners and deferred members.
Based upon the results of the triennial funding valuation at 31
March 2015, the Sedgemoor Scheme's Trustees agreed with Sedgemoor
Limited on behalf of the participating employers to continue the
participating employers' contributions under the deficit recovery
plan agreed at the previous valuation at 31 March 2012. This
required contributions of GBP1.7m p.a. increasing by 3% each April
payable over the period to 31 March 2022.
The results of the triennial funding valuation as at 31 March
2015 were updated to the accounting date by an independent
qualified actuary in accordance with IAS 19.
The pension liability at 31 March 2019 was GBP2.5m (2018:
GBP3.0m) and the total pension charge was GBP0.4m (2018:
GBP0.4m).
In October 2018, it was ruled that the trustees of Lloyds
Banking Group had a duty to remove inequalities in scheme benefits
that arose under Guaranteed Minimum Pensions (GMPs) being unequal
between men and women. As a result of this, the liabilities of the
pension scheme increased by GBP0.9m with a corresponding past
service cost being recognised as an exceptional charge (see note
8).
17. Events after the reporting date
Dividend
A final dividend of 6.75p per share (2018: 6.35p), amounting to
a dividend of GBP5.4m (2018: GBP4.5m) and bringing the total
dividend for the year to 9.55p (2018: 9.0p), was declared by the
Board on 29 May 2019. The discoverIE Group plc financial statements
do not reflect this dividend.
Business combinations
On 16 April 2019, subsequent to the period end, the Group
completed the acquisitions of Coil-Tran Corporation (trading as
Hobart Electronics) and Positek Limited. Coil-Tran Corporation was
acquired for an initial cash consideration of $15.2m (GBP11.7m) and
Positek Limited for an initial cash consideration of GBP4.2m, both
on a debt free, cash free basis. A contingent payment of up to
$4.0m (GBP3.1m) will be payable to the vendors of Coil-Tran
Corporation subject to the achievement of certain growth targets
over the next 3 years. A contingent payment of up to GBP0.4m will
be payable to the vendors of Positek Limited subject to the company
achieving certain integration and profit targets over the next 18
months. The acquisitions were funded from existing debt
facilities.
Share placing
On 18 April 2019, 7,309,867 shares were issued at a premium of
GBP28.9m for an aggregate consideration of GBP29.2m, and GBP28.2m
after costs. The shares were issued at a price of 400 pence per
share representing a discount of 3.85% to the closing price of 416
pence per share on 15 April 2019. The placing structure attracted
merger relief under section 612 of the Companies Act 2006, and
therefore did not require an increase in share premium. This
resulted in an increase in distributable reserves of GBP27.8m,
being the excess of the net proceeds of GBP28.2m over the nominal
value of the shares issued of GBP0.4m.
18. Exchange rates
The profit and loss accounts of overseas subsidiaries are
translated into sterling at average rates of exchange for the year
and consolidated statement of financial positions are translated at
year end rates. The main currencies are the US Dollar and the Euro.
Details of the exchange rates used are as follows:
Year to 31 March Year to 31 March
2019 2018
----------
Closing Average Closing Average
rate rate rate rate
---------- -------- -------- -------- --------
US Dollar 1.3090 1.3139 1.4083 1.3261
Euro 1.1651 1.1340 1.1430 1.1345
---------- -------- -------- -------- --------
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.
END
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