Carclo Regulatory News (CAR)

Carclo plc

Interim Report and Accounts

Half Year Ended 30 September 2019

Summary of Results

Carclo plc is a public company whose shares are quoted on the Main Market of the London Stock Exchange. The Group is a global provider of value-adding engineered solutions for the medical, optical and aerospace industries.

The financial highlights for the first half of the financial year to 31 March 2020, being the six months to 30 September 2019 ("H1 2020"), are summarised below:

·; H1 2020 saw strong performances from the two continuing businesses (Aerospace and Technical Plastics)

·; Revenue from continuing operations increased by 12% to £56.1m (H1 2019: £49.9m)

·; Underlying operating profit from continuing operations increased by 56% to £3.3m (H1 2019: £2.1m)

·; The LED Division, where the principal Wipac UK and smaller Wipac Czech businesses were exited after the period-end, continued to have significant performance issues. The results of the two disposed businesses are shown as discontinued operations whilst the results of the remaining Optics Business are included in those of the Technical Plastics Division. The two Wipac businesses reported a combined loss, before exceptional costs, of £2.7m (H1 2019: profit of £2.4m)

·; Exceptional costs from continuing operations were £1.9m (H1 2019: £0.2m) with £2.8m (H1 2019: nil) also incurred in respect of discontinued operations

·; Group statutory loss before tax was £5.6m (H1 2019: £3.4m profit)

·; Solid progress was made in improving the financial position of the Group with net debt, excluding IFRS16 lease liabilities, reducing to £26.8m at 30 September 2019 (30 September 2018: £35.9m)

·; Negotiations with the bank and pension trustee over the long-term funding position of the Group remain on-going, with no certainty that a satisfactory outcome will be reached

Notes:

(1) underlying results are those calculated before discontinued operations and exceptional items. A reconciliation to statutory figures is set out in the Financial Review below.

(2) the results for H1 2019 have not been restated following the implementation of IFRS 16 Leases from 1 April 2019. The impact of the implementation of IFRS 16 is set out in the Financial Review below.

Commenting on the results, Mark Rollins (Chairman) said:

"The strong results of the continuing businesses, along with the exit from the Wipac businesses after the period end, demonstrate the clear progress being made to stabilize the business. Whilst significant challenges remain in reaching agreement on the long-term funding of Carclo with the lending bank and pension trustee, the encouraging operational performances of the Technical Plastics and Aerospace Divisions provide a foundation on which a sustainable future for the Group might be developed."

Enquiries

Carclo plc Mark Rollins - Chairman 01924 268040

FTI Consulting Nick Hasell / Susanne Yule 020 3727 1340

Forward looking statements

Certain statements made in these report & accounts are forward looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events to differ materially from any expected future events or results referred to in these forward-looking statements.

Alternative performance measures

The alternative performance measures are defined in the Financial Review, with a reconciliation to statutory figures also included to aid the user of these accounts. The Directors believe that alternative performance measures provide a more useful comparison of business trends and performance. The term 'underlying' is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

Overview

Trading PerformanceThe Group delivered good trading performances from both the Technical Plastics ("CTP") and Aerospace Divisions (collectively the "continuing operations"), with Group revenue from continuing operations increasing by 12% to £56.1m (H1 2019: £49.9m) for the six month period to 30 September 2019 ("H1 2020"). This revenue growth, together with improved operational performances in a number of CTP operations, resulted in underlying operating profit from continuing operations increasing by 56% to £3.3m (H1 2019: £2.1m).

As previously reported, the LED Division continued to have significant performance issues, with two of the three businesses in the Division for sale throughout much of the period. These two businesses, Wipac Czech and Wipac UK, were exited after the period end with their results reported as discontinued operations in these results. As the only other business in the Division, the Optics business based in Aylesbury, UK, was retained following the sale of the Wipac operations. Its results are included in continuing operations within the CTP Division.

The continuing businesses incurred significant exceptional costs during the period in external advisor fees associated with the ongoing negotiations for the long-term financing of the Group. Due to: these exceptional costs, which were £1.9m (H1 2019: £0.2m); the two Wipac businesses reporting a combined operating loss, including exceptional costs, of £5.6m (H1 2019: profit of £2.4m); and finance costs of £1.4m (H1 2019: £0.9m), the Group statutory loss before tax was £5.6m (H1 2019: £3.4m profit).

Underlying earnings per share from continuing operations for H1 2020 were 2.2 pence (H1 2019: 1.2 pence). The statutory loss per share for the period, for all operations, was 8.3 pence compared to earnings per share of 3.5 pence for H1 2019.

Cash generated from all operations for H1 2020 increased to £14.6m (H1 2019: £1.6m) as a result of the improved trading performance from continuing operations and the one-off realisation of certain Wipac assets resulting from the previously reported decision, taken mid-way through the period, to exit three mid-volume automotive lighting programmes.

As a result of this higher than usual cash generation in the period, net debt, excluding operating lease liabilities, fell to £26.8m at 30 September 2019 (30 September 2018: £35.9m and 31 March 2019: £38.5m). IFRS 16 (Leases) was implemented for the first time from 1 April 2019 and net debt, including the consequent operating lease liabilities, was £31.7m at the end of the period.

Whilst much progress has been made, the Group's long-term financing position is not yet agreed and negotiations, which are on-going with the lending bank and pension trustee, continue to consume significant financial resource and management time with a satisfactory outcome not yet certain.

The half-yearly financial report and results have not been audited by the Group's auditors.

Operations - ContinuingThe CTP Division provides value-adding engineered solutions for the medical, optical and other industrial markets mainly using plastic injection molding and assembly technologies. Its largest market is the medical diagnostic market which continues to see steady long-term growth. In H1 2020 most of the Division's operations benefited from both the overall growth in the market as well as from a number of new programme wins, largely from existing customers as operational performance improved.

In addition, CTP India, whose largest customer makes ATM machines, saw a marked increase in its market share and benefited from the key customer's newest product ramping up in volume. Activity in CTP Czech was, however, negatively impacted by the loss of a major industrial customer following its acquisition and the acquiror consolidating its product range. This reduction had been anticipated with the facility footprint successfully reduced in the period, mitigating the impact of the revenue loss on the operation's profitability. The Optics business, which was retained following the Wipac sale with its results now included within the CTP Division, performed in line with expectations.

The Aerospace Division provides, through facilities in the UK and France, cable assemblies and specialist machined parts to the commercial and military aerospace markets. A large proportion of the Division's sales are spares and consequently revenues are sometimes variable. Its commercial sales are mainly for Airbus programmes. H1 2020 saw a healthy level of spares orders together with increasing Airbus build-rates and some market share gains on machined parts in the UK.

Operations - DiscontinuedTwo of the three businesses making up the historic LED Division were involved in the design, development and manufacture of low volume automotive lighting products for high value cars. As previously reported, the main Wipac UK business struggled to meet customer requirements, as it attempted to launch a high number of new programmes into a highly unstable manufacturing environment. With the Group unable to fund the significant losses and cash requirements of the business, decisions were taken, mid-way though H1 2020, to: exit three mid-volume programmes and monetise some of the related assets; sell the two automotive operations; and to halt further funding for these businesses, instead seeking and receiving customer support to fund them through to their sale.

In the second half of the six month reporting period the three mid-volume programmes were successfully moved out of Wipac and both Wipac businesses were exited after the period end: Wipac Czech on 20 November 2019 through a sale to Magna Automotive Europe GmbH for Euro 1.1m and Wipac UK, through an insolvent "pre-pack" sale, to Wuhu Anrui Optoelectrics Co. Ltd for £10.5m on 20 December 2019. Further details of these transactions, which have been previously reported, are set out later under "Post Balance Sheet Events" in the Financial Review. Given their exit from the Group, the two Wipac businesses are reported as discontinued operations in these results.

StrategyOver the past twelve months the Group's key strategy focus, driven through necessity, has been to seek to ensure the future survival of the Group through: stemming the significant cash outflows associated with Wipac growing rapidly in a very weak operational environment; improving the operational performances of the CTP and Aerospace businesses; and providing a long-term funding solution for the Group.

The strong results of the continuing businesses, along with the exit from the Wipac businesses after the period end, demonstrate the clear progress being made to stabilize the business. Whilst significant challenges remain in reaching agreement on the long-term funding of Carclo with the lending bank and pension trustee, the encouraging operational performances of the Technical Plastics and Aerospace Divisions provide a foundation on which a sustainable future for the Group might be developed.

Financial PositionNet debt, excluding IFRS16 lease liabilities, was £26.8m at 30 September 2019, with overseas operations holding £8 million in cash and UK borrowings close to £35 million.

Total UK bank facilities at 30 September 2019 were £40.0m, including a revolving credit facility of £30.0m, due to expire on 31 January 2021, and an overdraft facility of £10.0m. In mid-January 2020, the lending bank received two initial distributions, totaling £5.0m, from the Administrator of Wipac Limited, following its insolvency and subsequent sale. At the same time, the Group's overdraft facility reduced in line with the receipts to £5.0m, leaving total UK bank facilities at £35.0m at the date of this report.

The deficit, in respect of the Group's defined benefit pension, included on the Group's balance sheet at 30 September 2019, was £51.3m. The Group has an agreement in place, effective until January 2021, to make contributions of £2.7m per annum.

Negotiations are currently ongoing with the bank, to renew the bank lending facilities beyond their current expiry at the end of January 2021, and with the pension trustee, to agree the level of future contributions to the pension scheme. The future contribution level, which is likely to be higher than currently, has to be affordable for the Group and acceptable to the pension trustee. The negotiations with the bank and pension trustee are inter-dependent and are expected to be concluded before the financial year end.

DividendGiven the financial performance and position of the Group, the Board is not recommending the payment of a dividend in respect of H1 2020 (H1 2019: nil). The payment of dividends will only recommence when the Group's finances are on a more stable and stronger footing and no dividend is envisaged to be paid in respect of the current year.

Board ChangesThere have been a number of changes to the Board since the beginning of the year.

Antony Collins, who had been fulfilling the role of Chief Restructuring Officer since he joined the Group at the end of May 2019, was appointed Group Chief Executive and joined the Board with effect from 1 October 2019. At this time, the Group's Chairman, Mark Rollins, ceased to act in an executive capacity and returned to his Non-executive Chairman role.

In July 2019, the Group Finance Director, Sarah Matthews-DeMers informed the Board that she would be leaving the Group at the end of October 2019 to take up the Chief Finance Officer role at AB Dynamics plc. Ed Watkinson was appointed Group Chief Finance Officer designate on 30 September 2019 and took over on Sarah's departure in an interim capacity only. He did not join the Board and, following the sale of Wipac, left the Group on 9 January. A search for his successor is close to completion.

External AuditorAs reported in the 2019 Annual Report, KPMG LLP has been the Group's external auditor since September 2005. Whilst KPMG was reappointed as auditor by shareholders at the General meeting on 19 December, the Group is currently in the process of holding a tender for future audit services in which KPMG LLP has chosen not to participate.

Going ConcernExisting bank facilities have been extended until 31 January 2021 and an agreement is in place with the Pension Trustee for the level of company contributions to the pension scheme over the same period. The forecast projections for the Group's performance over this twelve-month period have been reviewed by the Directors and, based on their assessment, the Directors consider that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and that it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. However, subject to the ongoing support of the Group's lending bank and an affordable funding agreement being reached with the Pension Trustee, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its financial statements.

OutlookCTP continues to make solid cash generative progress and the results for the Division, for the financial year to 31 March 2020 ("FY2020") are expected to be comfortably ahead of those for FY2019, with the outcome for the second half anticipated to be similar to the strong second half performance of the prior year. Aerospace, operating in a niche market having limited growth, is also anticipated to deliver healthily profitable results for FY2020 with a second half result similar to the first. However, the Group's long-term financing position is not yet agreed and negotiations, which are on-going with the lending bank and pension trustee, continue to consume significant financial resource and management time with a satisfactory and affordable outcome not yet certain.

Divisional Review

Technical Plastics Division (continuing operations)

Note (1): The Optics business, based in Aylesbury (UK), was retained by the Group following the sale of Wipac. Its results - revenue of £3.633m (H1 2019: £4.060m) and underlying operating profit of £0.466m (H1 2019: £0.626m) - are included in the table above for both periods. These results were previously included in those of the LED Division.

The Technical Plastics Division now operates out of nine facilities, two in the UK (including the Optics business), four in the USA and one each in the Czech Republic, India and China. Each country, other than the Czech Republic, saw increased revenue in H1 2020, compared with H1 2019, as the key medical diagnostic market grew, and improved operational performance and customer service led to market shares gains in a number of geographies. In addition, India, whose largest customer makes ATM machines, saw a marked increase in its market share and benefited from the key customer's newest product ramping up in volume. Overall the Division saw revenue increase by 12% to £52.4m in H1 2020 (H1 2019: £46.8m) with £1.3m of the increase due to favourable foreign exchange movements. With the strategy to increasingly focus on production volumes, tooling revenue declined in the period, representing only 7% of Divisional revenue in H1 2020 (H1 2019: 11%).

Underlying operating profit increased as a result of the revenue growth and effective cost control. The Czech operation also reported an improved profit, with the negative impact of the loss of a major industrial company, following its acquisition and the acquiror consolidating its product range, having been anticipated and the facility footprint successfully reduced in the period. India reported the strongest profit growth as the facility, which had been expanded in prior years, saw much improved footprint utilisation. In total, the Technical Plastics Division reported underlying operating profits for the first half of 2020 of £4.6m (H1 2019: £3.2m), with £0.1m of the increase due to favourable foreign exchange movements. This 45% improvement was achieved despite tooling profits declining to £0.3m (H1 2019: £0.8m).

As a consequence, the Technical Plastics Division's operating profit margin improved to 8.9% for H1 2020 (H1 2019: 6.9%).Aerospace Division (continuing operations)

Both Bruntons, in the UK, and Jacottet, in France, saw healthy increases in revenue during H1 2020 compared with the same period in 2019. This was largely due to build rate increases at Airbus, market share gains by a key customer for arrestor ropes, improved levels of spares activity and a large customer increasing stocks ahead of Brexit. Overall, Divisional sales increased by 18% to £3.7m (H1 2019: £3.1m).

Operating profit for the Division increased broadly in line with revenue as the improved contribution generated was partially offset by increased costs, particularly at Bruntons where employee costs rose ahead of inflation in order to retain the required skills in the business. As a result, underlying profit for the Division increased by around 18% to £0.7m (H1 2019: £0.6m). Operating margins remained around the 19.5% level.

Wipac businesses (discontinued operations)

Note (1): The Optics business, based in Aylesbury (UK), was retained by the Group following the sale of Wipac. Its results - £3.633m revenue (H1 2019: £4.060m) and underlying operating profit of £0.466m (H1 2019: £0.626m) are included in the results of the CTP Division.

Discontinued operations consist of the two Wipac automotive lighting businesses: a major manufacturing and design facility in the UK and a smaller design facility in the Czech Republic. As described earlier, both facilities were in sale processes for the latter three months of the period and were exited after the period end. Further details of these transactions are set out in the "Post Balance Sheet Events" paragraph of the Financial Review below.

As fully described in the Annual Report and Accounts for the year ended 31 March 2019, Wipac experienced severe operational and financial difficulties during the second half of that year as a result of significant number of new programmes being launched into a very weak operational environment. This led to customers experiencing delivery delays and quality issues and the Wipac business reporting significant monthly losses and cash outflows at the start of H1 2020. This situation was in significant danger of adversely affecting the viability of the Carclo Group unless action was taken. Consequently, during H1 2020 the businesses were put up for sale and three mid-volume programmes were exited, with some related assets realised. Operational management was also strengthened and Carclo stopped funding the Wipac business, instead obtaining financial support from the customer base through temporary price surcharges, to allow the businesses to continue to operate whilst the sale processes took place.

The result of these actions were: an improved operational performance, and near elimination of delivery arrears; a business operating around break-even since August, largely due to a significant increase in the size of the temporary price increases from that time; and, ultimately, a successful exit from both Wipac businesses after the period end.

Against this background, production sales revenue grew very strongly as programmes awarded in prior years were launched, although total sales were only up 2% at £21.9m in H1 2020 (H1 2019: £21.5m) as customers avoided awarding any new programmes to Wipac, resulting in a steep decline in revenue from design, development and tooling from £13.5m in H1 2019 to £1.8m in H1 2020.

The operational difficulties, combined with the steep decline in the historical higher margin design, development and tooling activity, led to Wipac making significant losses in the first few months of the period. As mentioned above, these monthly losses were mitigated in the final two months of the period through a marked increase in the level of customer support. As a result, H1 2020 saw the two Wipac operations report a combined underlying loss, before exceptional costs, of £2.7m (H1 2019: £2.4m underlying operating profit).

Financial Review

The additional financial information set out below should be read in conjunction with the commentary included earlier in the Overview and Divisional Review sections of this report.

IFRS 16 - LeasesThe Group has applied IFRS 16 for the first time in the period ended 30 September 2019. As permitted by the standard, comparatives for H1 2019 have not been restated and the impact on net assets has been recognised within retained earnings as at 1 April 2019.

IFRS 16 has resulted in almost all leases now being recognised on the balance sheet, with an asset of £4.9m (the right to use the leased asset) and a liability of £4.9m (the liability to pay the lease rentals) being recognised at 30 September 2019. At 1 April 2019, the start of the period and the date of implementation, the corresponding amounts were £5.7m.

In addition, instead of charging a rental expense within operating profit, a depreciation on the right to use asset and a finance charge are now recognised in the income statement. Compared with the previous accounting treatment, these changes have increased the statutory operating profit for the first half by £0.1m but decreased the statutory profit before tax by £0.1m.

Central CostsThese consist principally of the costs of pension scheme administration, people employment, office rent and running costs, travel, share options and fees associated with the audit, the company's stock exchange listing and the bank facility. They total £2.0m for H1 2020 (H1 2019: £1.7m) with the largest constituent being employee salary costs of £0.6m. The main reason for the increase was £0.2m of central IT costs that had been recharged to Wipac operations but, because they will be unable to be recharged in the future, are required to be accounted for in continuing, rather than discontinued, operations. Central costs are expected to remain at a similar level in the future.

Exceptional CostsThe exceptional costs incurred for continuing operations in H1 2020 total £1.9m (H1 2019: £0.2m) and principally relate to: £1.5m for the costs of external advisers of the Company and its lending bank; the costs associated with independent third party consultants involved in the financial restructuring, including £0.2m for Antony Collins when operating in the role of Chief Restructuring Officer; £0.1m of additional costs paid to the auditor as a result of the extra work required because of the financial situation of the Group; and other costs such as redundancy and extraordinary bank fees related to the waiving and renegotiating of bank covenants. The largest amounts paid to external advisers were to PwC (£0.8m), for restructuring advice given to the Company, and to Grant Thornton (£0.3m), the financial advisers to the Group's lending bank, HSBC.

The exceptional costs associated with the discontinued businesses for H1 2020 total £2.8m. These costs principally relate to: a further £1.5m impairment, down to fair value, of the Wipac operation to reflect the subsequent actual sale proceeds of the business; a further £0.5m impairment in the value of the contract assets associated with the mid-volume programmes exited in the period; a write-down of £0.3m in the carrying value of inventory; and £0.5m for the fees of external advisers to Wipac in respect to the restructuring and sale of the business, with amounts paid to PwC of £0.4m being the major element.

The exceptional costs for H1 2020 may be analysed as follows:

Exceptional professional advisory fees have continued to be incurred at a similar rate during the three months since the end of the first half of the financial year. Whilst a modest reduction in the rate of spend can be expected following the sale of the Wipac businesses, these costs will not reduce substantially until the long-term funding position of the Group is secured.

Finance CostsTotal finance costs, for continuing and discontinued operations, in H1 2020 were £1.4m (H1 2019: £0.9m), consisting of net interest payable on bank loans and finance leases of £0.8m (H1 2019: £0.5m) and net interest on the defined benefit pension liability of £0.6m (H1 2019: £0.4m). The increases in costs were respectively due to the inclusion, for the first time due to the implementation of IFRS16, of interest costs on operating leases, and an increase in the defined benefit pension liability which significantly increases the imputed interest cost.

TaxThe H1 2020 accounts include a tax charge of £0.5m (H1 2019: £0.4m) on the profit before tax of continuing operations. The effective tax rate is much higher than the UK tax rate of 19% (2019: 19%) mainly because a deferred tax asset has not been recognized in respect of the UK losses, as there is no certainty that the losses will be utilized in the foreseeable future, which has had the effect of increasing the apparent underlying tax rate.

Working Capital and Capital ExpenditureLargely as a result of certain fixed asset, tooling and development cost asset realisations at Wipac, following the decision to exit three mid-volume automotive lighting programmes, working capital (being current assets less current liabilities) fell to £31.3m at 30 September 2019 (30 September 2018: £37.1m). Gross capital expenditure for the period, on a cash basis, was £3.3m (H1 2019: £3.2m) with the majority expended on injection molding machines. Proceeds for the sale of equipment, principally relating to the programme exits at Wipac, were £2.5m for the period (H1 2019: £0.3m).

Cash Flow, Net Debt and Banking FacilitiesAs a result of the one-off asset realisations at Wipac, and the improved financial performance of the CTP and Aerospace Divisions, cash generated from operations increased to £14.6m (H1 2019: £1.6m), despite the significant exceptional cash costs associated with external advisor fees.

This, combined with a normal level of net capital expenditure, resulted in net debt (excluding IFRS16 liabilities associated with operating leases) decreasing to £26.8m at 30 September 2019 (30 September 2018: £35.9m; 31 March 2019: £38.5m). Including IFRS16 liabilities net debt was £31.7m at the end of the period.

At 31 March 2019, the Group's total UK bank facilities were £47.0m of which £30.0m related to a revolving credit facility and £17.0m to an overdraft facility. The overdraft facility reduced by £2.0m on 1 July 2019 and by a further £5.0m before the end of September 2019, to £10.0m, as monies were received from the Wipac asset realisations. Total UK bank facilities at 30 September 2019 were £40.0m, with the revolving credit facility of £30.0m due to expire on 31 January 2021. In mid-January 2020, the lending bank received two initial distributions, totaling £5.0m, from the Administrator of Wipac Limited, following its insolvency and subsequent sale. At the same time, the Group's overdraft facility reduced by £5.0m, to £5.0m, leaving total UK bank facilities at £35.0m at the date of this report.

PensionAs reported in the Report and Accounts for the year ended 31 March 2019, the deficit on the Group's defined benefit pension scheme, which was closed to future accrual many years ago, moved from a deficit of £29.8m at 31 March 2018 to a deficit of £49.1m at 31 March 2019. This movement resulted from: an increase in liabilities as the AA corporate bond rate fell; an increase in assumed member longevity, following the results of an updated mortality study; and the requirement to account for guaranteed minimum pension benefit equalisation, following a High Court judgement handed down in October 2018 relating to the Lloyds Banking Group's defined benefit scheme. The deficit increased slightly during H1 2020 and stood at £51.3m at 30 September 2019 (30 September 2018: £29.5m), with strong investment returns largely offsetting the adverse impact of a further change in the assumption for the discount rate on liabilities to 1.80% per annum (31 March 2019: 2.40%).

On 21 July 2019, agreement was reached with the Pension Trustee whereby the total contributions paid by the Company (for deficit recovery contributions and scheme administration costs) were set at £225k per month for the period to 31 January 2021. The total cash paid by the Company for the six-month period was £0.8m (H1 2019: £0.2m), with the increase mainly due to the fact that the annual deficit recovery payment was previously paid in a lump sum in October each year.

The last triennial actuarial valuation was carried out as at 31 March 2015. The next triennial valuation as at 31 March 2018 was due to be finalised by 30 June 2019, but negotiations regarding the future level of contributions remain ongoing with an affordable solution yet to be agreed.

Post Balance Sheet EventsAs previously reported, the decision was taken mid-way through the half year to sell the two Wipac businesses, with both businesses being successfully exited after the end of the period.

Firstly, the entire share capital of Wipac Czech s.r.o. was sold on 26 November 2019 to Magna Automotive Europe GmbH for a total consideration of €1.1m, comprising €0.8m in cash and the assumption of €0.3m of outstanding liabilities. In the year to 31 March 2019, Wipac Czech reported operating profits of €0.1m and had gross assets of €0.9m at the end of that financial year.

Then, on 20 December 2019, the Group exited the Wipac UK business with Administrators being appointed to Wipac Limited who, immediately following their appointment, sold the business. The business and assets of Wipac Limited (in administration), other than those related to its Aylesbury based Optics business ("Optics"), were sold to Wipac Technology Limited, a newly formed wholly owned subsidiary of Wuhu Anrui Optoelectrics Co. Ltd, for a total consideration of £10.5m. The Group's defined benefit pension scheme and lending bank were the principal secured creditors of Wipac Limited and it is expected that approximately £3.5m of the net proceeds will be paid by the Administrator to the Group's pension scheme and approximately £5.0m will be used to reduce the outstanding drawn balance of the Group's revolving credit facility. In the year ended 31 March 2019, Wipac Limited generated a loss of £13.2m and had gross assets at 31 March 2019 of £46.3m.

Given their sale, the two Wipac businesses are reported as discontinued operations in these results. It is intended that full details of any profit or loss on sale of the businesses will be reported in the Report and Accounts for the year ended 31 March 2020.

Optics is a profitable standalone business, historically operating within the Wipac Limited legal entity, with its business closely related to the Group's Technical Plastics Division. Its principal supplier is CTP Czech. Immediately following the appointment of the Administrators, the Group acquired the business and assets (other than trade debtors) related to Optics, for a total cash consideration of £0.25m. The Administrators retained the Optics trade debtors and the Group will assist in their collection. In the year ended 31 March 2019, the Optics business generated a profit before taxation of £1.1m and had gross assets at 31 March 2019 of £3.5m. The results of the Optics business are now included in the results of CTP Division. 

Alternative Performance MeasuresIn the analysis of the Group's financial performance and position, operating results and cash flows, alternative performance measures are presented to provide readers with additional information. This report includes both statutory and adjusted non-GAAP financial measures, the latter of which the Directors believe better reflect the underlying performance of the business and provides a more meaningful comparison of how the business is managed and measured on a day-to-day basis. Underlying results exclude certain items because if included, these items could distort the understanding of the performance for the year and the comparability between the periods. A reconciliation between the statutory and underlying financial measures is shown below.

Principal Risks and Uncertainties

In the Annual Report for the year ended 31 March 2019 a detailed review of the principal risks faced by the Group and how the risks were being managed was provided.

These risks related to:Funding and banking covenantsOperational execution riskReliance on major customersReliance on major projectsManagement bandwidthPensionsGlobal economyPolitical uncertainty including "Brexit"IT security breach / system failures

Whilst the Board considers that these principal risks and uncertainties have not materially changed since the publication of the 2019 Annual Report it is worth noting:

·; the sale of Wipac after the period end, which can be expected to reduce the operational execution and reliance on major projects risks;

·; the departure on 9 January 2020 of the Group CFO, which is likely to lead to a short-term increase in the management bandwidth risk; and

·; the ongoing negotiations with the lending bank and pension trustee which, although not necessarily increasing the risks, bring the realisation of the funding and pensions risks closer in time.

Going Concern

Net debt at 30 September 2019 was £26.8m (excluding operating lease liabilities), an encouraging reduction from £38.5m at 31 March 2019. The decrease was largely as a result of the decision, taken mid-way through the reporting period, to exit three mid-volume programmes at Wipac, with monies subsequently received from customers in respect of the work done on the design, development and tooling for these programmes.

The Directors have reviewed the detailed cash flow forecasts that have been prepared for a period in excess of two years from the date of the approval of these financial statements. The Directors have also considered the debt facilities available to the Group which currently comprise of an overdraft facility of £5.0m and a £30.0m revolving credit facility maturing at the end of January 2021, a period of twelve months from the date of this report.

The bank covenants were renegotiated during the period, as part of the on-going financing discussions, with the main applicable covenants at 30 September 2019 being Interest Cover of greater than 1.75x and a Net Debt: EBITDA ratio of less than 4.50x. These were both met, based on the September management accounts, at the period end with Interest Cover being 3.27x and Net Debt: EBITDA being 3.21x. Under the cash flow forecast base case, the Group's financing is forecast to remain within the available facilities and covenants for at least the twelve-month forecast period.

A number of assumptions that have been made in the forecast including:

·; The lending bank continuing to offer sufficient facilities

The base case cash flow forecast and hence the going concern assessment have been prepared on the basis that the bank continues to extend a sufficient overdraft facility for the period to January 2021, in addition to the £30m revolving credit facility.

·; An affordable funding agreement being reached with the Pension TrusteeThe Group's defined benefit pension scheme has a sizeable funding deficit. Until 31 January 2021, a total of £2.7m per annum is being paid to the scheme by the Group. Negotiations for a long-term funding agreement are on-going and it is likely that a higher-level of contributions will be required. The base case cash flow forecasts and hence the going concern assessment have been prepared on the basis that an affordable level of contributions can be agreed.

·; Suppliers continuing to offer normal commercial credit terms

Certain credit insurers have removed cover on the Group. To date this has not had a material impact on the cash flows. The cash forecast assumes that suppliers continue to offer normal commercial credit terms. Any move to acceleration of supplier payments could impact on cash requirements.

·; Customers paying invoices to terms

Any significant delay in receiving payment could impact on headroom.

·; Ongoing trading performance

The CTP Division has won a number of new sales programmes which are due to start in the current financial year. Any delay in commencement or in the ramp up of forecast volumes or failure to deliver revenue and margin growth could reduce headroom, as could any material trading underperformance in the remaining businesses or loss of existing customers.

·; Capital investment projects completing on time and on budget

The CTP Division has won a number of new sales programmes which require capital investment. If this investment is not completed on time and on budget, there could be further cash requirements for the Group

Financial sensitivity modelling was carried out which assessed the impact of the risks noted above both individually and in aggregate on both headroom and bank covenants.

The Board concluded that in the event of any of these individual risks occurring and having a material impact on the forecasts, the Group would require the support of its lenders by way of additional overdraft facility and/or covenant waiver or deferral.

Based on their assessment, the Directors consider that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and that it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. However, subject to the ongoing support of the Group's lending bank and an affordable funding agreement being reached with the Pension Trustee, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its financial statements.

Responsibility Statement

We confirm to the best of our knowledge:

(a) the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board,

Mark Rollins Antony Collins Chairman Group Chief Executive

20 January 2020

Glossary of Terms