Hardide Regulatory News (HDD)

Hardide plc

("Hardide" or "the Group" or "the Company")

Preliminary results for the year ended 30 September 2017

Hardide plc (AIM: HDD), the developer and provider of advanced surface coating technology, announces its preliminary results for the year ended 30 September 2017.

Highlights

Financial

Business & operational

Post-Period

Commenting on the results, Robert Goddard, Chairman of Hardide plc, said: 

"I am very pleased to report that Hardide has achieved record revenue for the year to 30 September 2017. The positive trend in the underlying oil and gas market conditions that began in H2 2016 has continued through the full year and beyond. Sales to customers in each of Hardide's other key sectors of aerospace, flow control and precision engineering also rose year-on-year.

"The board is encouraged by progress in the diversification and development of the customer base and efforts to diversify further will continue. The facility in Virginia is performing well and the post-period-end fundraise will allow us to increase our capacity in the US. The expanded production base in the US will serve multiple sectors of the North American market. At the same time, we aim to expand further our presence in selected UK & European markets. 

"The civil aerospace market represents significant growth potential and, in addition to the recently-gained industry approvals for the UK plant, the Company plans to bring the US facility to aerospace standard during 2018.

"The board is confident in the outlook and expects the good progress to continue in 2018 and beyond."

Notes to editors:

www.hardide.com

Hardide develops, manufactures and applies advanced technology tungsten-carbide coatings to a wide range of engineering components. Its patented technology is unique in combining, in one material, a mix of toughness and resistance to abrasion, erosion and corrosion; together with the ability to coat accurately interior surfaces and complex geometries. The material is proven to offer dramatic improvements in component life, particularly when applied to components that operate in very aggressive environments. This results in cost savings through reduced downtime and increased operational efficiency. Customers include leading companies operating in oil and gas exploration and production, valve and pump manufacturing, precision engineering and aerospace industries.  

chairman's and ceo's report

INTRODUCTION

Hardide has made very good progress in the year in all of its key sectors and the Group is reporting record full year sales of £3.24m (2016: £2.14m). The global downturn in oil and gas activity that began in 2014, and adversely affected most companies operating in this sector including Hardide, bottomed out in the first half of the period and by year-end we saw a 92% improvement in oil and gas sales over FY16. Revenue from our other key sectors of flow control, aerospace and precision engineering also increased.

Strategic plans to develop the aerospace sector were advanced significantly as the UK site gained global approved supplier status from Airbus and achieved the prestigious Nadcap accreditation. The latter becoming a pre-requisite for all suppliers to many aerospace primes and their supply chains worldwide.

Post-period, in October 2017, an oversubscribed fundraising of £2.54m (before expenses) was completed. This comprised an Initial Fundraising of £1.72m at 1.7 pence per Hardide Share and a second deferred fundraising that will raise a further £0.82m at 1.7 pence per Hardide Share. This second tranche is subject to advance assurance before the end of March 2018 from HM Revenue & Customs of eligibility under the Enterprise Investment Scheme (EIS) and/or Venture Capital Trust (VCT) tax relief schemes. At the same time, Martinsville-Henry County Economic Development Corporation (MCEDC) approved a US$240,000 loan in support of the expansion of the Company's Martinsville facility. The proceeds of this loan will be used to help fund new reactors and other developments at the Martinsville site and bring it up to aerospace standards. Proceeds will also be used to upgrade existing UK and US production equipment, increase marketing resources and strengthen the balance sheet.

FINANCIAL RESULTS

The Company generated record sales of £3.24m in the year ended 30 September 2017 (2016: £2.14m). Primarily this reflects a return in demand from key customers in the oil and gas sector, but also increasing demand from other sectors and new applications. A 130% increase in gross profit compared with a 51% growth in sales demonstrates the Company's high operational gearing. The Company reported an operating loss of £1.24m (2016: loss of £1.47m). The result is a £0.56m improvement in earnings before interest, tax, depreciation and amortisation, with a loss of £0.74m (2016: £1.30m loss).

On the balance sheet, net assets at 30 September 2017 were £3.29m (2016: £4.38m). This included a cash balance of £1.21m (2016: £1.97m). 

OPERATIONAL OVERVIEW

Customers and Markets

Strong progress was made towards our strategic goal to diversify our customer and market base. During the oil and gas industry downturn which began in 2014, we continued with development projects that are now turning into production sales. This includes a collaboration with MasterFlo Valve, Inc. of Canada, to develop a new solution to protect high pressure, high temperature (HPHT) subsea choke valves. Its success has been demonstrated by qualification to all API requirements and deployment in deepwater wells for a major oil and gas operator. Development work with a global oil and gas operator led to a framework supply agreement being finalised post-period. This is Hardide's first direct oil and gas operating company customer. The operator is the ultimate beneficiary of the improved performance afforded to drilling and production tools by Hardide's technology. Sales to date have been to the oil service companies supplying the operating companies and we believe that working directly with the end-user will result in new and different applications. A second supply agreement was signed post-period with an international developer and provider of completion technology solutions.

The Airbus global approved supplier status and Nadcap accreditation achieved during the year at Bicester have strengthened the platform for securing future aerospace business. Life-testing continues on wing components for the Airbus A320, A330 and A380 and on landing gear parts. Development and trialling of further components for both fixed- and rotary- wing aircraft is well underway. We believe the medium and long-term potential value to the Group is worth the effort involved in the longer sale cycles in this sector and we are confident that future volume sales will result.

The Hardide coating continues to be integral to the performance of the new high-resolution airport X-ray baggage scanning machine that commenced volume production during 2016. A new application for Royal Mail moved into production during the year and Hardide-coated deflector plates are expected to be fitted into all letter sorting machines in the UK by Christmas 2017. We are currently working with Royal Mail on the development and testing of two more high-wear parts for sorting machine applications. The Company is exploring new precision engineering applications for the coating in the powder metallurgy, metal injection moulding, plastic extrusion and 3D printing sectors.

Hardide's technical director has delivered several presentations at high-profile technical conferences throughout Europe and papers have been published in several international publications. These continue to raise awareness across existing and new industries and regions.

Production, Technology, Research & Development and Industry Accreditations

Sales to customers in North America accounted for 47% of revenue in FY17 and are expected to rise significantly over the medium and long term. In anticipation of increased demand, it is planned that some of the proceeds from the fundraising will be used to acquire two new coating reactors. An order was placed for the first reactor in November 2017 and that is intended to be operational by Autumn 2018. So as to accommodate bigger components and greater batch sizes, the second reactor is planned to be larger than existing ones. It is expected that this will be ordered late FY18 and be fully operational in FY20. Investment will also be made to enhance the capability of pre-treatment and other process areas in the UK and US and bringing more reactors up to aerospace standards.

The investment in new reactors will also provide the capacity to support technical development projects. These are fundamental to the Group's strategy to diversify and win new business. By dedicating resource to technical development projects during the recent oil and gas downturn, the Company was well-advanced with many new applications when the market recovered. At any one time, the Company has a number of strategic development projects underway, as well as several in-house and third-party test programmes aimed at generating new applications.

The Company was very pleased to secure Airbus Approved Supplier status and the challenging Nadcap global aerospace standard for the Bicester site during the year, as well as transition to the new ISO9001:2015 quality management system. Post-period, Hardide Coatings Ltd completed its transition audit to the new-standard of aerospace AS9100 Revision D. In September 2017, we recruited an aerospace-experienced Quality Assurance Manager with responsibility for both the UK and US sites. Aerospace accreditation of the US facility to AS9100 is planned during the first half of calendar year 2018. 

The REACh sunset date banning the use of hexavalent chromium salts in the European Union (EU) passed in September 2017. Before that date, a group representing industries traditionally using hard chrome submitted an application for a seven-year extension that would enable use-specific exemptions to be granted. Their argument being that this would allow time to industrialise alternatives to chromium coatings. This application is awaiting a decision by the European parliament, and is expected to be taken in mid-2018. We have been in dialogue with our aerospace customers who inform us that the possible extension will not alter their plans to develop chromium-free aircraft designs. The life of aircraft and parts currently in design is far longer than any deferral period and the additional compliance costs will make hard chromium plating less available and more expensive. We are confident that the possible approval of the extension will have no material impact on our progress in the aerospace market.

Another European regulation is also expected to benefit Hardide in the longer term: In January 2017, the European Chemicals Agency (ECHA) proposed to re-classify cobalt metal as a carcinogen, mutagen and reproductive toxicant. It is expected that allowable occupational exposure limits for cobalt in inhalable form will be reduced significantly. When these restrictions are approved, as they are widely expected to be, the compliant use of HVOF coatings will be substantially more difficult. High velocity oxy-fuel is a thermal spray tungsten carbide coating alternative to hard chrome plating which is produced using cobalt metal powder. The re-classification will affect the production and handling of the metal powders used in this technique, the coating application process and the post-coat grinding. Each of these processes produces substantial amounts of cobalt dust. This re-classification is likely to be replicated worldwide as part of the United Nation's Globally Harmonised System (GHS) - the single worldwide system for classifying and communicating the hazardous properties of industrial and consumer chemicals. The Hardide coating process poses none of these risks and offers a technically, commercially and environmentally superior alternative.

Intellectual Property

The IP committee met quarterly to review the IP portfolio. During the year, a European patent was granted for the coating of industrial diamonds, in addition to the equivalent patent in China. Research continues into the development of new coating variants and applications with the objective of strengthening and widening the Group's IP portfolio.

Brexit effect

There has been no change to the status reported in 2016. That is, to the extent that it can predict the effects of Brexit, the Group expects no particular negative effects on its business and is currently benefitting modestly from the weaker pound. None of the existing development programmes with customers are expected to be adversely affected.

STRATEGY

Hardide's coatings are technologically advanced and can convey considerable commercial advantage by helping to solve complex and difficult engineering problems. Our coatings provide a unique combination of advantageous physical properties and would enhance the product ranges of many other surface technology companies. While the acceptance process for a new application is typically long and involved, particularly for large customers, there is significant potential for long-term revenues once Hardide's technology is adopted and embedded in a design.

As demonstrated by the successful fundraising in October 2017, the board continues to maintain its positive view of Hardide's potential for growth. Accordingly, the Company will invest further in expanding production capacity, marketing, business development and R&D. The board is confident in the medium and longer-term outlook and encouraged by the progress being made in diversifying and developing the customer base, particularly in North America. The Company's efforts to further diversify will continue and the new and soon-to-be-expanded production base in the US will be deployed to develop North American business across multiple sectors. At the same time, we aim to expand further our presence in selected UK & European markets. 

The civil aerospace market continues to represent significant growth potential for us, and in addition to the recently-gained industry approvals for the UK site, the Company plans to gain AS9100 aerospace approval for the US facility during 2018. 

We see substantial new application opportunities in the oil and gas sector and are working to convert these into future revenue. The precision engineering market continues to develop with multiple new applications foreseen. 

At all times, the Group aims to achieve success and customer satisfaction in a safe, environmentally-conscious and socially-responsible manner taking account the needs of all stakeholders. The Company manages hazards to employees by the deployment of robust safety control systems and procedures and rigorous adherence to relevant health and safety legislation. In addition, Hardide encourages the reporting of accidents, near-misses and unsafe conditions, all of which are regularly reviewed by the executive's Health & Safety Committee and Board where appropriate. At every stage of the process our operational aim is to minimise the overall impact on the environment. Hardide takes a proactive approach to environmental issues and has targets to reduce waste and its carbon footprint and these are regularly reviewed as part of our ISO14001 environmental management system.

OUTLOOK

Hardide's technical and commercial activity over the year, and the post-period fundraising, have established a solid platform for growth and the Group is well positioned to deliver further improvement in performance. Investment will be made in line with expected demand and costs will continue to be closely monitored.

We remain confident in the outlook and expect further progress in 2018. Against the backdrop of new applications in oil and gas and precision engineering, and the conversion of aerospace test programmes into sales, supported by a strong balance sheet, we continue to see strong growth prospects for the Group.

Finally, we take this opportunity to thank our employees and shareholders for their continued support.

CONSOLIDATED INCOME STATEMENT

for the year ended 30 September 2017

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 September 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 September 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2017