Hardide Regulatory News (HDD)

15 Dec 2009 07:00



Hardide plc

("Hardide" or "the Group")

Preliminary results for the year ended 30 September 2009

Hardide plc (AIM:HDD), the provider of unique metal surface engineering technology, announces its preliminary  results for the twelve months ended 30 September 2009.

Financial Highlights

Operational Highlights

Post-Period Events

Commenting on the results, Dr Graham Hine, Chief Executive of Hardide plc, said: "Hardide's growth over the last year has been adversely affected by the economic downturn and the impact that it has had on the markets in which our key customers are operating which include oil and gas, and construction.

"We took a number of actions throughout the year to protect and restructure the Group's business, and to significantly reduce costs and conserve cash. This means that we are well placed to benefit from the markets as they recover.

"The outlook at the start of the new financial year is cautious but stable as we see signs of growth returning to our key customers' markets and with that, confidence in their own operations and in demand for the Hardide technology."

For further information:

Notes to editors:

Hardide manufactures and applies tungsten carbide-based coatings to a wide range of engineering components. The Group's patented technology provides a unique combination of ultra-hardness, toughness, low friction and chemical resistance in one coating. When applied to components, the technology is proven to offer dramatic cost savings through reduced downtime and extended part life. Customers include leading companies operating in oil and gas exploration and production, valve and pumps manufacturing, general engineering and aerospace.

  CHAIRMAN'S STATEMENT 

Hardide plc's results for the year to 30 September 2009 reflect the economic downturn that has affected all the sectors in which Hardide's key customers are operating. The Group's position is in common with that of many small manufacturers and has been further affected by aggressive de-stocking by major customers. This caused a sharp fall-off in orders, beginning in Q2 2009, as announced.

The Group is reporting FY 2009 sales revenue of £1.21 million, a decrease of 43% compared with the same period last year (FY 2008 £2.12 million). The Group PBT for the year narrowed to a loss before tax and exceptional items of £1.46 million, a 16% reduction from the pre-tax loss of £1.74 million in 2008.

The reduction in demand from our customers who service the oil and gas, construction and automotive markets was sudden and sharp and has been followed by a prolonged period of very limited visibility of future demand. Swift and significant management action was necessary to protect the Group's business and restructure it so as to withstand better the effects of the manufacturing downturn. In March 2009, the Group announced the hibernation of the Houston manufacturing facility, a redundancy programme in the UK and a plan to significantly reduce costs and conserve cash. These were hard decisions but necessary to create longer term stability and preserve a solid foundation from which the Group can re-build as markets improve. In total, these actions delivered an annualised cost saving of £650,000, which resulted in an EBITDA loss for the year of £1.12 million, broadly similar to the FY 2008 EBITDA loss of £1.09 million. The hibernation of the Houston facility resulted in an exceptional impairment charge of £364,000.

In May 2009, the board announced that it was undertaking a review of its strategic options to further ensure the future of the Group. This culminated in fundraising that was completed in July 2009 and raised £1,566,200 of new funds with a further £1 million of loans being converted into new ordinary shares at the placing price. The new money covered working capital needs, the further development of Hardide's patented diamond coating technology and the continued development of the US market. The board acknowledges and thanks the major shareholders for their continued faith and support, and their further investment in the Group.

In light of the new market conditions, in late Q4 2009, the management team, supported by the board, began a further strategic review to revisit previous analysis and assumptions of key markets and applications with the highest potential for the Hardide technology. This is an in-depth process and due for completion in early 2010. Initial findings support the current strategic plan but the review is expected to lead to a plan to deliver short-term sales revenue and a diversified and robust business.

While the Group's growth has been badly affected by the wider economic climate, the board remains confident in the technology, its potential for new applications with existing customers and in new markets, and in the recovery of demand. Post-period, the Group has received positive indications from key customers that demand will rise over the course of the next calendar year. 

I would like to thank all staff, shareholders and members of the board for their support and continuing confidence in the Group during this difficult year. Thanks are also due to David Mott, who retired from the board in March 2009, for his sound advice and guidance as a Non-Executive Director since the earliest days of Hardide.

Robert Goddard

Chairman

14 December 2009 

  CHIEF EXECUTIVE OFFICER'S REVIEW

The fierce slowdown of global trade and economic activity at the end of 2008 triggered huge uncertainties in our key customers' primary markets i.e. the oil and gas, construction and automotive industries. This quickly filtered through the supply chain and in Q2 2009, Hardide experienced a rapid deterioration in demand as customers radically reined in expenditure.

In March 2009, it was necessary to implement a Group-wide cost reduction plan to re-align the business to the new market conditions. This included the hibernation of the Houston manufacturing facility and the temporary move of all US production to the UK, a UK redundancy programme and a re-evaluation of all discretionary expenditure. It was extremely disappointing to have to take this action at a time when the Hardide technology continues to gain recognition as an 'enabling' technology by blue chip customers operating in multi-billion dollar markets. Nevertheless, the sales cycle remains frustratingly slow due to the unique nature of the technology and the need for stringent and prolonged testing in the majority of its current applications. By the end of March 2009, all US sampling and production had been moved seamlessly to the UK with no loss of customers. 

UK: Hardide Coatings Limited

The UK operating company, Hardide Coatings Limited, delivered FY 2009 revenue of £1.09 million, down 45% from £1.97 million in 2008. The UK business was particularly hard hit by depressed activity within the oil and gas sector. Lower oil and gas prices caused the operating companies to reduce expenditure dramatically, cancel projects or request price concessions. This squeeze saw discretionary drilling being put on hold as the oil price in mid-2009 sat at around half the level of July 2008, when it had peaked at US$147. Together with the customer de-stocking issue, this market softening was the major contributory factor to the 2009 revenue drop. No customers reduced orders due to dissatisfaction with the Hardide technology or service.

The UK business reported a pre-tax loss of £324,000, compared with a pre-tax loss of £133,000 in the same period last year. While lower revenue was not completely off-set by lower costs, overheads in the UK were reduced by 38%, mainly due to a reduced headcount and a spending moratorium.

In February 2009, the management team was strengthened by the appointment of Nick King as Business Development Manager for UK and Europe. He joined from Praxair Surface Technologies Ltd., bringing more than 30 years of experience and contacts within the surface treatment market. He has made a strong impact on the management team, helping to shape the future direction of sales and market development.

Throughout the year, the operations and engineering teams have concentrated on improving delivery performance and plant efficiency, using any spare capacity to improve general housekeeping throughout the shop floor and customer-facing areas. This has resulted in increased yields and loading capacities, improved plant efficiency via Total Productive Management, more robust coating practices and standardised methods, and a more streamlined enquiry process with full traceability. 'On-time' delivery has improved by 9% while late orders have reduced by 37% and the average time period for a late order has been reduced by 50%. Improved design of furnace tooling for one high volume application has led to an increase in yield of 150%. Overall the plant has recorded a 17% reduction in reworks due to improved process and plant efficiencies.

The Airbus three-year test programme that the UK company entered into and reported last year is advancing, with samples now undergoing extensive corrosion, wear and metallographic testing. Interim results are encouraging.

US: Hardide Coatings, Inc.

The Houston facility reported sales revenue of $182,000 in the six months to 31 March 2009 when the plant was hibernated, and a FY 2009 loss of $1.80 million after accounting for an impairment charge. The US business had continued to experience an extended sales cycle which, when combined with the effects of the depressed oilfield services market, meant that it was not possible to sustain manufacture in the region without putting the entire Group at risk. The sales, operations and engineering teams worked closely to ensure a seamless transition of customers, samples and production parts to the UK. This worked well and all customers were retained. Lead and sample times have been maintained, and in some cases improved, despite shipping. The plant remains in place in Houston and will be re-opened when the UK reaches capacity and/or when US sales are sufficient to support the re-start of operations. Meanwhile, the US continues to play an important role, both in current sales and future business growth. Two significant new customers, FMC Technologies and Flowserve Corporation, were gained in H2 2009 in our key sectors of oil and gas, and valves respectively. Furthermore, the Group is in extensive test programmes with two blue chip strategic customers in the region, both customers forming cornerstones of our diversification strategy.

Markets

Customer and sector diversification remains a priority for the Group. The global economic downturn has slowed our progress in achieving this strategic goal but we are working to develop new revenue streams from existing customers and enter new markets with proven applications. Developing these strategic relationships with key global customers will position us to meet their needs as economic conditions improve and embed our technology across a wider portfolio of applications.

Our core commercial markets of oil and gas, valves and pumps have all been affected by the global economy but remain large and profitable. We are confident that they will remain central to the Group's growth. The management team is undertaking a strategic review to identify and qualify additional markets and applications which have the highest potential to deliver short term financial returns and build a pipeline for a diversified business. This is due for completion in early 2010.

Health, Safety and Environment

Hardide plc is committed to the highest standards of health, safety and environmental policy and practice. The Group recorded no lost time accidents during the reporting period and achieved a record 350 days without an entry into the accident book.

The Group has continued to develop and improve its quality systems and methods throughout the year. A stage 2 AS9100 audit is planned for the new calendar year. If successful, this will replace the current ISO 9001 standard and support the continued progress of Hardide in the aerospace market.

Technology, Research & Development 

The Applications Development Committee (ADC) led by Dr Yuri Zhuk, Technical Director, has continued to make good progress throughout the year. The committee was formed last year to evaluate, prioritise, manage and monitor the development of new applications in both the UK and US. The ADC works on a rotation of no more than twelve key applications that are scored for technical and commercial potential before being selected for development and testing. Last year, the development of variant coatings for diamonds and titanium were identified as key projects for R&D resources.

In March 2009, the Group was pleased to announce that it had successfully developed a process to enable the Hardide coating of titanium. Tests are now underway in the UK and US with blue chip customer partners. This is a significant breakthrough for the coating of a high-performance metal commonly used in the aerospace, defence, motorsport and general industrial applications.

Testing is continuing on the new variant coating for diamond with three customer partners in the UK and US. This application is for a new and patented tungsten carbide Hardide coating that offers an unprecedented combination of adhesive and protective properties. Improved tool performance and durability is expected to offer impressive cost savings to customers. The results are promising although scale-up and commercialisation will require capital investment.

During the year, a new coating, Hardide-A was developed as a substitute for hard chrome plating which is under threat from EU REACH and other similar environmental regulations worldwide. Hard chrome plating is widely used in the aerospace sector and many blue chip companies including the major aircraft manufacturers have launched programs to identify and develop new coatings to replace hard chrome. Hardide-A matches the key characteristics of hard chrome plating including hardness and thickness, and outperforms the material in some key protective properties. Hardide-A is currently under test and evaluation with two leading European high-tech companies.

Outlook

Our outlook at the start of the new financial year is cautious but stable. In the short term, a key determining factor in the timing of our return to revenue growth is the timing of the economic recovery. When this happens, in particular when oil and gas exploration and production expenditure returns, as it is beginning to, we are well placed to respond rapidly and effectively. We have retained the critical infrastructure, people, skills and knowledge-base to be able to scale up as soon as the markets improve. As we enter the new financial year, we are seeing signs of stability returning to our key customers' markets and with that, confidence in their own operations and in demand for the Hardide technology.

I would like to thank our customers for their confidence and support, and our employees for their commitment during a turbulent year. We have gone through a period of retrenchment and consolidation but the Group has used the downtime wisely and enters the new financial year ready to manage the resumption of demand.

Dr Graham Hine

Chief Executive Officer

14 December 2009

  FINANCIAL REVIEW

While the 2008/09 financial year started encouragingly for the Group, in Q2 we began to be affected badly by reduced demand in our end markets and savage inventory cuts by our largest customers.

Our response was to reduce production resources in the UK to more closely align with demand, and to reduce overheads (both staff and non-staff) to a size more appropriate to the Group's needs, at the same time ensuring that we retained the capacity, expertise and resources to deal with resumption in demand from our existing customers and convert opportunities for new applications and customers

In spite of these actions, gross margins in the UK fell by 16%, although with production salaries excluded variable costs of sales remained stable. Overheads in the UK operation were reduced by £492,000 (38%) to £794,000, and the timing of our cost reductions means that there should be a significant flow through into the current financial year. Overall, Hardide Coatings Limited recorded a pre-tax loss of £324,000 against a loss of £133,000 in the prior year. 

We also took the decision to hibernate our facility in Houston and transfer all production to the UK. Hardide Coatings Inc remains as a legal entity in the US and all the assets and fixtures at the plant have been left in-situ so that production can be resumed when conditions allow. The hibernation has resulted in an exceptional impairment charge against the fixed assets in Houston of $540,000 (£364,000). This reflects their current status as non-revenue earning, rather than any actual change in their effectiveness or capacity.

Hardide Coatings Inc made a pre-tax loss of £834,000 (2008: £1,194,000) before inclusion of the impairment charge. As with the UK, the timing of the suspension of operations in March, and the presence of costs which tailed through into the second half of the year, means that substantial cost reductions will flow through into the current financial year. 

A capital reorganisation of the Group was undertaken in the second half of the year, including raising £1,566,200. The conversion of £1,000,000 of existing loans into equity resulted in a one-off credit to finance costs of £78,000 as these loans had been treated as combined instruments since their inception in 2007. 

Overall, the actions we have taken, although painful, have substantially reduced the break even point of the Group and resulted in a much more sustainable business going forwards. 

Peter DavenportFinance Director14 December 2009

  CONSOLIDATED INCOME STATEMENT

for the year ended 30 September 2009

All operations are continuing.

  CONSOLIDATED BALANCE SHEET

at 30 September 2009

The financial statements were approved and authorised for issue by the Board on 14 December 2009.

Graham Hine

Director

  CONSOLIDATED CASH FLOW STATEMENT

for the year ended 30 September 2009 

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

for the year ended 30 September 2009 

PUBLICATION OF NON-STATUTORY ACCOUNTS 

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. 

The consolidated balance sheet at 30 September 2009, and the consolidated income statement and consolidated cash flow statement for the year then ended have been extracted from the Group's 2009 statutory financial statements upon which the auditors have reported. The auditor's report is unqualified and does not include any statement under Sections 498 (2) (accounting records or returns inadequate or accounts not agreeing with records) or 498 (3) (failure to obtain necessary information and explanations) of the Companies Act 2006. Those financial statements have not yet been delivered to the Registrar of Companies. 

The auditors have made a matter of emphasis in their audit report relating to uncertainty regarding going concern should the Group not fulfil its current plan for revenues, costs and cashflows. These matters indicate the existence of a material uncertainty which may cast significant doubt over the Company's ability to continue as a going concern. The directors are confident that the plan will either be realised given its conservative view of revenue recovery and the actions already taken to reduce the Group's cost base, or that fresh funding will be available.