Hardide Regulatory News (HDD)

Hardide plc

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

Preliminary results for the year ended 30 September 2015

Hardide plc (AIM: HDD), the developer and provider of advanced surface coating technology, announces its preliminary results for the year ended 30 September 2015.

Key Points

Financial

· After record H1, overall performance affected by downturn in oil & gas exploration, as expected

· Revenue of £3.00m (2014: £3.03m)

· Gross profit of £1.81m (2014: £2.09m)

· Group operating loss of £0.22m (2014: profit of £0.18m)

· Loss before interest, tax, depreciation and amortisation of £0.33m (2014: profit of £0.12m)

· Cash at bank at 30 September 2015 of £2.33m (30 Sept 2014: £3.47m)

Business/ Operational

· Key investment projects in UK and US progressed to plan - positioning the business for growth:

- UK facility upgraded - for greater efficiency and increased capacity. Installation of third large reactor

- new facility in Virginia substantially completed - will be production-ready this month

· Growing sales to North America and continental Europe - up 117% and 64% respectively

· Encouraging progress with customer trials across a range of industries, including aerospace

- Airbus programme completed and now waiting for formal technical approval

· Board remains cautious about near term outlook given oil & gas sector headwinds. However longer term prospects remain good, supported by diversification strategy

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

"After a record first half, Hardide's performance in the second was, as expected, affected by weak demand from the oil & gas sector, particularly reduced expenditure in exploration. As a result, full-year revenues are largely flat year-on-year at £3.00m. While this is disappointing, the Company has made encouraging progress in diversifying its customer base, including geographically and by end-user markets. Sales to North America more than doubled and we expect to see a further rise in demand from this territory, supported by the establishment of our new facility in Virginia, which is expected to be production-ready this month.

"The continuing low oil price is a significant headwind for some of our key customers and accurately forecasting demand from this sector over the coming year is difficult. However, if the current conditions persist for the whole of the financial year to 30 September 2016, we expect revenues to be similar to those reported here. Our balance sheet remains robust and we will maintain tight control over costs. Based on the range of new products now undergoing customer testing we remain very positive about the longer-term prospects for the Group."

For further information:

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, nuclear, advanced engineering and aerospace industries. 

chairman's and ceo's report

INTRODUCTION

After a record first half, Hardide's performance in the second has been adversely affected by the weak oil & gas sector; in particular, reduced expenditure in exploration and drilling. As a result, revenues are largely flat year-on-year at £3.00m. While this is disappointing, the Company has continued to make good progress in diversifying its customer base; both geographically and by end-user markets. We have also continued investing in business development, including R&D, which underpins the Company's longer term growth prospects.

Over the year, we invested significantly in both the UK and US. Our new production facility in Virginia is expected to become fully operational by the end of December 2015 and will support increasing sales to North America, including sales to the General Electric Company Inc. ("GE") and other large volume customers. Additional investment in the UK facility supports our moves into selected European markets as well as ongoing R&D for new applications for the existing coatings range and new coatings. 

FINANCIAL RESULTS

The Company generated total revenues of £3.00m for the year ended 30 September 2015. This is largely unchanged on the prior year (2014: £3.03m), with the second half of the year affected by the substantial slowdown in the global oil & gas sector. Gross profit for the year decreased by 13% to £1.81m (2014: £2.09m) and gross margin reduced to 60% (2014: 69%). This mainly reflected the changes in volume, product mix and the cost of US production staff for the new facility in Virginia. After accounting for the Virginia costs, investment in the UK facilities, additional resource in business development and technical areas, as well as increased sales and marketing activity, the Company generated an operating loss of £0.22m (2014: operating profit of £0.18m). Post-period with effect from 4 December 2015, the lease on the Group's dormant Houston facility was terminated, resulting in the release of £269k from the onerous lease provision into the 2015 financial statements.

Costs incurred in creating the new Virginia facility totalled £1.03m which were offset by cash grants of £0.30m received in the year from the Martinsville-Henry County Economic Development Corporation and the Commonwealth of Virginia, with further substantial grants and incentives due over the next few years as the new business develops.

The Company generated a loss before tax of £0.21m (2014: £0.11m profit) and the loss before interest, tax, depreciation and amortisation ("EBITDA") was £0.33m (2014: £0.12m profit).

The balance sheet remains robust with net assets at 30 September 2015 of £3.86m (2014: £3.96m). This included cash balances of £2.33m (2014: £3.47m). Capital expenditure totalled £1.04m.

OPERATIONAL OVERVIEW

Customers and Markets

An important objective has been to diversify our customer and market base, and we continued to make good progress here. While the oil & gas sector as a whole remains an important market for Hardide, we are focused on expanding our existing presence in flow control, plastics processing and advanced engineering, as well as the aerospace sector. Over the year, sales to our core markets of oil & gas and flow control increased respectively by 3% (2014: 44%) and 10% (2014: decrease of 11%). 

Over the year we made excellent progress in growing sales to North America. These rose 117% to £1.20m (2014: £0.55m), with volumes benefitting from the strategic supply agreement with GE, as well as the flow control orders received late in the second half of the last financial year. As previously reported, we have established an excellent working relationship with GE and in March 2015 our supply agreement was extended by a further year to February 2017, providing guaranteed sales of c.$2.00 million over the term. We remain optimistic for a further two-year extension to this contract and continue to work with GE on other opportunities. 

The new coating facility in Virginia, which we announced in January 2015, will support the increasing demand projected from North America and we expect this to be fully operational before the end of 2015. In anticipation of this, we appointed our first two US production employees in the second half and they will be managing the phased transfer of some production work from the UK to Virginia. Establishing a production presence in the US is an important step in growing the Group's sales in the region and we remain confident about progress in this regard.

Sales in the UK decreased by 29%, with the reduction reflecting weaker demand from oil & gas customers in the second half as well as a return to more normal levels of orders from a long-term customer in the construction sector, after an exceptionally high demand from them in 2014. Orders for coating components for a new type of airport X-ray machine for three-dimensional scanning of baggage continue to increase, with sales up 100% year-on-year. Volume production of the machine commenced this year and we expect demand increases from this customer as the new machine is rolled out globally.

Our UK production facility also supports orders from continental Europe and sales from this territory rose by 64%. The rise mainly reflects our increased sales and marketing activity in Norway, Germany and Italy, where we are focusing particularly on the flow control, plastics processing and advanced engineering sectors. In Germany, we are seeing considerable interest in our technology from the plastics processing industry and customer trials are continuing. Our progress in Germany is also gaining momentum and we secured our first production order through our agent following the success of a test programme which began last year. Sales to Norway also rose, with good demand from customers in the advanced engineering and flow control sectors.

We continued to promote our unique technology through conferences and trade exhibitions. Other promotional activity during the year included international trade media editorial, direct e-marketing and the production of German and Italian language marketing materials. Both German and Italian language websites are now operational.

Major new customer trials and industry accreditations

Previously highlighted has been the good progress we are making with trials for a number of potential new customers, most significantly Airbus and AgustaWestland. Both are considering the use of a Hardide coating as a replacement for hard chrome plating. EU legislation, which is driving the changes in hard chrome production processes, has set a sunset date of 21 September 2017, by which time all manufacturing processes must be compliant. Trials underway on components for Airbus and AgustaWestland suggest the potential for good revenues.

The development, test and qualification programme with Airbus, in its eighth year, is now complete and we submitted our final documentation to Airbus for approval in early November 2015.

Our qualification programme with AgustaWestland is also progressing well and coated test parts are now with the helicopter manufacturer for mechanical testing and evaluation. We expect the pace of this qualification programme to increase as the September 2017 sunset date approaches for the use of hexavalent chromium.

Post period, in November 2015, Hardide Coatings Ltd passed the aerospace industry's re-certification audit for the AS9100 and ISO9001 quality management systems. We are planning for the new facility in Virginia to be certified in mid-2016. In addition, we are also preparing for the aerospace industry's global accreditation standard, Nadcap, and expect to be ready to apply for the Nadcap audit in spring 2016. 

We continue to find exciting and novel opportunities for our newly-patented coating process for industrial diamonds. These exist not only within the oil & gas sector but also in advanced manufacturing, particularly with cutting tools. Several trials are underway with customers.

Production, Technology, Research & Development

Our coating capacity in the UK increased by nearly 50% with the commissioning of a third large reactor in October 2014. This was supported by significant investment in process and technology upgrades and UK infrastructure improvements. Both new reactors for the US have been installed with systems that help widen the coating process parameters and give improved gas utilisation. This is expected to have quality and cost benefits. The latest control software has been installed in the UK and US pre-treatment lines, and the UK line was extensively refurbished. The Company also invested in a second reactor cooling system and new air ducting for improved energy efficiency.

Alongside our infrastructure investment, we added technical and research & development personnel, including strengthening our capability in metallographic analysis.

We continue with the Group's own testing plans and successfully concluded several projects in the year. Two projects to test anti-galling and fracture properties were conducted with Southampton University and have provided valuable additional data to support more applications and new operating conditions for the coating. Further work on understanding these valuable coating properties is planned to be undertaken during 2016 and we continue work on expanding the range of materials suitable for our coatings.

Intellectual Property

During the year the Group strengthened its IP portfolio, filing national phase patent applications on its new coating for industrial diamonds in Canada, China, European Patent Office countries, Japan, Russia and South Korea. The UK patent has already been granted and the US patent is pending. We are continuing to research and develop other coating variants with additional features to add to our growing IP portfolio.

Board Changes

In March, we were delighted to appoint Jan Ward CBE as a non-executive director. Jan has over 30 years' experience in high-technology engineering, both in the UK and internationally, and is CEO and co-founder of Corrotherm International, the global supplier of specialist metals for critical applications.

Jan replaces William Zakroff who stepped down from the board in March. He leaves with our very best wishes and grateful thanks for his contribution over eight years as a non-executive director. 

Staff

On behalf of the board, we would like to thank all our colleagues for their hard work during the year and in particular their efforts in preparing the new Virginia facility for opening on time and to budget.

STRATEGY

Hardide's coatings are technologically highly advanced. They fill a gap in the range of others' surface engineering offerings. Our coatings provide commercial advantage and 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.

The board continues to maintain its positive view of the Company's potential for growth and accordingly will continue to invest in marketing, business development and product development so as to drive growth and gross profit. Presently, this has to be considered in the light of the severe downturn in our main market of oil & gas, and a commercial landscape with low visibility. Nonetheless, the board is confident in the longer-term outlook for Hardide's technology from this sector and is satisfied with the progress being made in diversifying and developing the customer base. The Group will take advantage of the benefits of its new production base in North America and our growing presence in selected European markets. The aerospace market continues to represent a significant growth opportunity for our existing product range and we are also targeting expansion in the flow control, plastics processing and advanced engineering sectors. 

At all times, the Group aims to operate in a safe, environmentally-conscious and socially-responsible manner, valuing its employees' contributions.

OUTLOOK

The continuing low oil price is a significant headwind for some of our key customers and accurately forecasting demand from this sector over the coming year is difficult. However, if the current conditions persist for the whole of the financial year to 30 September 2016, we expect revenues to be similar to those reported here. Our balance sheet remains robust and we will maintain tight control over costs. Based on the range of new products now undergoing customer testing we remain very positive about the longer-term prospects for the Group.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 September 2015

All operations are continuing.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 September 2015

The financial statements were approved and authorised for issue by the Board on 07 December 2015.

Robert Goddard

Chairman

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 September 2015

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2015

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 statement of financial position at 30 September 2015, and the consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended have been extracted from the Group's 2015 statutory financial statements upon which the auditors have not yet reported. The auditor's report is expected to be unqualified and expected not to 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.

Accounting Policies

The preliminary announcement for the year ended 30 September 2015 has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The accounting policies applied in this preliminary announcement are consistent with those reported in the Group's annual financial statement for the year ended 30 September 2015 and with new standards and interpretations which became mandatory for that financial year.

Copies of the Annual Report and Financial Statements will be posted to shareholders shortly and will be available from the Company's registered office at 11 Wedgwood Road, Bicester OX26 4UL.