Last checked at 8 Dec 2008 07:01
| Press Release | 8 December 2008 |
Hardide plc
("Hardide" or "the Group")
Preliminary results for the year ended 30 September 2008
Hardide plc (AIM:HDD), the provider of unique metal surface engineering technology, announces its preliminary results for the twelve months ended 30 September 2008.
Financial Highlights
| Group turnover decreased 14% to £2.12 million (FY 2007: £2.47 million) | |
| Decreased loss before tax of £1.74 million (FY 2007: loss £1.86 million) | |
| Decreased loss per share of 1.1 p (FY 2007: loss 1.2 p) | |
| Successful raising of £1.5 million (gross) new funds | |
| Maiden profit achieved for UK operating company, Hardide Coatings Limited, in H1 2008. Full year-loss for Hardide Coatings Limited due to customer de-stocking issue at the start of H2 2008
| |
| Group overheads reduced by £600,000 (21%) on an annualised basis |
Operational Highlights
| Appointment of Dr Graham Hine as CEO | |
| Commencement of three-year testing programme with Airbus | |
| Global gas supply agreement for tungsten hexafluoride successfully negotiated in H1 2008
| |
| Formation of an Applications Development Group to strategically evaluate, prioritise, manage and monitor the development of new applications for both the UK and US divisions.
| |
| New markets successfully identified, including the industrial diamond market
| |
| Houston facility achieves ISO 9001 accreditation |
Commenting on the results, Dr Graham Hine, Chief Executive of Hardide plc, said: "Hardide has had a challenging year, however the business performance was sound and the year ended in line with market expectations.
"A new strategic plan has been developed which is focused on delivering value to our shareholders. In the short term, resources are concentrated on increasing cash generation in the UK and commercialising the significant customer interest in the US whilst ensuring that discretionary capital and revenue expenditure is minimised until firm sales growth is established. For the medium to longer term, we have identified a number of exciting new areas for growth which we are steadily progressing.
"I am further encouraged by the fact that that we have started the new financial year strongly with a record sales month and the Group achieving maiden profit."
For further information:
| Hardide plc | |
| Dr Graham Hine, Chief Executive Jackie Robinson, Head of Communications | Tel: +44 (0) 1869 353 830 |
| www.hardide.com |
| Seymour Pierce Limited | |
| Nicola Marrin | Tel: +44 (0) 20 7107 8000 |
| www.seymourpierce.com |
Media enquiries:
| Abchurch | |
| Chris Lane / George Parker | Tel: +44 (0) 20 7398 7719 |
| george.parker@abchurch-group.com | www.abchurch-group.com |
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
2008 has been a challenging year for Hardide plc. However, the fundamental business performance was sound and the year ended in line with revised market expectations. An increase in Group turnover and gross profit, and reduction in operating loss, was reported for H1 2008 together with a maiden pre-tax profit for the UK business, Hardide Coatings Limited. However, the sudden customer de-stocking issue, which became apparent at the start of H2 2008, combined with slow growth in the US business, has depressed the full year results. Sales revenue for the year ended 30 September 2008 was £2.12 million, down 14% from £2.47 million in 2007. The Group result for the year was a loss before tax of £1.74 million, a 6% reduction from the pre- tax loss of £1.86 million in 2007. Sharp focus on cost reduction has helped control the decline in gross margin caused by lower volumes, from 52% in 2007 to 47% this year.
On 1 April 2008, the Board took the decision to suspend trading in the Group's shares. The share suspension continued until 3 June 2008 during which time Group Chief Executive Officer, Jim Murray-Smith, resigned and new funds of £1.5 million (gross) were raised. The new money covered operating losses and has facilitated the development of new applications intended to generate additional near and mid-term sales revenue.
On 2 June 2008, the Board was pleased to appoint Dr Graham Hine as Chief Executive Officer. Graham brings a powerful combination of general management, technical knowledge and commercial experience. He began his career at Philips PLC and has subsequently held a number of director-level business development and general management roles. He has more than twelve years' experience in Chairman and CEO roles where he significantly grew shareholder value in technology-based companies in the advanced materials and sensor industries.
A revised strategic plan was formulated in April 2008. This was subsequently developed further by Graham and the management team. In the short term, the new strategy is focused on increasing cash generation in the UK and commercialising the significant customer interest in the US. At the same time, discretionary capital and revenue expenditure is being minimised until firmer ongoing sales growth is established. For the medium and longer term, carefully targeted resources have been committed to developments designed to provide growth in a number of exciting new areas.
H2 2008 saw a rigorous cost reduction programme and a marked tightening of financial controls. This has resulted in the reduction of £600,000 (21%) of total Group overheads, on an annualised basis.
Hardide has entered the new financial year in a stronger position and with a clear strategy for diversification, a streamlined management structure, firm control of costs and enhanced internal reporting. The Board and management now have a clear view of the business and have set the strategy and implemented the changes that are needed to grow revenues and deliver shareholder value.
The Group is alert to the effect that the global economic downturn may have on our business. However, to date we have observed no adverse indications for Hardide. We will remain vigilant and take appropriate action in the event that we believe sales may fall below our current forecast.
I would like to thank all staff and members of the Board for their support and contribution over the last year.
Robert Goddard
Chairman
08 December 2008
CHIEF EXECUTIVE OFFICER'S REVIEW
In my first six months, I have been impressed and encouraged by the strength of the Hardide technology, the quality of people and the commitment of our customers. The technology is robust and has exciting potential for further development, the management and staff have proven that they are talented and committed, and our customers continue to be extremely supportive. We have streamlined and revitalised the management team, developed a new strategic plan and dramatically reduced base costs and overheads. The focus is now on increasing revenues through cross-selling to existing customers, and growing and diversifying our customer base. The US business must now realise the substantial interest in the technology and commercialise the samples and tests that are being carried out. The direction and framework has been set to achieve this.
UK: Hardide Coatings Limited
The UK operating company, Hardide Coatings Limited, delivered FY 2008 revenue of £1.97 million, down 18% from £2.41 million in 2007. The company achieved maiden profit in H1 2008 but the full year results were driven down by the sudden customer de-stocking. Orders resumed from this customer in Q4 2008 and have since returned to previous levels. We are working more closely with the customer to minimise the effect of any repetition of such a situation.
In H1 2008, the Group negotiated a global gas supply agreement for tungsten hexafluoride, its principal raw material. This is estimated to save a minimum of £600,000 over a three year period. The Group also negotiated prices of other process gases leading to a total reduction in gas costs of 41%. Together with other efficiency measures, this led to an improvement of 3% in the variable cost of sales.
The technical and production teams in the UK have been working hard to increase furnace yield. This project has achieved considerable success and is reported on more fully in the Technology, Research & Development section. The resultant increase in capacity defers the need for additional capital expenditure to meet demand. UK gross margin remains healthy, although down by 2% due to reduced sales and fixed production costs.
As reported in the interim results, the UK business entered a three-year test programme with Airbus during the year. The results so far have been encouraging although this is understandably a risk averse sector and it will take time to move to a commercial basis.
US: Hardide Coatings, Inc.
The US operating company was strengthened with the appointment in November 2007 of Ken Siddall, now US Vice President and General Manager. Ken brings over 20 years of coating technology, engineering and general management experience and has been instrumental in implementing the operational and production practices necessary to underpin commercial success in the US. However, the sales cycle is taking longer than anticipated and revenues have been slow to develop, with FY 2008 sales of $0.41 million; although this is an increase of 164% over sales of $0.16 million in 2007. In the last six months, significant progress has been made in identifying and focusing on core markets. Local engineering support has also been established to support sampling and sales. Having thoroughly reviewed the pipeline of new business and personally met key prospective customers, I am optimistic that conversions, particularly in the valve sector, will be realised during 2008/09.
Relationships with local suppliers have been strengthened to support quick turnaround with the result that samples are being processed in approximately half the time that it took only nine months previously. This is already leading to improved customer relationships.
The facility achieved ISO 9001 in November 2007.
Markets
A strategic review was carried out in April 2008 and re-visited in depth on my appointment in June 2008. Our core markets are large, growing and profitable and we are confident that oil and gas, valves and pumps, and aerospace remain sectors of high potential for the Group. However, diversification of product sales to major customers and sales to new customers is fundamental to growing a solid and valuable business. To accelerate revenue generation we are intensifying our focus on developing new business with key customers through strong customer relationship management, and in generating new business in our core markets and for existing applications. We are also investigating new sectors which require moderate resource investment for high potential return. An organisational framework and evaluation system have been established to prioritise these opportunities.
We are making progress with the coating of industrial diamonds; a new market with exciting potential. We are working closely in both the UK and US with leading manufacturers of industrial diamonds that are used in drill and saw tools in the oil and gas, mining and construction industries. 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 users. Testing to date is encouraging and is a priority for our technical team.
Health, Safety and Environment
The effective management of health, safety and environmental (HSE) risks continues to be a priority for the Board and management of Hardide plc. The UK and US facilities have complied with all HSE regulations throughout the year.
Following ISO 14001 certification in September 2007, the UK business was praised by LRQA this year for progress made in internal maintenance, waste management and duty of care. I am also pleased to report that electricity consumption was reduced by 14% during the year.
A Group-wide energy awareness programme and policy is being introduced to assist energy consumption reduction and measures are being taken, particularly by furnace staff, to ensure that electricity and gas consumption at evenings and weekends is minimised. The US business entered into an electricity contract that uses at least 10% renewable resources.
Technology, Research & Development
An Applications Development Group led by Technical Director, Dr Yuri Zhuk, was formed during the year to strategically evaluate, prioritise, manage and monitor the development of new applications for both the UK and US facilities. This has resulted in a more cohesive and commercially-oriented approach to the development and testing of new applications. Previously the Company processed and tested over 200 samples per annum, although many of these could never be commercially viable. The new and focused strategy is concentrating on a rotation of far fewer key projects, all of which have scored highly in the evaluation process. This allows for the disciplined attention of limited resources and is already proving successful, with two recently completed projects expected to generate commercial orders in the near future. One of the projects, which is for a US customer, has resulted in a 400% increase in furnace yield for 2" ball valves, one of the most common components for Hardide coating. A combination of high-capacity jigging, a larger furnace bell and modifications to the coating process has quadrupled the furnace load capacity for this part. This reduces the unit cost to the customer and offers raw material and process cost efficiencies to the Group. Plans are underway to replicate this success with other commonly-coated component types.
Last year's investment in state-of-the-art scientific equipment has paid dividends with improvements in the production process and lower material costs. As a unique technology with a wide variety of applications, we inevitably experience occasional process failures. This year we reworked 40% fewer parts due to pre-treatment stage failures. This is primarily due to the use of the X-ray fluorescence equipment purchased last year to swiftly and accurately diagnose and understand the cause of any failures.
The continual improvement in loading and jigging techniques and in the robustness of the coating process will realise even greater yields from furnace runs. Recent trials have validated tooling techniques that are increasing yields by up to 300% on some components.
The Group's R&D activities have also been re-prioritised in the course of the year. The development of variant coatings for diamonds and titanium have been identified as key projects for R&D resources. These are both medium-term projects with high potential for new opportunities in our existing oil and gas, and aerospace markets and diversification into mining and Formula 1 motorsport. Development work is being undertaken in conjunction with customer partners although both projects will require capital investment for scale-up and commercialisation.
Outlook
We are already seeing the benefits of a flatter management structure, goal alignment between the UK and US, and better engagement with key customers. The focus must now be on revenue generation and I believe we are well placed to grow sales in all of our key markets over the next year. We have some exciting prospects in the pipeline and I expect a small number of large and strategically significant new application and new customer gains in 2008/09. Meanwhile, we remain firmly focused on controlling costs and maximising operating efficiencies. The Board is optimistic about the future of the business in both the UK and US.
The management and staff across the Group have endured a year of change. It is testament to the strength of previous recruitment and belief in the future of our business that the large majority of people and talent have remained in place and dedicated to success. I would like to thank all staff throughout the Group for their continued loyalty, hard work and support.
Dr Graham Hine
Chief Executive Officer
08 December 2008
Financial Review
While consolidated turnover was down by 14% over the year, the Group made positive progress in a number of areas and has implemented stringent forecasting and other methodologies which have improved the financial heart of the business.
Overall Group sales decreased to £2.12m from £2.47m in the previous year and revenue from the UK operation, Hardide Coatings Limited was down 18% to £1.97m. However, a fall in UK variable costs of 33% and a 16% reduction in overheads helped mitigate the impact of the revenue decline such that the UK pre-tax loss was £134,000 compared to a UK pre-tax loss of £50,000 on sales of £2.39m last year. The UK operation achieved an EBITDA positive position and was also substantially cash positive for the year. Tight control of working capital reduced levels of stock and debtors to around half their level of a year ago.
The depressed sales performance has masked the considerable progress that the Group has made both in terms of process efficiency and success in securing advantageous supply contracts for our principal raw materials. Group variable cost of sales fell by 21% as a result of these measures while energy efficiency and improved purchasing helped reduce energy costs by 11% year on year. After including production salaries (which represent more than 50% of cost of sales) Group overall gross margin fell by 5%. The financial benefits from the considerable technical developments throughout the year such as furnace yield only began to impact at the end of this year and further benefits should become apparent in 2009.
Sales from our Houston facility more than doubled to $0.41m although they have been slower to develop than anticipated. The appointment of an experienced and locally-based General Manager has improved the focus on margins and yield such that to produce sales growth of 164% incurred a cost of sales increase of only 39%.
In May 2008, the Group embarked on a programme to cut discretionary and capital expenditure and to tighten cost controls. Significant cuts were made to overheads as part of this rolling cost reduction process, reducing these on an annualised basis by £600,000. The benefits of these cuts will flow through to 2009. The majority of the decline in administrative expenses shown in 2008 is due to the favourable exchange rate variance on the intercompany loan.
The depreciation charge includes £47,000 for one-off adjustments. Finance costs of £187,000 include £79,000 for non-cash FRS25 charges for combined instruments.
The Group will continue to focus on cash retention and overhead reduction, as well as continuing to steer our Houston operation towards cash positive status. We are grateful for the continued support of our major shareholders through what has been a difficult year.
Peter Davenport
Finance Director
08 December 2008
CONSOLIDATED INCOME STATEMENT
for the year ended 30 September 2008
| 2008 £000 | 2007 £000 | ||
| Revenue | 2,123 | 2,470 | |
| Cost of sales | (1,132) | (1,180) | |
| Gross profit | 991 | 1,290 | |
| Administrative expenses | (2,081) | (2,676) | |
| Depreciation | (500) | (475) | |
| Operating profit | (1,590) | (1,861) | |
| Finance income | 37 | 31 | |
| Finance costs | (187) | (26) | |
| Profit on ordinary activities before taxation | (1,740) | (1,856) | |
| Taxation | 37 | 25 | |
| Profit on ordinary activities after taxation | (1,703) | (1,831) | |
| Loss per share: Basic | (1.1)p | (1.2)p |
All operations are continuing.
The accompanying accounting policies and notes form an integral part of these financial statements.
CONSOLIDATED BALANCE SHEET
at 30 September 2008
| 2008 £000 | 2007 £000 | ||
| Assets | |||
| Non-current assets | |||
| Goodwill | 69 | 69 | |
| Intangible assets | 4 | 7 | |
| Property, plant & equipment | 1,366 | 1,661 | |
| Total non-current assets | 1,439 | 1,737 | |
| Current assets | |||
| Inventories | 44 | 99 | |
| Trade and other receivables | 325 | 648 | |
| Other current financial assets | 160 | 147 | |
| Cash and cash equivalents | 995 | 1,135 | |
| Total current assets | 1,524 | 2,029 | |
| Total assets | 2,963 | 3,766 | |
| Liabilities | |||
| Current liabilities | |||
| Trade and other payables | 356 | 512 | |
| Financial liabilities | 110 | 145 | |
| Provisions | - | - | |
| Total current liabilities | 466 | 657 | |
| Net current assets | 1,058 | 1,372 | |
| Non-current liabilities | |||
| Financial liabilities | 1,162 | 893 | |
| Total non-current liabilities | 1,162 | 893 | |
| Total liabilities | 1,628 | 1,550 | |
| Net assets | 1,335 | 2,216 | |
| Equity | |||
| Share capital | 1,896 | 1,467 | |
| Share premium | 4,102 | 3,345 | |
| Retained earnings | (4,705) | (3,077) | |
| Share-based payments reserve | 347 | 450 | |
| Translation reserve | (305) | 31 | |
| Total equity | 1,335 | 2,216 |
The financial statements were approved and authorised by the Board on 5 December 2008.
Graham Hine
Director
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 30 September 2008
| 2008 £000 | 2007 £000 | ||
| Cash flows from operating activities | |||
| Operating profit | (1,590) | (1,825) | |
| Impairment of intangibles | |||
| Depreciation | 500 | 439 | |
| Share option charge | 50 | 59 | |
| (increase) / decrease in inventories | 55 | 23 | |
| (increase) / decrease in receivables | 310 | (224) | |
| Increase / (decrease) in payables | (155) | 72 | |
| Finance income | 37 | 31 | |
| Finance costs | (108) | (25) | |
| Tax received / (paid) | 26 | 107 | |
| Net cash generated from operating activities | (875) | (1,343) | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (123) | (439) | |
| Net cash used in investing activities | (123) | (439) | |
| Cash flows from financing activities | |||
| Net proceeds from issue of ordinary share capital | 1,173 | - | |
| Finance lease inception | - | 209 | |
| Finance lease repayment | (145) | (95) | |
| New loans raised | 225 | 1,000 | |
| Net cash used in financing activities | 1,253 | 1,114 | |
| Net increase / (decrease) in cash and cash equivalents | 255 | (668) | |
| Cash and cash equivalents at the beginning of the year | 1,135 | 1,803 | |
| Effects of foreign exchange rate changes | (395) | ||
| Cash and cash equivalents at the end of the year | 995 | 1,135 |
PUBLICATION OF NON-STATUTORY ACCOUNTS
The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985.
The consolidated balance sheet at 30 September 2008, and the consolidated income statement and consolidated cash flow statement for the year then ended have been extracted from the Group's 2008 statutory financial statements upon which the auditors proposed opinion is unqualified and does not include any statement under Section 237 of the Companies Act 1985. Those financial statements have not yet been delivered to the registrar of companies.
The proposed audit report is unqualified but will include two emphases of matter, the first relating to uncertainty regarding the recoverability of a loan from Hardide plc to Hardide Coatings Inc amounting to £3.6m and the second relating to uncertainty regarding going concern should the group under perform its current plan for revenue, costs and cashflow. The directors are confident that this will either be achieved or that fresh funding will be available.