Porvair Regulatory News (PRV)

For immediate release 31 January 2022

Results for the year ended 30 November 2021

Porvair plc ("Porvair" or "the Group"), the specialist filtration, laboratory and environmental technology group, announces its results for the year ended 30 November 2021.

Highlights

· Revenue 8% higher at £146.3 million (2020: £135.0 million), 12% higher on a constant currency basis*.

· Operating profit 25% higher at £15.8 million (2020: £12.6 million).

· Adjusted operating profit* 17% higher at £15.9 million (2020: £13.6 million).

· Profit before tax 28% higher at £14.8 million (2020: £11.6 million).

· Adjusted profit before tax* 17% higher at £14.8 million (2020: £12.6 million).

· Basic earnings per share were 26.0 pence (2020: 18.4 pence).

· Adjusted basic earnings per share* were 25.2 pence (2020: 21.6 pence).

· Net cash was £10.2 million (2020: £4.9 million) after investing £7.2 million (2020: £4.2 million) in capital expenditure and acquisitions.

· Recommended final dividend of 3.5 pence (2020: 3.3 pence) bringing the full year dividend to 5.3 pence (2020: 5.0 pence).

Commenting on the outlook, Ben Stocks, Chief Executive, said:

"Laboratory demand increased strongly in 2021 and most other segments saw some measure of recovery except aerospace, where activity levels remain well below those of 2019. However the spread of markets served by the Group generated a positive overall performance, supported by the strong balance sheet and long-term investment focus that are central to Porvair's strategy. The Group remains well positioned to address global growth trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

"At the start of 2022, while order books are flattered by extended lead times through almost all supply chains, underlying orders are still better than they were a year ago, notably in aerospace and laboratory. Consistent investment is improving productivity and margins. In laboratory, covid-related demand may settle to more regular levels as the pandemic recedes, but as it does so aerospace activity should pick up. Porvair management teams are monitoring near-term supply dislocations and inflationary pressures closely and provided these challenges are navigated successfully the outlook for 2022 is promising".

* See notes 1 and 3 for definitions and reconciliations.

For further information please contact:

An analyst briefing will take place at 9:30 a.m. on Monday 31 January 2022, please contact Buchanan if you wish to join. An audiocast of the meeting and the presentation will subsequently be made available at www.porvair.com.

Operating Review

Overview of 2021 and impact of covid-19

If 2020 was the year of the pandemic, 2021 was a year of after-shocks and consequences. In January most of the Group's markets were still in some level of lockdown, but a wave of industrial re-stocking gathered pace in the Spring. Sharp order increases improved trading but brought supply dislocation and inflationary pressures. Management's priority for the year was again staff wellbeing and working with covid; continuing to invest for the longer term; and adjusting operations to cope with vicissitudes of supply.

Aerospace activity remained well below 2019 levels through the year, but laboratory demand increased strongly in 2021 and most other segments saw some measure of recovery. Porvair remains well positioned to address global growth trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

Porvair's unchanged strategic purpose is to develop specialist filtration, laboratory and environmental technologies for the benefit of all stakeholders. This statement, and the full Environmental, Social and Governance ('ESG') report that accompanies it, set out how the Group has worked for its customers, staff, shareholders, pensioners, and communities in 2021.

Financial Results

* see note 1 and note 3

Reported revenue increased by 8%. At constant currencies, revenue increased by 12%. Profit before tax increased 28%. Adjusted profit before tax increased by 17% as did adjusted earnings per share.

The Group invested £7.2 million (2020: £4.2 million) in acquisitions and capital expenditure in 2021.

The Group's record for growth, cash generation and investment is as follows:

* Compound annual growth rate

Porvair's strategy and purpose has remained consistent for 17 years, a period that now encompasses two recessions, a pandemic, and many years of growth. This longer-term record gives the Board confidence in the Group's capabilities and is the basis for longer term capital allocation and planning decisions.

Strategic statement and business model

Porvair's strategic purpose is to develop specialist filtration, laboratory and environmental technology businesses for the benefits of all stakeholders. Principal measures of success include consistent earnings growth over the medium term and selected ESG measures as set out in the full ESG report.

Porvair businesses have certain key characteristics in common:

· Specialist design or engineering skills are required;

· Product use and replacement is mandated by regulation, quality accreditation or a maintenance cycle; and

· Products are typically designed into a system that will have a long life-cycle and must perform to a given specification.

Orders are won by offering the best technical solutions at an acceptable commercial cost. Technical expertise is necessary in all markets served. New products are often adaptations of existing designs with attributes validated in our own test and measurement laboratories. Experience in specific markets and applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads the Group to:

1. Focus on markets with long term growth potential.

2. Look for applications where product use is mandated and replacement demand is regular.

3. Make new product development a core business activity.

4. Establish geographic presence where end-markets require.

5. Invest in both organic and acquired growth.

Therefore:

· We focus on three operating segments: Aerospace & Industrial; Laboratory; and Metal Melt Quality. All have clear long term growth drivers.

· Our products typically reduce emissions or protect downstream systems and, as a result, are replaced regularly. A high proportion of our annual revenue is from repeat orders.

· Through a focus on new product development, we aim to generate growth rates in excess of the underlying market. Where possible, we build intellectual property around our product developments.

· Our geographic presence follows the markets we serve. In the last twelve months: 47% of revenue was in the Americas; 20% in Asia; 22% in Continental Europe; 10% in the UK; and 1% in Africa. The Group has plants in the US, UK, Germany, the Netherlands and China. In the last twelve months, 49% of revenue was manufactured in the US, 29% in the UK, 18% in Continental Europe and 4% in China.

· We aim to meet dividend and investment needs from free cash flow and modest borrowing facilities. In recent years we have expanded manufacturing capacity in the UK, Germany, US and China and made several acquisitions. All investments are subject to a hurdle rate analysis based on strategic and financial priorities.

Environmental, social and governance ('ESG')

The Board understands that responsible business development is essential for creating long term value for stakeholders. Most of the products made by Porvair are used for the benefit of the environment. Our water analysis equipment measures contamination levels in water. Industrial filters are typically needed to reduce emissions or improve efficiency. Aerospace filters improve process reliability. Nuclear filters confine fissile materials. Metal Melt Quality filters reduce waste and help improve the strength to weight ratio of metal components.

A full ESG report is published with this statement, setting out:

· Porvair's ESG management framework and goals;

· How a net zero carbon future might affect markets served by the Group;

· ESG metrics and results; and

· How the Group has acted for the benefit of its stakeholders in 2021.

Aerospace & Industrial

* see note 2

The Aerospace & Industrial division designs and manufactures a wide range of specialist filtration products, demand for which is driven by customers seeking better engineered, cleaner, safer or more efficient operations. Differentiation is achieved through design engineering; the development of intellectual property; and quality accreditations.

Revenue was 10% lower in 2021 due to falls in aerospace and gasification activity, partially offset by growth in microelectronics and petrochemical filtration. Aerospace revenue fell for a second year, down 4% in 2021 (2020: down 25%), broadly in line with wider industry metrics. As expected, there was no gasification revenue in 2021 (2020: £7 million). In other industrial segments activity recovered through the year, with re-stocking lifting orders. Microelectronics was particularly strong, with revenues benefitting from newly developed and patented products introduced at the start of the year. Demand in European industrial and petrochemical markets was steady. Royal Dahlman traded well in the year, it has been fully integrated into the Group and achieved synergies with other parts of the division.

The aerospace outlook for 2022 is better. Aerospace orders started to improve in the second half of 2021 and shipping schedules in early 2022 are stronger.

Lower gasification and aerospace revenue suppressed operating margins in the plants directly affected, causing adjusted operating profits in the division to fall to £4.4 million (2020: £6.3 million). Margins were to some extent protected by restructuring actions carried out in 2020. Cash generation in the division was good as inventories fell in line with levels of activity. Capital investment was directed at productivity and capacity enhancements which should start benefiting performance in 2022.

Laboratory

* see note 2

The Laboratory division has two operating businesses: Porvair Sciences (including JG Finneran and Kbiosystems ("Kbio")) and Seal Analytical.

· Porvair Sciences manufactures laboratory filters, small instruments and associated consumables. Differentiation is achieved through proprietary manufacturing capabilities and filtration media.

· Seal Analytical is a leading supplier of instruments and consumables for environmental laboratories for which demand is driven by water quality regulations. Differentiation is achieved through consistent new product development.

Revenue grew 33% in 2021. Like for like revenue growth (at constant currency and excluding acquisitions) was 24%, driven in part by demand for a range of products used in covid testing and analysis. Capital investment in the year focused on increasing the capacity and improving the quality of these components. Although we expect some softening of covid-related demand as the pandemic recedes, we have gained market share in this category over the last two years.

Beyond covid, Laboratory demand has been robust for much of 2021, with global expansion of diagnostic, analytic and environmental labs. The division has been further helped in the US by expanding routes to market through JG Finneran and by prior year investments in new manufacturing lines across the division. Increased demand also brought challenges around supply dislocation, inflation and staff shortages, all of which require close attention as we move into 2022.

Kbio, acquired in February 2021, makes equipment used in microplate assays for analytical laboratories, products that fit well with Porvair Sciences' microplate business and through JG Finneran's US routes to market. It has started strongly with the Group, and prospects for 2022, particularly through US channels, are promising.

Seal Analytical had a record year. Like for like revenue grew 15% with demand better in all main markets. Seal has a strong recent track record of introducing new and differentiated products. Those launched in 2021 offer faster throughput, lower detection limits and better energy efficiency and will start to generate revenues in 2022.

Metal Melt Quality

* see note 2

The Metal Melt Quality division manufactures filters for molten aluminium, ductile iron and nickel-cobalt alloys. It has a well differentiated product range based on patented products and a promising new product pipeline.

Revenue rose 14% in 2021, back to 2019 levels despite aerospace-related activity in this division remaining 23% below 2019. Aluminium filtration was up 33%, driven by industrial re-stocking and growing demand for aluminium from carbon-efficient transport and the move away from plastic packaging. Iron foundry sales also recovered (to 6% below 2019 levels, up 28% in 2021) with US auto production curtailments balanced by US supply chain re-shoring.

Adjusted operating profit margins were 13.6% (2020: 8.5%), with more profitable trading in China; consistent operating efficiencies; and the benefits of 2020 cost reductions all contributing. Inflationary and supply dislocation challenges were successfully navigated. Adjusted operating profit of £5.1 million is a record. As outlined at the half year, the Board does not expect margins in this division to remain at such levels once sales and marketing costs return to more normal levels post-pandemic, but nonetheless expects that underlying margins are sustainable at higher than the ten year average for this division.

Dividends

The Board re-affirms its progressive dividend policy and recommends a final dividend of 3.5 pence per share, a cost of £1.6 million (2020: 3.3 pence per share, a cost of £1.5 million). The full year dividend increases by 6% to 5.3 pence per share, a cost of £2.4 million (2020: 5.0 pence per share, a cost of £2.3 million). The Company had £27.8 million (2020: £17.9 million) of distributable reserves at 30 November 2021.

Staff

While perhaps less disrupted than 2020, 2021 was another challenging year and the Board is pleased to recognise and applaud the response of our staff to the many difficulties they have faced. Porvair believes in devolving management autonomy as far as possible, and our management teams do their best to monitor and promote staff wellbeing. In many respects, of our various stakeholders, it is our staff that are the most crucial. The Board takes employee engagement seriously and, as set out in the ESG report, has a system in place to make sure it hears and responds to all staff comments. The Board is very grateful for the hard work, enthusiasm and dedication of all our staff.

Current trading and outlook

Laboratory demand increased strongly in 2021 and most other segments saw some measure of recovery except aerospace, where activity levels remain well below those of 2019.  However the spread of markets served by the Group generated a positive overall performance, supported by the strong balance sheet and long-term investment focus that are central to Porvair's strategy. The Group remains well positioned to address global growth trends: tightening environmental regulations; growth in analytical science; the need for clean water; carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process quality and efficiency.

At the start of 2022, while order books are flattered by extended lead times through almost all supply chains, underlying orders are still better than they were a year ago, notably in aerospace and laboratory. Consistent investment is improving productivity and margins. In Laboratory, covid-related demand may settle to more regular levels as the pandemic recedes, but as it does so aerospace activity should pick up. Porvair management teams are monitoring near-term supply dislocations and inflationary pressures closely and provided these challenges are navigated successfully the outlook for 2022 is promising.

Ben Stocks

Group Chief Executive

28 January 2022

Financial review

Revenue was 8% higher on a reported currency basis and 12% higher at constant currency (see note 1). Kbio contributed £5.4 million of revenue (see note 6). Operating profit was £15.8 million (2020: £12.6 million) and profit before tax was £14.8 million (2020: £11.6 million). Profit after tax was £11.9 million (2020: £8.4 million).

Alternative performance measures - profit

The Group presents alternative performance measures to enable a better understanding of its trading performance (see note 1).

Adjusted operating profit and adjusted profit before tax exclude items that are considered significant and where treatment as an adjusted item provides a more consistent assessment of the Group's trading. Adjusted operating profit excludes £0.1 million (2020: £1.0 million) of net charges from operating profit. Adjusted items include £0.7 million (2020: £0.6 million) for the amortisation of acquired intangible assets, £0.5 million (2020: £4.9 million) for impairment of assets and restructuring costs; and a £1.3 million credit (2020: £nil) relating to the forgiveness of a loan received in the prior year under the Paycheck Protection Program (PPP). Further details of these adjustments are set out in note 1.

Impact of exchange rate movements on performance

The international nature of the Group's business means that relative movements in exchange rates can affect reported performance. The rates used for translating the results of overseas operations were:

The movement in average rates used for translating US dollar and Euro results into Sterling has resulted in a £4.5 million adverse revenue variance between reported and constant currency.

In the year, the Group sold $16.5 million (2020: $28.1 million) at a net rate of $1.36:£1 (2020: $1.30:£1) and €10.5 million (2020: €3.5 million) at a net rate of €1.14:£1 (2020: €1.15:£1).

At 30 November 2021, the Group had $1.0 million and €0.3 million (2020: $1.3 million) of outstanding forward foreign exchange contracts; hedge accounting has not been applied to these contracts.

Finance costs

Net interest payable comprises bank borrowing costs, interest on lease liabilities, interest on the Group's pension deficit and the cost of unwinding discounts on provisions and other payables. Interest increased in the year to £1.1 million (2020: £1.0 million). Interest cover was 15 times (2020: 14 times). Interest cover on bank finance costs was 51 times (2020: 49 times).

Tax

The Group tax charge was £2.8 million (2020: £3.1 million). Tax on adjusting items was a credit of £0.4 million (2020: charge £0.5 million) and tax on adjusted profit before tax was £3.2 million (2020 £2.6 million).

Eligible costs in the prior year associated with the US PPP loan were previously treated as disallowed for tax; however it has since been established that these costs are allowable in 2021. Furthermore, the PPP income, arising on the forgiveness of the loan, in the current year does not attract US tax. These items combined contribute to the tax credit on net adjusting items.

The effective rate of tax on adjusted profit is 22% (2020: 21%). The increase in the year reflects the impact on deferred tax of the increase in the UK rate from 19% to 25% from 1 April 2023 (impact £0.1 million). The Group effective tax rate is also impacted by overseas profits, which currently attract tax rates higher than the 19% in the UK.

The total tax charge comprises current tax of £2.7 million (2020: £2.3 million) and a deferred tax charge of £0.1 million (2020: £0.8 million).

The Group has current tax provisions of £0.9 million (2020: £0.2 million). The current tax provision includes £1.1 million (2020: £1.0 million) for uncertainties relating to the interpretation of tax legislation in the Group's operating territories, offset by payments on account and amounts recoverable for overpayments of tax.

The Group carries a deferred tax asset of £1.8 million (2020: £2.6 million) and a deferred tax liability of £2.4 million (2020: £2.8 million). The deferred tax asset relates principally to the deficit on the pension fund and share-based payments. The deferred tax liability relates to accelerated capital allowances, capitalised development costs and other timing differences, predominantly in the US, and on acquired intangible assets arising on consolidation.

Total equity and distributable reserves

Total equity at 30 November 2021 was £108.9 million (2020: £98.2 million), an increase of 11% over the prior year.

The net increase in total equity includes profit after tax of £11.9 million (2020: £8.4 million), together with a £1.4 million actuarial gain (2020: loss £2.0 million).

The Company had £27.8 million (2020: £17.9 million) of distributable reserves at 30 November 2021. The Company's distributable reserves increased in the year from dividends received from other Group companies, together with an actuarial gain, offset by head office costs and dividends paid to shareholders.

Cash flow

The table below summarises the key elements of the cash flow for the year:

Generating free cash flow is key to the Group's business model and operating cash flow of £18.6 million (2020: £13.2 million) represented a 94% (2020: 80%) conversion rate of operating profit before depreciation and amortisation. Net working capital increased by £0.8 million (2020: £6.3 million). Receivables decreased by £0.2 million (2020: decrease £4.1 million), despite the revenue growth, with strong collections throughout the year. Inventories increased by £0.5 million (2020: £0.3 million), as certain businesses were required to manage the impact of supply chain disruption. Payables and provisions reduced by £0.5 million (2020: decrease of £10.1 million), despite increased trading activity in the year.

Provisions and contingent liabilities

The Group has £4.7 million (2020: £4.6 million) of provisions for dilapidations and warranty risks. £1.0 million of warranty provisions have been created in relation to sales made in the year. £0.9 million of warranty provisions have been released in the year, following the latest estimate of the expected costs to be incurred.

At 30 November 2021, the Group had the following advanced payment bonds (relating to monies received in advance on contracts) and performance bonds issued to customers in US dollars and Euros:

The uncalled performance bonds, which are classified as contingent liabilities, are expected to be called or released no later than December 2024.

Capital expenditure

Capital expenditure on property, plant and equipment was £3.2 million in the year (2020: £3.6 million), as the Group continued to invest in capital projects within each of the three divisions.

Acquisitions

On 25 February 2021, the Group purchased 100% of the share capital of Kbiosystems Limited ("Kbio") (see note 6). Consideration paid in the year was £4.0 million (net of cash acquired). A further £2.0 million of consideration is contingent on Kbio meeting profit targets for the years ending 31 March 2022 and 2023.

Pension schemes

The Group supports its defined benefit pension scheme in the UK ("The Plan"), which is closed to new members, and provides access to defined contribution schemes for its other employees.

The Group's net retirement benefit obligation measured in accordance with IAS 19 Employee Benefits was £12.6 million (2020: £15.4 million). The Plan's liabilities increased to £49.6 million (2020: £48.6 million). The Plan's assets increased to £37.0 million (2020: £33.4 million). An actuarial gain in the year of £1.4 million (2020: loss £2.0 million) was recognised within the statement of comprehensive income.

The Group's cash contributions paid to The Plan were £2.3 million (2020: £2.2 million), which included deficit recovery payments of £1.6 million (2020: £1.6 million).

The triennial actuarial valuation of The Plan determines the cash contributions that the Group makes to The Plan. The next full actuarial valuation will be based on The Plan's position at 31 March 2021 and is expected to be completed before 30 June 2022.

Borrowings and bank finance

At 30 November 2021, the Group had cash balances of £15.4 million (2020: £15.6 million) and borrowings of £5.2 million (2020: £10.7 million); with net cash (excluding lease liabilities) being £10.2 million (2020: £4.9 million).

On 18 May 2021, the Group agreed a €28 million (£24 million) four year secured revolving credit facility, with an option to extend by one year, plus a €17 million (£14 million) accordion facility, with Barclays Bank plc and Citibank N.A., London Branch. The financial covenants require the Group to maintain interest cover of 3.5 times and net debt to be less than 2.5 times EBITDA. The Group also has a £2.5 million overdraft facility provided by Barclays Bank plc. 

At 30 November 2021, the Group had €21.5 million/£18.3 million (2020: €12.6 million/£11.3 million) of unused credit facilities and an unutilised £2.5 million (2020: £2.5 million) overdraft facility.

Finance and treasury policy

The treasury function at Porvair is managed centrally, under Board supervision. It seeks to limit the Group's trading exposure to currency movements. The Group does not hedge against the impact of exchange rate movements on the translation of profits and losses of overseas operations.

The Group finances its operations through share capital, retained profits and, when required, bank debt. It has adequate facilities to finance its current operations and capital plans for the foreseeable future.

James Mills

Group Finance Director

28 January 2022

Consolidated income statement

For the year ended 30 November

Consolidated statement of comprehensive income

For the year ended 30 November

Consolidated balance sheet

As at 30 November

Consolidated cash flow statement

For the year ended 30 November

Reconciliation of net cash flow to movement in net debt

 Consolidated statement of changes in equity

Notes

1. Alternative performance measures

Alternative performance measures are used by the Directors and management to monitor business performance internally and exclude certain cash and non-cash items which they believe are not reflective of the normal course of business of the Group. The Directors believe that disclosing such non-IFRS measures enables a reader to isolate and evaluate the impact of such items on results and allows for a fuller understanding of performance from year to year. Alternative performance measures may not be directly comparable with other similarly titled measures used by other companies.

Alternative revenue measures

Revenue at constant currency is derived from translating overseas subsidiaries results at budgeted fixed exchange rates. In 2021 and 2020 the rates used were $1.4:£1 and €1.2:£1, compared with reported rates of $1.37:£1 (2020: $1.28:£1) and €1.16:£1 (2020: €1.13:£1).

Underlying revenue is revenue at constant currency adjusted for the impact of acquisitions made in the current and prior year.

The acquisition line relates to the revenue in relation to the acquisition of Kbio, which was acquired in February 2021.

Alternative profit measures

A reconciliation of the Group's adjusted performance measures to the reported IFRS measures is presented below:

An analysis of adjusting items is given below:

Adjusted operating profit and adjusted profit before tax exclude:

A tax charge or credit has been calculated on each adjusting credit or charge using the Group tax rate prevailing in each of the local territories where it arises. Eligible costs in the prior year associated with the US PPP loan were previously treated as disallowed for tax; however it has since been established that these costs are allowable in 2021. Furthermore, the PPP income, arising on the forgiveness of the loan, in the current year does not attract US tax. These items combined contribute to the 2021 tax credit on net adjusting items.

Return on capital employed

The Group uses two return measures to assess the return it makes on its investments:

· Return on capital employed of 13% (2020: 12%) is the tax adjusted operating profit as a percentage of the average capital employed. Capital employed is the average of the opening and closing Group net assets less the average of the opening and closing net cash position; and

· Return on operating capital employed of 31% (2020: 29%) is calculated on the same basis except that the capital employed is adjusted to remove the average of the opening and closing goodwill and the opening and closing pension deficit to give a measure of the operating capital.

2. Segment information

The chief operating decision maker has been identified as the Board of Directors. The Board of Directors has instructed the Group's internal reporting to be based around differences in products and services, in order to assess performance and allocate resources. Management have determined the operating segments based on this reporting.

As at 30 November 2021, the Group is organised on a worldwide basis into three operating segments:

1) Aerospace & Industrial - principally serving the aviation, and energy and industrial markets;

2) Laboratory - principally serving the bioscience and environmental laboratory instrument and consumables market; and

3) Metal Melt Quality - principally serving the global aluminium, North American Free Trade Agreement (NAFTA) iron foundry and super-alloys markets.

Other Group operations' costs, assets and liabilities are included in the "Central" division. Central costs mainly comprise Group corporate costs, including new business development costs, some research and development costs and general financial costs. Central assets and liabilities mainly comprise Group retirement benefit obligations, tax assets and liabilities, cash and borrowings.

The segment results for the year ended 30 November 2021 are as follows:

The segment assets and liabilities at 30 November 2021 are as follows:

The segment assets and liabilities at 30 November 2020 are as follows:

Geographical analysis

3. Earnings per share

In addition to the above, the Group also calculates an earnings per share based on adjusted profit as the Board believes this to be a better measure to judge the progress of the Group, as discussed in note 1.