Final Results

RNS Number : 5025R

Hardide PLC

12 December 2016

 

Press Release

12 December 2016

Hardide plc

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

Preliminary results for the year ended 30 September 2016

Hardide plc (AIM: HDD), the developer and provider of advanced surface coating technology, announces its preliminary results for the year ended 30 September 2016.

Key Points

Financial

·   Sales of £2.14m (2015: £3.00m). Affected by the oil and gas downturn as expected

·   Sales in H2 25% ahead of H1. Signs of slow recovery from existing oil and gas customers and conversion of new opportunities

·   Gross profit of £0.69m (2015: £1.81m)

·   Group operating loss of £1.47m (2015: loss of £0.22m)

·   Loss before interest, tax, depreciation and amortisation of £1.30m (2015: loss of £0.33m), before crediting reversal of fixed asset impairment and release of provision

·   Successful fundraising of £1.60m completed during September 2016. Enables implementation of growth plans

·   Cash at bank at 30 September 2016 of £1.97m

Business/ Operational

·   Good progress made towards increasing aerospace business

·   US coatings facility now operational and generating regular revenue

·   Increasing sales in precision engineering -  up 126% from prior year

·   Board expects growth in both aerospace and precision engineering markets and a slow return in oil and gas activity to contribute towards improved performance in 2017

·   Costs reduced in response to lower orders from the oil and gas sector

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

"In common with most companies operating in the oil and gas supply chain, Hardide's full year performance was, as anticipated, adversely affected by depressed demand. This was due to the sector's longest and most severe downturn in decades. H2 saw an improvement over H1 with signs of a tentative recovery from oil and gas. New opportunities are emerging from key customers in this sector and we saw a substantial rise in sales to precision engineering customers.

"Despite weak demand in the oil and gas sector, the underlying picture is encouraging. Good progress is being made with Airbus and other aerospace companies in Europe and North America as well as with our new X-ray machine customer.  For the first time, sales to customers in North America were higher than to UK customers.  The new facility in Virginia is producing regular revenue following customers' exhaustive verification trials and approvals.

"Accurate forecasting of demand from our oil and gas customers is always difficult but indications are that the bottom of the cycle has been reached. With the market reported to be close to balance, demand is expected to continue on an upward trend during 2017 and beyond.  The board remains positive about the Group's progress in diversifying by end-user and geography, and therefore the medium and longer-term prospects. 

"The cost base is stable and under tight control and the recent fundraising of £1.6m significantly strengthens the balance sheet and will enable the Group to move forward with its development plans."

For further information:

Hardide plc
Philip Kirkham, CEO  Jackie Robinson, Communications Manager	Tel: [phone]
finnCap  Stuart Andrews / Grant Bergman/James Thomson	Tel: [phone]

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, precision engineering and aerospace industries.  

chairman's and ceo's report

INTRODUCTION

In common with most companies operating in the oil and gas sector, over the last 18 months Hardide's revenue was adversely affected by the longest and most severe downturn in global oil and gas activity in decades.  The Group is reporting full year sales of £2.14m (2015: £3.00m), primarily reflecting the fall in demand from customers in oil and gas exploration drilling.  In response to this industry-wide slump, the Company took a number of actions throughout the year to cut costs and limit cash outflow.  This was achieved while completing the new US coatings facility in Virginia, which became operational in February 2016.

H2 saw a 25% improvement in sales over H1, with sales to customers in oil and gas and precision engineering sectors both rising by over 50%.  Indications from major oil and gas customers are that the bottom of the cycle has been reached, the oil market is close to balance and so drilling activity is expected to pick up in 2017.

Significant progress was made with our strategic plan to develop the aerospace market with technical approval by Airbus of the coating in late 2015. Our new, highly-experienced aerospace business development manager is successfully identifying further applications with potential new customers and a number of new test programmes are underway.  Also, after a lengthy development programme, sales commenced to the manufacturer of a new type of high-speed X-ray screening machine for airport baggage. We expect that sales for this ground-breaking aviation security technology will grow in line with its adoption and demand for the coating will rise. Even during this oil and gas downturn, many new applications have come to us from engineers in the sector as they become increasingly aware of the potential for Hardide coatings to further improve tool life, efficiency and reduce operating costs.

A placing of 200,202,000 new ordinary shares at 0.8p per share was completed during September 2016 and raised £1.60m (gross). The proceeds are to be used to invest in a range of projects and activities that the board believes will enhance shareholder value.

FINANCIAL RESULTS

The Company generated total sales of £2.14m in the year ended 30 September 2016. This compares with £3.00m for the prior year, with the slowdown in the global oil and gas sector beginning in H2 2015 and continuing throughout 2016. Some signs of a pick-up have emerged recently and our key oil and gas customers are signalling that they expect a slow recovery as 2017 progresses.

Gross profit for the year decreased to £0.69m (2015: £1.81m) and gross margin reduced to 32% (2015: 60%).  This sharp reduction was due mainly to the mix of product being processed and the fixed nature of production salaries. In addition, managing component manufacturing for a growing customer, Virginia site validation and the recruitment of additional production staff in Virginia also depressed percentage margins.

After accounting for the reversal of fixed asset impairment and the release of provision, the Company incurred an operating loss of £1.47m (2015: loss of £0.22m).  The impairment reversal related to the redeployment of plant in the US which had previously been written off; and the release of a provision that covered the final months of the lease on the Group's former site in Houston, which we fully-exited in October 2015. The loss before interest, tax, depreciation and amortisation was £1.30m (2015: £0.33m loss).  Cash grants of £0.18m were received from the Martinsville Henry County Economic Development Corporation and the Commonwealth of Virginia.

On the balance sheet, net assets at 30 September 2016 were £4.38m (2015: £3.86m).  This included a cash balance of £1.97m (2015: £2.33m).  Final one-off capex costs of £0.60m were incurred in completing the installation and commissioning of the Virginia facility. Capital expenditure for the Group totalled £0.66m.

OPERATIONAL OVERVIEW

Customers and Markets

The diversification of our customer and market base remains an important strategic goal.  Over the year, we made good progress in increasing sales to customers in the precision engineering sector.  These rose 126%, with volume orders being received for components for the new airport X-ray baggage screening machine.

Significant headway was made with Airbus, with the coating being technically approved for use as an alternative to hard chrome plating by design engineers and the sub-contractor network.  Life-testing of the coating on specific high-volume Airbus A320 components is now underway, with commercial discussions taking place regarding these and other volume components for both single-aisle and wide-body aircraft.  Announcements of further progress are expected during 2017. 

The dramatic drop in exploration and drilling by our customers in the oil and gas and flow control sectors, both in the UK and North America, resulted in falls in revenue of 47% and 17% respectively.  During the year, we worked closely with a major oil service company in North America to enhance the performance of an onshore hydraulic fracturing tool.  The technology is now proven and we expect a strengthening of demand from this customer as North American onshore drilling activity continues to rise.  The Baker-Hughes rig count, an accepted measure of the state of the North American drilling industry, has shown encouraging month-on-month increases since March 2016. After extensive testing and trials, the coating was specified by a major global manufacturer for a series of subsea flow control applications and first orders are now being received for these components. For the first time, the Company's sales to North America exceeded those to the UK.

The take-or-pay supply agreement with GE, which had an original term of two years but as has been previously announced was extended to three years, expires at the end of February 2017. GE has indicated that they expect to be left with an excess of inventory due to reduced customer demand from the oil & gas sector. As expected by Hardide management, GE needs time to reduce this overstocking before re-ordering. Clearly, how long that takes will depend upon their rate of usage. We have current orders in production that will complete the contract by February 2017. GE has made clear that the coating has been very successful and as a result they have now standardised on use of the coating on all variants of their product and will resume ordering as soon as their current inventory levels have reduced.

To raise awareness further in new geographies and industries, a programme of presentations of technical papers at prestigious international industry conferences was undertaken by Hardide's technical director.  In July, we exhibited at the Farnborough International Airshow in July where some promising new customer contacts were made.

Major new customer trials and industry accreditations

The Hardide coating has been technically approved by Airbus and Leonardo Helicopters (formerly AgustaWestland) as a replacement for hard chrome plating (HCP). The HCP process uses hexavalent chrome, which has a sunset date of 21 September 2017 imposed by EU REACh regulations.  While this creates opportunities for Hardide, it is important to realise that demand for Hardide coatings within the aerospace sector is not limited to just hard chrome replacement. For example, the application of Hardide coating to components on the Eurofighter Typhoon aircraft is related to its anti-galling properties.   Also, the coating is currently being tested as an alternative to HCP, HVOF (high velocity oxy-fuel) and other hard coatings in several aerospace companies in Europe and North America.

The component testing programme with Leonardo Helicopters has progressed much more slowly than expected. This has been due to the unavailability of the customer's highly-specialised rig used to test these safety-critical components. It is now expected that the tests will begin in early 2017.  Post-period we received new parts from this customer for coating and testing.  These are for less-critical applications, which do not need the specialised rig and so we expect the testing of them to be quicker.

Trials have also been underway for some time on hydraulic actuators with a major European manufacturer of aircraft landing gear. They are now considering the use of Hardide on additional components.

For some while now, industries traditionally using hard chrome have been lobbying the EU for an extension of the REACh sunset date. Part of their argument for this has been the difficulty that a ban on HCP would present for replacement parts for aircraft no longer in production. The Company has been in dialogue with its aerospace customers for some time about the possible extension and as a result we are confident that if the seven-year extension now proposed by the European Chemicals Agency is accepted by the European parliament, it will have no material impact on our progress in the aerospace markets. None of our aerospace test programmes or current revenue opportunities are for 'legacy' parts and none are expected to be affected by any deferral of the sunset date.

In November 2015, Hardide Coatings Ltd passed its triennial re-certification audit for the aerospace AS9100:Rev C and ISO9001 quality management systems. During the year, we also upgraded our environmental certification to the new ISO14001:2015 standard.  Certification of the facility in Virginia is intended to take place in 2017.  For some time now we have been preparing for the aerospace industry's global accreditation standard, Nadcap. Audit of the Bicester site has been scheduled by the assessors for the second quarter of calendar 2017.

Production, Technology, Research & Development

The new production facility in Virginia became production-ready in February 2016 and is now integral to supporting sales to North America.  Additional production personnel were recruited in Virginia, bringing the US headcount there to seven.  Led by a team from the UK, procurement, installation and commissioning of equipment was managed smoothly within time and budget.  Validation of the production process by major US customers took several months and the site is now approved for production and is producing regular revenue.

The UK-based technical team was strengthened by the recruitment of a R&D engineer and the total number of staff in the UK was reduced during the year to better align with sales revenues.

The Group continued with various test programmes aimed at developing further potential new applications.  These programmes include both in-house and third-party projects.

Intellectual Property

The IP committee met quarterly to review the IP portfolio.  During the year, a US patent was granted for the coating for industrial diamonds, a process that enables their secure bonding to metallic substrates. Research continues into the development of new coating variants, and if successful these will strengthen and widen the Group's IP portfolio.

Brexit effect

To the extent that it can predict the effects of Brexit, the Group expects no particular negative effects on its business and is currently benefitting modestly from the weaker pound, more than 50% of its revenue being denominated in US dollars. None of the existing development programmes with customers should be adversely affected.

STRATEGY

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

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, R&D and process development so as to grow revenue and gross profit. Presently, this has to be considered in the light of the longest downturn for over 20 years in our current main market of oil and gas, and a commercial landscape with low visibility.  Nonetheless, the board is confident in the medium and longer-term outlook and encouraged by the progress being made in diversifying and developing the customer base. The Group will use its new production base in the US to develop North American business across multiple market sectors and we will expand our presence in selected European markets.  The civil aerospace market represents a significant growth potential for our coating range, as do new applications in the oil and gas sector. We are also targeting expansion in other precision engineering sectors. 

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

OUTLOOK

Visibility from our oil and gas customers remains limited as the industry adjusts to the lower oil price. However, current market indications give the board confidence that demand will slowly return during 2017 as drilling activity picks up. The Company is well-positioned to benefit when this happens. The board is further encouraged by progress with the North American fracking tool manufacturer referred to earlier and is optimistic about potential opportunities when the sector recovers. 

We are in the early stages of growth with our X-ray machine customer and are moving forward with commercial discussions with Airbus and tests on new applications with Leonardo Helicopters and several aerospace component manufacturers.

Our balance sheet is sound and costs are under tight control.  Based on the progress of customers' tests and the range of strategic development projects underway, the board is positive about the medium and longer term prospects for the Group.

Robert Goddard	Philip Kirkham
Chairman	CEO
9 December 2016	9 December 2016

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 September 2016

		2016 £000	2015 £000
Revenue		2,142	3,003
Cost of sales		(1,457)	(1,198)
Gross profit		685	1,805
Administrative expenses		(1,989)	(2,130)
Depreciation and amortisation		(418)	(161)
Reversal of fixed asset impairment		232	-
Release of onerous lease provision		23	269
Operating profit / (loss)		(1,467)	(217)
Finance income		6	12
Finance costs		(1)	(2)
Profit / (loss) on ordinary activities before taxation		(1,462)	(207)
Taxation		121	91
Profit / (loss) on ordinary activities after taxation		(1,341)	(116)
Profit / (loss) per share: Basic		(0.1)p	(0.01)p
Profit / (loss) per share: Diluted		(0.1)p	(0.01)p

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 September 2016

		2016 £000	2015 £000
Assets
Non-current assets
Goodwill		69	69
Intangible assets		1	3
Property, plant & equipment		1,872	1,262
Total non-current assets		1,942	1,334
Current assets
Inventories		60	59
Trade and other receivables		566	469
Other current financial assets		270	271
Cash and cash equivalents		1,967	2,327
Total current assets		2,863	3,126
Total assets		4,805	4,460
Liabilities
Current liabilities
Trade and other payables		408	544
Financial liabilities		17	16
Provision for lease obligation		-	21
Total current liabilities		425	581
Net current assets		2,438	2,545
Non-current liabilities
Financial liabilities		3	20
Total non-current liabilities		3	20
Total liabilities		428	601
Net assets		4,377	3,859
Equity attributable to equity holders of the parent
Share capital		3,242	3,041
Share premium		10,305	8,935
Retained earnings		(8,964)	(7,623)
Share-based payments reserve		184	154
Translation reserve		(390)	(648)
Total equity		4,377	3,859

 

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 September 2016

	2016 £000	2015 £000
Cash flows from operating activities
Operating profit / (loss)	(1,467)	(217)
Impairment of intangibles	2	1
Depreciation	416	160
Reversal of fixed asset impairment	(232)	-
Share option charge	28	27
Increase in inventories	1	(9)
(Increase) / Decrease in receivables	(18)	67
Increase / (Decrease) in payables	(160)	81
Increase / (Decrease) in provisions	(23)	(269)
Exchange rate variance	31	-
Cash generated from operations	(1,422)	(159)
Finance income	6	12
Finance costs	(1)	(2)
Tax received / (paid)	64	53
Net cash generated from operating activities	(1,353)	(96)
Cash flows from investing activities
Purchase of property, plant and equipment	(561)	(1,029)
Net cash used in investing activities	(561)	(1,029)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital	1,571	1
Finance lease repayment	(17)	(16)
Net cash used in financing activities	1,554	(15)
Net increase / (decrease) in cash and cash equivalents	(360)	(1,140)
Cash and cash equivalents at the beginning of the year	2,327	3,467
Cash and cash equivalents at the end of the year	1,967	2,327

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2016

	Share Capital	Share Premium	Share-based  Payments	Foreign Translation	Retained Earnings	Total Equity
At 1 October 2014	3,041	8,934	127	(639)	(7,507)	3,956
Issue of new shares	-	1	-	-	-	1
Share options	-	-	27	-	-	27
Combined instruments	-	-	-	-	-	-
Exchange translation	-	-	-	(9)	-	(9)
Loss for the year	-	-	-	-	(116)	(116)
At 30 September 2015	3,041	8,935	154	(648)	(7,623)	3,859
At 1 October 2015	3,041	8,935	154	(648)	(7,623)	3,859
Issue of new shares	201	1,370	-	-	-	1,571
Share options	-	-	28	-	-	28
Combined instruments	-	-	-	-	-	-
Exchange translation	-	-	2	258	-	260
Loss for the year	-	-	-	-	(1,341)	(1,341)
At 30 September 2016	3,242	10,305	184	(390)	(8,964)	4,377

 

END

 

 

FR LLFFDFSLAIIR