Preliminary results

RNS Number : 7853T

Hardide PLC

25 November 2013

 



Hardide plc

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

Preliminary results for the year ended 30 September 2013

Hardide plc (AIM: HDD), the provider of advanced surface coating technology, announces its preliminary results for the twelve months ended 30 September 2013.

Financial Results

·    Group turnover reduced by 17% to £2.4m (2012: £2.9m), predominantly as a result of a sudden and significant inventory adjustment by one major customer.

·    Gross profit decreased by 29% to £1.5m (2012: £2.1m).

·    Group EBITDA loss of £0.2m (2012: profit £0.5m) impacted by a strategic decision to strengthen the UK and US sales teams along with associated increased marketing expenditure.

·    UK operation, Hardide Coatings Limited: EBITDA of £0.5m (2012: £1.2m).

·    Group loss before tax of £0.9m (2012: profit £0.3m) after £0.4m provision for onerous lease under IAS37 and £0.1m impairment of fixed assets relating to the hibernated Houston facility.  

·    UK operation, Hardide Coatings Limited: profit before tax of £0.4m (2012:  £1.1m).

·    US sales up 17% to £0.7m (2012: £0.6m).

·    Loss per share 0.08p (2012: profit 0.03p).

·    Cash at bank at 30 September 2013 of £1.0m (2012 year end: £1.4m).

·    In January 2013, a loan note holder converted its convertible loan note of £225,000 into 50,000,000 new ordinary shares of the Company ("New Ordinary Shares").

·    A Technology Strategy Board (TSB) grant of up to £250,000 awarded to part‑fund development of a new coating for downhole tool and other high-wear applications.

Business and Operational Highlights

·    The number of active accounts rose by 31% to 38 from 29 in the previous year and the number of qualified prospects rose by 40%.

·   Supply agreement for a new coating developed as a result of the TSB grant.  Patent applications have been made for this product.

·   Commercial agreement with a US-based, blue chip provider of highly-engineered products.

·    Business development activity strengthened by the appointment of two additional managers, a sales consultant and an agent in Germany.

·    Test programmes by Airbus and AgustaWestland (AW) continue to make progress.  The expected completion date for generic testing by Airbus has slipped slightly and our current best estimate is that both programmes will be completed before mid-2014. 

Post Period Events

·    Promising start for sales of the new coating for oil & gas tools developed with the TSB grant support.

·    Coating for first hydraulic fracturing (fracking) tool application now on test with a major oil and gas company.

·   Marketing partner is being sought for the pump, valve and power generation markets in Italy.

·   Good signs of recovery of demand from major customer.

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

"Diversification remains a crucial strategic goal and to this end, there has been further investment in technical development, sales activity and marketing. Increased investment in these areas has been budgeted for 2013-14 because the Board maintains its view that this is required to realise new applications and to fuel business growth; thereby adding value to the Company.

"Looking forward, the Board expects to see the first results of these investments in the second half of this coming financial year. 

"The Board remains confident about the Group's prospects in its key markets and that investment to increase sector penetration and customer diversity is in the shareholders' best interests."

For further information:

Hardide plc
Robert Goddard, Chairman Philip Kirkham, Chief Executive Officer Jackie Robinson, Communications Manager	Tel: [phone] [e-mail] www.hardide.com
N+1 Singer Andrew Craig, Ben Wright	Tel: [phone] www.n1singer.com

Notes to editors:

Hardide develops, manufactures and applies nano-structured tungsten carbide-based coatings to a wide range of engineering components.  The Group's patented technology is unique in combining a mix of abrasion, erosion and corrosion resistant properties in one material and its ability to coat interior surfaces and complex shapes uniformly.  When applied to metal components in aggressive environments, the material is proven to offer dramatic improvements in component life resulting 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 statement

SUMMARY

The Company experienced a 17% decline in revenue.  This was due to an inventory reduction by a major customer that began in the latter part of H1 which we highlighted to shareholders at the time and which continued throughout H2, adversely affecting the full year result.  However, there are good signs that this slowdown is coming to an end.  The drop in demand was particularly disappointing because the Company is making very good headway in other areas, including product and technical development, building sales and marketing momentum and strengthening the patent portfolio.

Mainly as a result of this fall back in demand by the major customer, sales were 17% lower than last year and fixed factory overheads meant that the gross profit was £0.6m down and as a percentage of sales slipped to 65% (2012: 72%).

Administrative expenses rose to £1.8m from £1.6m last year on the back of increased sales and marketing expenditure, with additional business development resources recruited in the UK, Europe and the USA. 

The net effect of these movements was a £0.7m reduction in EBITDA to a loss of £0.2m.

Diversification remains a challenge in the short-term due to the long sales cycle.  However, progress is being made, with an increase of over 30% in customer numbers over the year and the successful completion of one long-term supply agreement and good progress on another with a major US-based customer.  The Board is confident that the correct strategy is in place to achieve further diversification. 

We remained sufficiently confident during the year to continue to invest in sales, marketing, product testing and development. As long as business performance remains as currently projected, expenditure of this nature will continue to increase ahead of the sales growth expected in the coming year.

FINANCIAL OVERVIEW

Whilst the Company has reduced its dependence on a small number of major customers, the progress was not sufficient to mitigate the effect of the dramatic inventory reduction by one such customer.  This adjustment, combined with delays in other customers' testing programmes and product introductions across several sectors, led to a fall back in full year sales revenue by 17% to £2.4m (2012: £2.9 m).  This is in line with market expectations but disappointing against a background of our technology performing exceptionally well and the many positive technical and commercial developments achieved in the year.

Group gross profit fell by 29% to £1.5m (2012: £2.1 million), and EBITDA to a loss of £0.2m (2012: profit £0.5m).  The Group made a loss before tax of £0.9m (2012: profit £0.3m).  

A prudent view has been taken on the remaining term of the lease on our Houston facility which is currently mothballed and partially sublet.  We have provided £0.4m for the 'onerous' lease and a further £0.1m impairment loss on the remaining plant and machinery.  Excluding these one-off items, Group loss before tax was £0.4m.

Cost of sales remained the same as FY2012 at £0.8m; attributed to fixed production salaries and the mix of components that were processed, resulting in gross margin reducing to 65% (2012: 72%).

Two new business development staff, a sales consultant, an agent in Germany and increased marketing spend accounted for the majority of the 13% increase in expenses to £1.8m (2012: £1.6m).

In January 2013, a convertible loan note of £225,000 was exercised, resulting in the issue of 50,000,000 New Ordinary Shares.

The Group was successful in its application for a Technology Strategy Board (TSB) grant in January 2013 and awarded up to £250,000 towards the project costs.  During the year, income from this grant of £53,000 was netted against development expenses incurred. 

BUSINESS REVIEW

Customers and Markets

Total revenue from the oil and gas sector fell by 26%, largely due to destocking by one major customer.

Sales to the flow control sector fell by 6% due to a general slowing in project activity but we saw a 28% rise in demand from our major customer in this sector; the second year in succession that they have significantly increased orders.

Advanced engineering and aerospace revenue grew by 4% from a low base. 

Across all sectors, eleven new accounts were gained, the number of repeat customers increased by 31% and the number of qualified prospects rose by 40%.

During the course of the year, we continued our planned investment in sales and marketing.  As well as appointing additional sales personnel, our corporate branding and marketing literature were refreshed and a German language version of our main brochure was produced.  The website was re-designed and more customer-focused content incorporated.  The Company exhibited at and attended many industry events and the technology was presented at various seminars and conferences.  The Company joined the West of England Aerospace Forum (WEAF) to reinforce its connection with major aerospace companies.  We also joined NAMTEC, the National Metals Technology Centre, part of the Advanced Manufacturing Research Centre (AMRC) run by the University of Sheffield, Rolls-Royce and Boeing.

Since so many of Hardide coatings' applications are on critical components with a high cost of failure, final acceptance often comes only after lengthy testing, sometimes taking years.  However, once approved the coatings are truly embedded and we enjoy long term relationships, repeat orders and enquiries for new applications from satisfied customers.  Despite great efforts to expedite progress, we have little influence on the speed of customers' testing and our experience is that their programmes often extend well beyond the time and scope first indicated to us.

Several test programmes reached a conclusion during the year and eleven new accounts were gained across a range of sectors as a result.  One highlight was the success of long term testing on critical parts for a world-leading, US-based advanced engineering company.  A strategic supply agreement with minimum guaranteed annual volumes is now being negotiated and tests on further components are already underway and are planned to be included in the agreement's scope when proven.

In April 2013, the Company signed a mutually exclusive five-year supply agreement with 'hardfacing' specialists Cutting & Wear Resistant Developments to supply the new coating for 'superabrasive' products for use in oil and gas applications. 

In the US

Our plant in Houston remains intact but will not become operational until demand from North America has reached a sufficient level. To this end, we are engaged in trials with several of the world's largest valve and oil and gas service companies for high volume parts.  Lab testing was completed successfully on our first fracking tool application for a major oilfield services company and they intend to begin field trials with results expected early in 2014.  These developments, as well as the appointment of a new US-based business manager are designed to bolster demand in North America to the point at which the plant can be re-opened.  Sales in North America to new and existing customers rose by 17% to £0.7m (2012: £0.6m). 

Operations

The production team embarked on a Six Sigma lean manufacturing programme.  This has resulted in efficiency improvements, including a sharp increase in throughput per cycle for certain components.  Two key process managers have been trained and shortly will be awarded their Six Sigma green belt status.

In 2013, we were very pleased to recruit our first apprentice who is being trained as a quality technician while attending college one day a week.  We believe that apprenticeships should play an important role in our business because they have the potential to develop skills specific to our technology and so enhance productivity.

Our excellent safety record remains in place.  No lost-time incidents were recorded during the year and the Company surpassed all its environmental objectives.

Technology, Research & Development

Rapid progress was made on the further development and commercialisation of a next-generation superabrasive coating technology.  The new Hardide coating is incorporated into a hardfacing material that extends the life of drilling and other tools operating in extremely abrasive environments.  The project was fast-tracked from lab research stage with the support of a TSB grant.  This is the first successful high-performance adhesive coating of its kind and we believe that the technology is applicable to other extractive industries and to construction.  Accordingly, we have filed UK and international patent applications. 

In the second half of the year we launched two independent test programmes.  One is investigating the behaviour of the coating on two widely-used substrates and the other is testing its resistance to a particular wear mechanism in pumps.  The programme is due to be completed by the end of 2013 and if successful will open up opportunities in the fast growing subsea sector and for new pump industry applications.

Erosion tests at Southampton University on behalf of a major oil and gas customer yielded impressive results. The coating's erosion rate was 125 times better than stainless steel and seven times better than HVOF, a competing high performance coating.  These results have been disseminated by our customer and we expect new applications on the strength of our performance.

Test programmes by Airbus and AgustaWestland (AW) continue to make progress.  Since the coating will be used in safety-critical applications, tests have had to be very wide-ranging and detailed. 

Airbus has very nearly completed its generic test programme.  AW, having already successfully completed its generic testing, is now conducting tests on an extremely critical component.  If these tests are successful, this will also qualify the coating for use in multiple, less-severe applications, where it is thought that there may be major advantages to be had from using the coating. 

With both of these aerospace customers, the availability of test equipment is an important factor in the time that it takes to complete these test programmes and grant approval.  Our current best estimate is that both programmes will be completed before mid-2014.

The reputation of the Hardide coating as an alternative to hard chrome plating, the production of which is shortly to be severely restricted under EU and US health, safety and environmental regulations, was enhanced when a customer, VelanInc authored a peer-reviewed paper in conjunction with two universities.  The article was published in the journal "Materials Chemistry and Physics" and concluded that the Hardide coating is a suitable alternative to hard chrome plating in severe service valves.

Outlook

Looking forward, the Board expects 2014 to show benefits from investment in business development, the increase in new customers and from the recent 40% uplift in the number of qualified prospects.  There are further positive commercial and technical developments underway and a healthy and growing pipeline of opportunities.  Activity in North America is gaining momentum and opportunities in Germany, Italy and Norway are also being targeted.

Investment in technology and marketing will continue, and the Board maintains its view that expenditure ahead of revenue will realise valuable new applications and fuel business growth and diversification, thereby improving shareholder value.

We are confident in the outlook for sales, in our plans to increase sector penetration and diversification, and in our ability to improve our overall performance.

Finally, our thanks are extended to the management team and employees for their hard work during the year and to our shareholders for their continued support.

Robert Goddard	Philip Kirkham
Chairman	CEO
25 November 2013	25 November 2013

Financial Review

While the year started promisingly, by the end of H1 it became apparent that one of our major customers was undertaking a destocking exercise throughout its global operations, and this continued through the second half.  While we converted a number of new accounts during the year, revenue from these was not sufficient to offset the decline from the major customer.  Indications are that demand from this major customer will return to more normal levels in the new financial year.

The consequence of the 17% decline in revenue on an operation with low variable but high fixed production costs was a larger decline in gross profit of 29%.  Overheads increased by £0.2m to £1.8m due to increased marketing, business development and technology improvement costs.

Revenue from our US customers increased on the back of higher economic activity there, and we also began to see the benefits of more active account management from our new US Business Development Manager.  However while the prospects for our North American business are improving, we have taken the prudent view to provide under IAS37 an amount of £0.4m in the P&L for the remaining rental on the facility in Houston, less the minimum amounts due to us from our sub-lessee.  Similarly, although there remain substantial amounts of plant and machinery in situ to facilitate a quick re-opening should conditions allow, the absence of a decision to do so has resulted in a write-down of its carrying value to zero; an additional expense to the P&L of £0.1m.

After accounting for these one-off items, the company's pre-tax loss was £0.9m (2012: £0.3m profit), if these are excluded, underlying EBITDA loss was £0.2m, down from an EBITDA profit of £0.5m in 2012.

Cash outflow in the year amounted to £368k including capital expenditure of £69k and net interest costs of £59k.

The company successfully applied for funding from the Technology Strategy Board to develop a coating variant for hardfacing material.  The grant contributes towards eligible project expenditure for up to two years.  During the year £50k was received, with a further £3k accrued.  Since these amounts relate to costs incurred, the grant has been accounted for as a credit to expenses, rather than income.  Substantial amounts of our developments in other areas continue to be eligible for R&D tax credits.  

The holder of a £225k convertible loan note converted and sold these on ahead of their maturity into 50m ordinary shares at a conversion price of 0.45p per share.  The shares were placed with a variety of institutional shareholders and private client brokers.  This same holder retains a £633k convertible loan note that matures in the summer of 2014.

Peter Davenport

Finance Director

25 November 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 September 2013

		2013 £000	2012 £000
Revenue		2,359	2,915
Cost of sales		(815)	(820)
Gross profit		1,544	2,095
Administrative expenses		(1,769)	(1,573)
Depreciation and amortisation		(110)	(108)
Impairment of fixed assets		(90)	(36)
Provision for onerous lease obligations		(376)	-
Operating (loss) / profit		(801)	378
Finance income		2	2
Finance costs		(103)	(115)
(Loss) / profit on ordinary activities before taxation		(902)	265
Taxation		54	42
(Loss) / profit on ordinary activities after taxation		(848)	307
Profit / (loss) per share: Basic		(0.08)p	0.03p
Profit / (loss) per share: Diluted		(0.07)p	0.02p

All operations are continuing.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 September 2013

		2013 £000	2012 £000
Assets
Non-current assets
Goodwill		69	69
Intangible assets		2	-
Property, plant & equipment		245	379
Total non-current assets		316	448
Current assets
Inventories		41	33
Trade and other receivables		434	549
Other current financial assets		154	98
Cash and cash equivalents		1,037	1,405
Total current assets		1,666	2,085
Total assets		1,982	2,533
Liabilities
Current liabilities
Trade and other payables		282	480
Financial liabilities		702	257
Provision for lease obligation		86	-
Total current liabilities		1,070	737
Net current assets		596	1,348
Non-current liabilities
Financial liabilities		5	673
Provision for lease obligation		290	-
Total non-current liabilities		295	673
Total liabilities		1,365	1,410
Net assets		617	1,123
Equity attributable to equity holders of the parent
Share capital		2,733	2,666
Share premium		6,085	5,848
Retained earnings		(7,841)	(6,993)
Share-based payments reserve		275	240
Translation reserve		(635)	(638)
Total equity		617	1,123

The financial statements were approved and authorised for issue by the Board on 25 November 2013.

Robert Goddard

Director

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 September 2013

	2013 £000	2012 £000
Cash flows from operating activities
Operating (loss) / profit	(801)	378
Depreciation	110	108
Impairment of fixed assets	90	36
Share option charge	35	1
Increase in inventories	(8)	(9)
Decrease in receivables	114	(139)
Decrease in payables	(198)	110
Increase in provisions	376	-
Cash generated from operations	(282)	485
Finance income	2	2
Finance costs	(61)	(83)
Tax received / (paid)	-	45
Net cash generated from operating activities	(341)	449
Cash flows from investing activities
Purchase of property, plant and equipment	(69)	(50)
Net cash used in investing activities	(69)	(50)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital	304	714
Loan repayment	(262)	-
Net cash used in financing activities	42	714
Net increase / (decrease) in cash and cash equivalents	(368)	1,113
Cash and cash equivalents at the beginning of the year	1,405	292
Cash and cash equivalents at the end of the year	1,037	1,405

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2013

	Share Capital	Share Premium	Share-based  Payments	Foreign Translation	Retained Earnings	Total Equity
At 1 October 2011	2,541	5,259	248	(632)	(7,310)	106
Issue of new shares	125	589	-	-	-	714
Share options	-	-	(8)	-	10	2
Combined instruments	-	-	-	-	-	-
Exchange translation	-	-	-	(6)	-	(6)
Profit for the year	-	-	-	-	307	307
At 30 September 2012	2,666	5,848	240	(638)	(6,993)	1,123
At 1 October 2012	2,666	5,848	240	(638)	(6,993)	1,123
Issue of new shares	67	237	-	-	-	304
Share options	-	-	35	-	-	35
Combined instruments	-	-	-	-	-	-
Exchange translation	-	-	-	3	-	3
Loss for the year	-	-	-	-	(848)	(848)
At 30 September 2013	2,733	6,085	275	(635)	(7,841)	617

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 2013, and the consolidated statement of comprehensive income and consolidated statement of cash flows for the year then ended have been extracted from the Group's 2013 statutory financial statements.  The audit report on the full financial statements has not yet been signed by the auditor.  The auditor's report is expected to be unqualified and is not expected 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 2013 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 2013 with new standards and interpretations which became mandatory for the 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.

 

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