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Volex PLC (VLX)

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Thursday 14 November, 2019

Volex PLC

Half-year Report of Volex plc

RNS Number : 3470T
Volex PLC
14 November 2019
 

14 November 2019

VOLEX plc

Half year results for the 26 weeks ended 29 September 2019

'Acquisitions on track, margin expansion and cash generation ahead of plan'

Volex plc ('Volex'), the global provider of Complex Assemblies, today announces its interim results for the 26 weeks to 29 September 2019 ('H1 FY2020').

Financial Summary

26 weeks to

29 September

2019

26 weeks to

30 September

2018

 

%

Change

Revenue

$195.7m

$182.4m

7.3

Underlying* operating profit**

$15.9m

$9.9m

61.7

Statutory operating profit

$10.4m

$5.7m

82.5

Underlying* profit before tax

$15.3m

$9.0m

70.0

Statutory profit before tax

$9.7m

$4.9m

98.0

Basic earnings per share

5.3c

2.7c

96.3

Underlying diluted earnings per share

8.5c

5.8c

46.6

Interim dividend per share

1.0p

-

-

Net cash (before IFRS 16 Leases adjustment)***

$7.9m

$24.9m

(68.3)

* Before adjusting items (non-recurring items and amortisation of acquired intangibles) and share-based payments

** The Group has adopted the cumulative catch-up approach to the adoption of IFRS 16 ('Leases'). The impact during H1 FY2020 is a $0.4 million increase to operating profit and $0.2 million increase in finance costs.

*** Net cash is presented before the $7.2 million lease liability recognised on adoption of IFRS 16 Leases.

 

Operational highlights

·     In July, we acquired Servatron, a US-based manufacturer of printed circuit board assemblies, box builds and complete sub-assembly solutions. The acquisition of Servatron in the North American market, as with that of Silcotec in the European market, allows us to continue to move up the value curve by offering more complex integrated manufacturing solutions to existing Volex customers

·     We have identified further opportunities to restructure our operations to improve efficiencies and further reduce costs across our global factory footprint

·     We have delivered further supply-chain improvements, including a major step towards vertically integrating our Power Cords business through the purchase in June of a Chinese cable manufacturing business, Ta Hsing

·     We are in the process of significantly expanding the manufacturing capacity in our Batam factory to allow for the production of high-speed data cables outside of China for the first time

·    We have been successful in winning two new global customers in our Power Cords division which will contribute to revenue in the second half

Financial highlights

·     Underlying gross margins have improved significantly from 18.7% for H1 FY2019 to 23.1% for H1 FY2020 across our Power Cords and Complex Assemblies divisions as a result of rigorous cost control and profit analysis across individual product lines to ensure that margins are at acceptable levels. A beneficial change in the product mix has led to a higher proportion of higher-margin Complex Assemblies activity during the period

·     Overall revenue has increased by 7.3% to $195.7 million as we reposition the business through targeted acquisitions and continue to reduce exposure to low-margin legacy customers

·     Operating cash flow (before movements in working capital) has shown significant improvement, up by 108% to $17.5 million, due to the combined impact of the acquisitions and improved margins

 

Nat Rothschild, Executive Chairman, said:

"I am delighted to announce that Volex plc will recommence the payment of a dividend, starting with an interim dividend of one pence per share. This is the first dividend we have paid since 2013 and it has been made possible due to the significant re-positioning seen across our business during that period. We are now cash generative, creating healthy profits across our two business divisions, and in acquisitive growth mode.

We have a clear strategy to grow this business and increase shareholder value. We understand where we have the capability and expertise to be competitive in our chosen markets. For the first time, the higher-margin Complex Assemblies business made up the majority of our revenue in the first half of FY2020, in accordance with our strategy of repositioning Volex towards higher-margin value-added business. We are well known as a high-volume manufacturer of power cords but it is our Complex Assemblies business that now leads the way in terms of profit generation.

We continue to invest through acquisitions of complementary capabilities and, alongside our customers, in new programmes for data centres and electric vehicles. The businesses that we acquired in the prior year are now embedded within our organisation and operating successfully within the Group. We made another two acquisitions in the first half of this year. Servatron, a US-based integrated solutions manufacturer, expands our capability set and provides additional routes to service customer demand. Ta Hsing, a Chinese manufacturer of cable products, provides us with additional control over our power product supply chain while also reducing our costs.

Within Complex Assemblies we continue to deliver solutions to customers who value our engineering expertise. We use our knowledge in this area to ensure we deliver to the highest quality standards with economical pricing in defensible niche markets such as medical, instrumentation and advanced data centre applications.

Certain customer segments play to the strengths in our Power Cords division. We work best with customers who value high-quality products at a competitive price point. We are highly skilled at developing solutions that balance aesthetics and reliability, which positions us well to work with premium brands. We are working hard to develop new customer relationships as well as deliver innovation and efficiency to our existing customers.

Outlook

Looking forward, we are taking the opportunity to selectively invest in increasing capacity in our key facilities and leverage our global footprint. We are continuing to vertically integrate our power cord manufacturing capability and optimise our supply chain and production capacity to reflect economic trends.

Volex has again delivered a solid first-half performance with growth in trading profit and margins. Despite macroeconomic headwinds, our business is proving resilient. There are further significant opportunities for each of our business units to improve both sales and margin performance through rigorous execution of the strategy, in both the short and longer term. The Board remains confident of delivering its full-year expectations and in the Company's ability to drive shareholder value."

 

 

Contact details

 

Volex plc                                                                                                                     +44 7909 995 887

Nat Rothschild, Executive Chairman

Daren Morris, Chief Financial Officer and Company Secretary

 

N+1 Singer - Nominated Adviser & Joint Broker                                               +44 20 7496 3000

Shaun Dobson

 

Whitman Howard - Joint Broker                                                                          +44 20 7659 1234

Hugh Rich

Nick Lovering

 

 

 

RESULTS FOR THE 26 WEEKS ENDED 29 September 2019

Overview

The Board is pleased to report the results for the half year to 29 September 2019, which has seen the Group continue to grow and deliver improved margins.

 

$'000

 26 weeks ended
29 September

2019

Total

26 weeks ended
30 September

2018

Total

 

Revenue

195,706

182,427

Cost of Sales

(150,429)

(148,404)

Underlying gross profit*

45,277

34,023

Underlying gross margin

23.1%

18.7%

 

 

 

Operating costs

(29,331)

(24,138)

Underlying operating profit*

15,946

9,885

Underlying operating margin

8.1%

5.4%

                   * Before adjusting items and share-based payment charges

Profitability in H1 FY2020 has seen a significant improvement in comparison to H1 FY2019. There are several reasons behind this. The Complex Assemblies business delivers higher margins because it is manufacturing products that require more intensive processing and development. Revenues from Complex Assemblies as a proportion of the combined Group have increased significantly since the comparative period as four of the five recent acquisitions sit within this division.

Margins have also improved due to lower input costs. This has come from a combination of negotiated price reductions from suppliers, lower commodity costs, including for copper, and favourable foreign exchange rates. This has been achieved without the need to add significant additional overhead or central costs.

Revenue has reduced slightly in our Power Cords division as we carefully manage the optimum customer and product mix to improve profitability. In Power Cords we have been very selective in which customer opportunities to pursue to help deliver consistent margins and to retain our commitment to high levels of quality and customer service. We continue to deliberately reduce our exposure to one major legacy customer which is the main reason for the decline in revenue. Our Complex Assemblies division is growing significantly as we see the benefit of our sales strategy bearing fruit and the acquisitions that have taken place over the last 18 months perform well.

One of our strategic objectives for the year is to continue the integration of the businesses we acquired in the last financial year as well as identify further acquisition targets. During the first half of FY2020 we have delivered successfully on both fronts. Our increased profitability in Complex Assemblies includes the contribution of the three businesses we acquired in FY2019: MC Electronics, Silcotec Europe and GTK. Each of these businesses is trading strongly and is operating effectively within the Group.

We acquired Servatron in July 2019 and Ta Hsing in June 2019. Servatron is a strategic addition to our Complex Assemblies division. It brings some strong customer relationships as well as technical capabilities that we did not possess within the Group. It also brings cross-selling opportunities as we introduce the Servatron skill set to our broader customer base. Ta Hsing produces wire and cable products and is a key supplier of our Power Cords division. Our acquisition of this business provides us with an opportunity to vertically integrate an important part of our supply chain.

During the period we recognised some costs associated with the relocation of one of our Chinese factories. We had reached the end of our lease for the manufacturing site and this provided us with an opportunity to rationalise our requirements and move into a building that better fits our future needs. This will result in some restructuring and transfer costs which have been recognised as an operating expense.

Volex plc will start paying a dividend in FY2020. This will commence with an interim dividend of 1.0 pence per share. The dividend will be paid on 5 February 2020 to those shareholders on the register as at 10 January 2020. The divisions are delivering strong and consistent cash flows and this supports our intention to maintain a sustainable and progressive dividend policy as we move forward.

 

Trading performance

Complex Assemblies Division

$'000

 26 weeks ended 29 September

2019

 26 weeks ended 30 September 2018

52 weeks ended

31 March

2019

 

 

 

 

Revenue

104,613

78,192

173,219

Underlying gross profit

26,917

15,224

37,141

Underlying gross margin

25.7%

19.5%

21.4%

 

 

 

 

Operating costs

(15,196)

(9,976)

(23,668)

Underlying operating profit

11,721

5,248

13,473

Underlying operating margin

11.2%

6.7%

7.8%

 

Volex designs and manufactures a broad range of cables and connectors that transfer electrical, electronic, radio-frequency and optical data. Volex products are used in a variety of applications including data networking equipment, data centres, wireless base stations and cell site installations, mobile computing devices, medical equipment, factory automation, vehicle telematics, agricultural equipment and alternative energy generation.

Revenue for H1 FY2020 was $104.6 million, up 33.8% on the prior period. This includes two months of Servatron revenue in H1 FY2020 and a full period of the three FY2019 acquisitions.

There has been an improvement to both underlying gross margin and underlying operating margin. This has been achieved through an improvement in product mix, and savings in production costs. The strength of the US dollar, which is the primary sales currency, has also helped margins.

The acquisitions in FY2019 delivered blue-chip customers, processes and excellent people to our organisation. There are areas of the market where we deliver products that exceed our customers' rigorous quality standards in applications where accuracy and reliability are critical. Our performance in the healthcare and data centre segments continues to be particularly strong. As we move forward, we are looking at how to leverage the experience we have in these segments to adjacent markets such as aerospace and defence.

Our high-speed data cables offer a market-leading solution in the demanding data centre space. Production of these cables was predominantly in China, and a significant volume of the sales are in the US. As a result of the trade tariffs introduced in 2018 on certain goods imported from China to the US, we have made a decision to move a proportion of production of these cables to our factory in Indonesia. This facility will ramp up to production volumes of these products in H2 FY2020. This demonstrates the value of our global manufacturing capability.

Servatron was acquired at the end of July, and the results above include two months of revenue which is $6.3 million. The acquisition introduces new capabilities to the Group in respect of printed circuit board assemblies, higher levels of system integration and complementary test technology. As already mentioned, there are significant cross-selling opportunities, and the ability to respond to the frequent requests we receive from our customers to deliver more complex assemblies.

The process of integrating and embedding the acquisitions into our global business has provided a platform to share best practice and drive consistency across the Group. This will benefit customer satisfaction and retention as well as providing an opportunity to further enhance margins.

 

Power Cords Division

$'000

 26 weeks ended 29 September

2019

 26 weeks ended 30 September

2018

52 weeks ended

31 March

2019

 

 

 

 

Revenue

91,093

104,235

198,885

Underlying gross profit

18,360

18,799

36,377

Underlying gross margin

20.2%

18.0%

18.3%

 

 

 

 

Operating costs

(11,213)

(10,735)

(23,148)

Underlying operating profit

7,147

8,064

13,229

Underlying operating margin

7.8%

7.7%

6.7%

 

Volex designs and manufactures power cords that are sold to the manufacturers of a broad range of electrical and electronic devices and appliances. Volex products are used in home entertainment and home computing devices, domestic and personal healthcare appliances, power tools and electric vehicles. Many of our customers are global household names operating in premium segments of the consumer market.

Revenues in the Power Cords segment have fallen in comparison to the first half of the previous financial year. The reduction was expected and is largely due to our decision to reduce our business with a significant consumer electronics customer. There will be further decline from this customer in the second half of the year, which will be partially offset by growth from programmes with new customers. We are also evaluating acquisition opportunities in the power space which is highly fragmented and ripe for consolidation.

Gross margins have improved from 18.0% to 20.2%. This has been achieved by identifying the correct price points for products and working on delivering efficiency. Most sales are in US dollars but a proportion of the cost base is in the local currency relevant to the production location. The strength of the dollar has helped improve margins, as have lower commodity costs, particularly in respect of copper.

Volex Power Cords products are known for their quality and solid engineering. A number of our competitors price very aggressively to secure market share, but it does not make commercial sense for Volex to compete on price in these situations because the margins are not acceptable given our quality requirements. We continue to focus on being profitable and delivering cost-effective solutions in the most efficient way. This includes our efforts to rationalise our product set. By producing fewer variants of our key products, we can reduce our costs, improving our pricing to customers and increasing our margins. An additional advantage of streamlining our offer is that we can simplify the quotation process and improve customer response times. It will take time for the benefits from this activity to come through because it will be necessary to seek relevant safety approval certificates.

The market for Power Cords is changing to accommodate consumer demands. We deploy our best-in-class engineering experience to help customers meet the challenges of safely delivering power to their new products. It is a combination of our ability to innovate as well as deliver on our commitment to quality that has helped us win new global customers during the period.

There is a culture of continual improvement across our manufacturing sites and we are investing in new technology to automate specific areas of our production. This activity is concentrated on where it will deliver the biggest benefit. As our manufacturing costs are reduced, we are able to re-engage with price-sensitive customers with a view to winning back share.

 

Group adjusting items and share-based payments

Adjusting items and share-based payments totalled $5.6 million in the period (H1 FY2019: $4.2 million).

Associated with the acquisitions, Volex has recognised certain intangible assets including customer relationships and order backlogs. As at 29 September 2019, the intangibles associated with Ta Hsing and Servatron are provisional and subject to change during the annual subsequent measurement period following each acquisition. The amortisation of these intangibles is non-cash and totals $2.8 million for the period.

During the acquisition process, we identify where there are key senior managers who have a critical role to play in the integration and successful operation of the acquired operation. Retaining these individuals is an important part of our acquisition strategy. As well as offering a competitive salary we also use share awards with strict performance criteria to retain key people and recognise exceptional performance in respect of the acquired business. This has resulted in an increase in the level of share-based payments during the period.

In H1 FY2019, the Group recognised $1.9 million of restructuring costs. In H1 FY2020, there have been no restructuring costs recognised as adjusting items. The prior period included $1.5 million associated with restructuring of the Shenzhen factory, a further $0.7 million expense relating to the closure of the facility in India and the release of a $0.3 million provision relating to an old potential claim. Where restructuring or re-configuration activity has occurred in the current period, it has been recognised as an operating expense in the relevant division. This is because the extent of the restructuring is not considered significant enough to require separate presentation.

During H1 FY2019 we incurred a total of $0.8 million of professional fees on the acquisitions of MC Electronics and Silcotec as well as certain post-acquisition retention payments. During the first half of FY2020, costs associated with the acquisitions have been less than $0.2 million.

Group taxation

The Group incurred a tax charge of $2.0 million (H1 FY2019: $1.5 million), representing an underlying effective tax rate of 15.7% (H1 FY2019: 18.1%). This is slightly higher than the estimated ETR for the full year. The decrease in ETR compared to 2019 is mainly due to the utilisation of tax losses within the Group.

Group net debt and cash flows

Net cash (before the IFRS 16 adjustment) decreased from $20.7 million at 31 March 2019 to $7.9 million at 29 September 2019. The Group generated a free cash flow after capital expenditure and tax, but before the cost of acquisitions, of $11.7 million. This included a cash operating inflow of $16.1 million and an adverse working capital movement of $1.3 million, as well as capital expenditure of $1.9 million and tax paid of $2.3 million.  Under IFRS 16 Leases, a liability is recognised for the present value of the future commitment under operating leases.  This liability totalled $7.2 million and is required to be shown within net debt.  This produces a statutory net cash position of $0.6 million.  As at 1 November 2019, net cash stood at $18.2 million.

The Servatron acquisition required $13.4 million of cash consideration and involved the assumption of $5.4 million of net debt. Ta Hsing cost $5.7 million after taking into account the cash on hand in the business.

In July, the Group extended its $30 million revolving credit facility with Lloyds Bank plc and HSBC UK Bank plc for three years on improved terms. The key terms of the extension were: a 40 basis point reduction in the non-utilisation fee and a 70 basis point reduction in interest-rate margin; fewer restrictions in key operational covenants; and a $10 million uncommitted "accordion" feature to provide further capacity, up to a total RCF limit of $40 million, for potential future acquisitions to support the group's strategy.

 

Risks and uncertainties

Risks to Volex are anticipated and regularly assessed and internal controls are enhanced where necessary to ensure that such risks are appropriately mitigated. There are a number of potential risks that could have a material impact on the Group's financial performance. The principal risks and uncertainties include competitive threats, legal and regulatory issues, dependency on key suppliers or customers, movements in commodity prices or exchange rates, and quality issues. These risks and the relevant risk-mitigation activities are set out in the FY2019 Annual Report and Accounts on pages 24 to 27, a copy of which is available on the website at www.volex.com.

 

 

 

 

Nat Rothschild                                                                                     Daren Morris

Group Executive Chairman                                                                Group Chief Financial Officer

13 November 2019                                                                             13 November 2019

 

 

Unaudited consolidated income statement                                        

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

 

 

26 weeks ended 29 September 2019

26 weeks ended 30 September 2018

 

 

Before

Adjusting items

Adjusting

items and share-based payments

Total

Before

Adjusting items

Adjusting

items and share-based payments

Total

 

Notes

$'000

$'000

$'000

$'000

$'000

$'000

 

 

 

 

 

 

 

 

Revenue

2

195,706

-

195,706

182,427

-

182,427

Cost of sales

 

(150,429)

-

(150,429)

(148,404)

(1,666)

(150,070)

Gross profit

 

45,277

-

45,277

34,023

(1,666)

32,357

Operating expenses

 

(29,331)

(5,559)

(34,890)

(24,138)

(2,495)

(26,633)

Operating profit/(loss)

2

15,946

(5,559)

10,387

9,885

(4,161)

5,724

Share of net loss from associates

 

-

-

-

(210)

-

(210)

Finance income

 

93

-

93

42

-

42

Finance costs

 

(776)

-

(776)

(703)

-

(703)

Profit/(loss) on ordinary activities before taxation

 

15,263

(5,559)

9,704

9,014

(4,161)

4,853

Taxation

4

(2,401)

451

(1,950)

(1,628)

88

(1,540)

Profit/(loss) for the period attributable to the owners of the parent

 

12,862

(5,108)

7,754

7,386

(4,073)

3,313

Earnings per share (cents)

 

 

 

 

 

 

 

Basic

5

8.8

 

5.3

6.0

 

2.7

Diluted

5

8.5

 

5.1

5.8

 

2.6

 

 

 

 

52 weeks ended 31 March 2019

 

 

 

 

 

Before

Adjusting items

Adjusting

Items and share-based payments

Total

 

Notes

 

 

 

$'000

$'000

$'000

 

 

 

 

 

 

 

 

Revenue

2

 

 

 

372,104

-

372,104

Cost of sales

 

 

 

 

(298,586)

-

(298,586)

Gross profit

 

 

 

 

73,518

-

73,518

Operating expenses

 

 

 

 

(51,912)

(8,614)

(60,526)

Operating profit/(loss)

2

 

 

 

21,606

(8,614)

12,992

Share of net loss from associates

 

 

 

 

(210)

-

(210)

Finance income

 

 

 

 

129

-

129

Finance costs

 

 

 

 

(1,276)

-

(1,276)

Profit/(loss) on ordinary activities before taxation

 

 

 

 

20,249

(8,614)

11,635

Taxation

4

 

 

 

(2,650)

221

(2,429)

Profit/(loss) for the period attributable to the owners of the parent

 

 

 

 

17,599

(8,393)

9,206

Earnings per share (cents)

 

 

 

 

 

 

 

Basic

5

 

 

 

13.1

 

6.9

Diluted

5

 

 

 

12.7

 

6.7

 

 

 

Unaudited consolidated statement of comprehensive income

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

 

 

26 weeks to

 29 September

2019

 

26 weeks to

 30 September

2018

(Audited)

52 weeks to

 31 March

2019

 

$'000

$'000

$'000

Profit for the period

7,754

3,313

9,206

 

 

Items that will not be reclassified subsequently to profit or loss:

 

Actuarial (loss)/gain on defined benefit pension schemes

(488)

Tax relating to items that will not be reclassified

-

-

-

 

(488)

Items that may be reclassified subsequently to profit or loss:

 

(Loss)/gain arising on cash flow hedges during the period

(771)

Exchange (loss)/gain on translation of foreign operations

(1,558)

Tax relating to items that may be reclassified

-

-

-

 

(2,329)

(189)

759

 

 

 

 

Other comprehensive (loss)/income for the period

(2,817)

142

1,064

 

Total comprehensive income for the period

4,937

3,455

10,270

 

 

 

 

 

Unaudited consolidated statement of financial position                              

As at 29 September 2019 (30 September 2018)

 

 

 

Note

 

29 September 2019

$'000

 

30 September

 2018

$'000

(Audited)

31 March

2019

$'000

Non-current assets

 

 

 

 

Goodwill

 

25,751

7,587

17,531

Other intangible assets

 

18,498

6,131

11,115

Property, plant and equipment

 

22,152

20,583

20,420

Right of use assets

 

5,709

-

-

Investments in associates

 

-

-

-

Other receivables

 

2,829

2,321

2,704

Deferred tax asset

 

3,353

4,311

4,271

 

 

78,292

40,933

56,041

Current assets

 

 

 

 

Inventories

 

54,394

51,536

49,122

Trade receivables

 

76,587

72,106

71,307

Other receivables

 

7,162

6,917

8,448

Current tax assets

 

1,772

713

1,092

Derivative financial instruments

 

-

46

374

Cash and bank balances

8

17,880

24,647

20,913

 

 

157,795

155,965

151,256

Total assets

 

236,087

196,898

207,297

Current liabilities

 

 

 

 

Borrowings

8

9,922

-

320

Trade payables

 

39,815

46,350

45,863

Other payables

 

35,958

30,074

30,212

Current tax liabilities

 

4,299

6,416

4,811

Retirement benefit obligation

 

989

881

975

Lease liabilities

 

3,568

-

-

Provisions

 

661

703

1,121

Derivatives financial instruments

 

393

476

-

 

 

95,605

84,900

83,302

Net current assets

 

62,190

71,065

67,954

Non-current liabilities

 

 

 

 

Borrowing

 

38

-

-

Other payables

 

1,557

1,419

988

Non current tax liabilities

 

1,134

-

1,134

Deferred tax liabilities

 

6,529

2,568

4,447

Retirement benefit obligation

 

1,378

1,466

1,460

Derivative financial instruments

 

                   -

10

-

Lease liabilities

 

3,715

-

-

Provisions

 

263

343

318

 

 

14,614

5,806

8,347

Total liabilities

 

110,219

90,706

91,649

Net assets

 

125,868

106,192

115,648

 

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

6

59,566

58,111

58,792

Share premium account

 

46,414

42,807

44,532

Non-distributable reserve

 

2,455

2,455

2,455

Hedging and translation reserve

 

(9,720)

(8,339)

(7,391)

Own shares

7

(1,509)

(792)

(1,890)

Retained earnings

 

28,662

11,950

19,150

Total equity

 

125,868

106,192

115,648

 

Unaudited Consolidated Statement of Changes in Equity

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

 

Share capital

Share premium account

Non-distributable reserves

Hedging and translation reserve

Own shares

Retained earnings/ (losses)

Total

equity

 

$'000

$'000

$'000

$'000

$'000

$'000

$'000

Balance 1 April 2018

39,755

7,122

2,455

(8,150)

(867)

7,829

48,144

Profit for the period attributable to the owners of the parent

-

-

-

-

-

3,313

3,313

Other comprehensive income/ (loss) for the period

-

-

-

(189)

-

331

142

Total comprehensive income/ (loss) for the period

-

-

-

(189)

-

3,644

3,455

Shares issued

18,205

35,685

-

-

-

-

53,890

Exercise of deferred bonus shares

151

-

-

-

-

(151)

-

Own shares sold/(utilised) in the period

-

-

-

-

75

(31)

44

Reserve entry for share option charges/(credit)

-

-

-

-

-

659

659

Balance at 30 September 2018

58,111

42,807

2,455

(8,339)

(792)

11,950

106,192

 

 

 

 

 

 

 

 

Balance 31 March 2019

58,792

44,532

2,455

(7,391)

(1,890)

19,150

115,648

Profit for the period attributable to the owners of the parent

-

-

-

-

-

7,754

7,754

Other comprehensive income/ (loss) for the period

-

-

-

(2,329)

-

(488)

(2,817)

Total comprehensive income/ (loss) for the period

-

-

-

(2,329)

-

7,266

4,937

Shares issued

692

1,882

-

-

-

-

2,574

Exercise of deferred bonus shares

82

-

-

-

-

(82)

-

Own shares sold/(utilised) in the period

-

-

-

-

381

(139)

242

Reserve entry for share option charges/(credit)

-

-

-

-

-

2,467

2,467

Balance at 29 September 2019

59,566

46,414

2,455

(9,720)

(1,509)

28,662

125,868

 

Unaudited consolidated statement of cash flows

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

 

 

 

Notes

 

26 weeks to

 29 September

2019

 

26 weeks to

 30 September

2018

(Audited)

52 weeks to

 31 March

2019

 

 

$'000

$'000

$'000

Profit for the period

 

7,754

3,313

9,206

Adjustments for:

 

 

 

 

Finance income

 

(92)

(42)

(129)

Finance costs

 

775

703

1,276

Income tax expense

 

1,950

1,540

2,429

Share of net loss from associates

 

-

210

210

Depreciation of property, plant and equipment

 

1,836

1,594

3,318

Impairment of property, plant and equipment

 

-

249

-

Effects of foreign exchange rate changes

 

7

-

67

Amortisation of intangible assets

 

2,811

630

2,451

Loss on disposal of property, plant and equipment

 

521

125

324

Share option charge

 

2,629

832

2,388

(Decrease)/increase in provisions

 

(741)

(748)

(390)

Operating cash flow before movements in working capital

 

17,450

8,406

21,150

 

 

 

 

 

Decrease/(increase) in inventories

 

1,153

(2,790)

606

Decrease/(increase) in receivables

 

4,534

(12,888)

(10,196)

(Decrease)/increase in payables

 

(6,974)

(11,497)

(15,068)

Movement in working capital

 

(1,287)

(27,175)

(24,658)

 

 

 

 

 

Cash generated by operations

 

16,163

(18,769)

(3,508)

Cash generated by operations before adjusting items

 

17,574

(16,219)

(236)

Cash utilised by adjusting items

 

(1,411)

(2,550)

(3,272)

Taxation paid

 

(2,330)

(942)

(2,501)

Interest paid

 

(483)

(438)

(734)

Net cash generated from/(used in) operating activities

 

13,350

(20,149)

(6,743)

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

Interest received

 

7

42

11

Acquisition of businesses, net of cash acquired

9

(22,701)

(9,398)

(23,843)

Proceeds on disposal property, plant and equipment

 

177

10

512

Purchases of property, plant and equipment              

 

(1,915)

(1,257)

(3,180)

Purchases of intangible assets

 

(7)

(161)

(163)

Utilisation of own shares

 

394

42

(1,023)

Purchase of preference shares

 

-

(1,000)

(1,300)

Net cash generated (used in)/from investing activities               

 

(24,045)

(11,722)

(28,986)

 

 

 

 

 

Cash flow before financing activities

 

(10,695)

(31,871)

(35,729)

Cash (used)/generated before adjusting items

 

(9,284)

(29,321)

(32,457)

Cash utilised in respect of adjusting items

 

(1,411)

(2,550)

(3,272)

 

 

 

 

Unaudited consolidated statement of cash flows (continued)

For the 26 weeks ended 29 September 2019 (26 weeks ended 30 September 2018)

 

 

 

 

 

Notes

 

26 weeks to

 29 September

2019

 

26 weeks to

 30 September

2018

(Audited)

52 weeks to

 31 March

2019

 

 

$'000

$'000

$'000

Cash flow before financing activities

 

(10,695)

(31,871)

(35,729)

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

Repayment of borrowings

 

(7,097)

(12,826)

(12,826)

Refinancing costs paid

 

(592)

-

-

New bank loan paid

 

7,000

-

-

Payment of lease liabilities

 

(1,257)

-

-

Proceeds on issue of shares

 

-

46,685

46,685

Net cash generated (used in)/from financing activities

8

(1,946)

33,859

33,859

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(12,641)

1,988

(1,870)

 

 

 

 

 

Cash and cash equivalents at beginning of period

8

20,593

22,981

22,981

Effect of foreign exchange rate changes

 

(550)

(322)

(518)

Cash and cash equivalents at end of period

8

7,402

24,647

20,593

 

Notes to the Interim Statements

1. Basis of preparation

These interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the 52 weeks ended 31 March 2019, which were prepared in accordance with IFRSs as adopted by the European Union.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information presented for the 26 weeks ended 29 September 2019 ('H1 FY2020') and the 26 weeks ended 30 September 2018 ('H1 FY2019') has not been reviewed by the auditors. The financial information for the 52 weeks ended 31 March 2019 ('FY 2019') is extracted and abridged from the Group's full accounts for that year. The statutory accounts for FY 2019 have been filed with the Registrar of Companies for England and Wales and have been reported on by the Group's auditors. The Report of the Auditors was not qualified and did not contain a statement under section 498 of the Companies Act 2006.

The Directors confirm that, to the best of their knowledge, the interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union and the AIM Rules for Companies, and that the interim report includes a fair review of the information required. The interim report was approved by the Board of Directors on 13 November 2019.

This interim report can be downloaded or viewed via the Group's website at www.volex.com. Copies of the annual report for the 52 weeks ended 31 March 2019 are available at the Company's registered office at Holbrook House, 34-38 Hill Rise, Richmond, Surrey, London, TW10 6UA, UK, and can also be downloaded or viewed via the Group's website.

In July 2019 the Group extended its multi-currency revolving credit facility ('RCF') to July 2022 on improved terms. The facility has an available limit of $30,000,000 (FY2019: $30,000,000). As at 29 September 2019 the Group had net funds of $637,000, or $7,920,000 excluding IFRS 16 lease liabilities (FY2019: $20,690,000, H1 FY2019: $24,936,000). The reduction during the period includes a $22,701,000 (FY2019: $23,843,000, H1 FY2019: $9,398,000) net outflow associated with the completion of two acquisitions.

The Group's forecast and projections, taking reasonable account of possible changes in trading performance, show that the Group should continue to operate with net funds (excluding lease liability) for the foreseeable future. As of 14 November 2019, the Group is not committed to any further acquisitions. Should any opportunities under review develop, the Group will consider the appropriate funding sources at the time. The Directors therefore believe that the Group is well placed to manage its business within the available facilities. Accordingly, they continue to adopt the going concern basis in preparing these condensed financial statements.

These condensed financial statements have also been prepared using accounting policies consistent with International Financial Reporting Standards as adopted for use in the European Union ('IFRS') and consistent with those disclosed in the annual report and accounts for the year ended 31 March 2019, with the exception of the adoption of IFRS 16 Leases.

The Group implemented IFRS 16 Leases with effect from 1 April 2019. The standard provides a single lessee accounting model, requiring the recognition of right-of-use assets and lease obligations. The Group has applied IFRS 16 using the modified retrospective approach under which the cumulative effect of initial application has been recognised in retained earnings on 1 April 2019. The comparative information has not been restated and continues to be reported under IAS 17. As part of the transition the Group has adopted a number of the practical expedients:

·     leases less than 12 months at transition have been treated as short-life leases;

·     leases of low value (defined as less than $5k) continue to be accounted for under an accruals basis;

·     a portfolio approach has been adopted which allows a single discount rate to be applied to a portfolio of leases with reasonably similar characteristics; and 

·     onerous lease provisions can be offset against the right-of-use asset.

 

On transition, the Group recognised $6,997,000 of right-of-use assets, $7,245,000 of lease liabilities and an amount of $247,000 recognised against the onerous lease provision. The Group recognised depreciation of $1,288,000 and interest costs of $210,000 in respect of leases in the period ended 29 September 2019.

Reconciliation of the lease liabilities at 1 April 2019 to the operating lease commitments at 31 March 2019

                                                                                                                                                                                   $'000

Operating lease commitments disclosed as at 31 March 2019                                                                  10,227

Discounted using the lessee's incremental borrowing rate                                                                         (1,535)

Less: short-term leases not recognised as a liability                                                                                       (965)

Less: low-value leases not recognised as a liability                                                                                             (2)

Less: adjustments due to treatment of extension and termination options                                                 (480)

Lease liability recognised as at 1 April 2019                                                                                                     7,245

Of which:                                                                                                                                                                           

Current lease liabilities                                                                                                                                      (4,011)

Non-current lease liabilities                                                                                                                              (3,234)

                                                                                                                                                                                            

Impact of standards issued but not yet applied by the Group

There are no new standards, amendments to standards or interpretations that are expected to have a material impact on the Group's results.

2. Business and geographical segments

Business segments

The internal reporting provided to the Group's Board for the purpose of resource allocation and assessment of Group performance is based upon the nature of products which the Group supplies. In addition to the operating divisions, a Central division exists to capture all of the corporate costs incurred in supporting the operations.

Division

Description

Power Cords

The sale and manufacture of electrical power products to manufacturers of electrical/electronic devices and appliances. These include laptop/desktop computers, printers, televisions, power tools, floor-cleaning equipment and electric vehicles.

Complex Assemblies (formerly Cable Assemblies)

The sale and manufacture of products for the transfer of electronic, radio-frequency and optical data. These can range from simple USB cables to high-speed complex assemblies and are used in numerous devices including medical equipment, data centres, telecoms networks and industrial robotics.

Central

Corporate costs that are not directly attributable to the manufacture and sale of the Group's products but which support the Group in its operations. Included within this division are the costs incurred by the executive management team and the corporate head office.

 

The following is an analysis of the Group's revenues and results by reportable segment.

 

26 weeks to 29 September 2019

26 weeks to 30 September 2018

 

Revenue

$'000

Profit/(loss)

$'000

Revenue

$'000

Profit/(loss)

$'000

 

 

 

 

 

Power Cords

91,093

7,147

104,235

8,064

Complex Assemblies

104,613

11,721

78,192

5,248

Unallocated central costs (excluding share-based payments)

 

(2,922)

 

(3,427)

Divisional results before share-based payments and adjusting items

195,706

15,946

182,427

9,885

Adjusting items

 

(2,931)

 

(3,329)

Share-based payments

 

(2,628)

 

(832)

Operating profit

 

10,387

 

5,724

Share of net loss from associates

 

-

 

(210)

Finance income

 

93

 

42

Finance costs

 

(776)

 

(703)

Profit before tax

 

9,704

 

4,853

Tax

 

(1,950)

 

(1,540)

Profit after tax

 

7,754

 

3,313

 

 

 

52 weeks to 31 March 2019

 

 

 

Revenue

$'000

Profit/(loss)

$'000

 

 

 

 

 

Power Cords

 

 

198,885

13,229

Complex Assemblies

 

 

173,219

13,473

Unallocated central costs (excluding share-based payments)

 

 

-

(5,096)

Divisional results before share-based payments and Adjusting items

 

 

372,104

21,606

Adjusting items

 

 

 

(6,226)

Share-based payments

 

 

 

(2,388)

Operating profit

 

 

 

12,992

Share of net loss from associates

 

 

 

(210)

Finance income

 

 

 

129

Finance costs

 

 

 

(1,276)

Profit before tax

 

 

 

11,635

Tax

 

 

 

(2,429)

Profit after tax

 

 

 

9,206

The accounting policies of the reportable segments are in accordance with the Group's accounting policies.

The adjusting items charge within operating profit for the period of $2,931,000 (H1 FY2019: $3,329,000, FY2019: $6,226,000) was split nil (H1 FY2019: $1,889,000, FY2019: $1,672,000) to Power Cords, $2,769,000 (H1 FY2019: $1,440,000, FY2019: $3,589,000) to Complex Assemblies and $162,000 (H1 FY2019: $nil, FY2019: $965,000) to Central.

 

 

Other segmental information

 

External revenue

Non-current assets

(excluding deferred tax assets)

Geographical segments

 

 

 

 

 

Asia (excluding India)

75,303

86,744

164,343

19,264

16,953

16,618

North America

68,231

58,325

119,623

15,963

2,125

2,067

Europe

52,172

35,238

85,883

39,709

17,052

33,083

India

-

2,120

2,255

2

492

2

 

195,706

182,427

372,104

74,938

36,622

51,770

 

3. Adjusting items and share-based payments

 

 

26 weeks to

 29 September

2019

$'000

 

26 weeks to

 30 September

2018

$'000

(Audited)

52 weeks to

31 March

2019

$'000

Amortisation of acquired intangibles

2,769

566

1,983

Acquisition costs

162

824

1,821

Restructuring costs

-

1,939

1,942

Pension past service costs

-

-

480

Total adjusting items

2,931

3,329

6,226

Adjusting items tax expenses

(451)

(88)

(221)

Total adjusting items

2,480

3,241

6,005

Share-based payments charge

2,628

832

2,388

Adjusting items and share-based payments

5,108

4,073

8,393

 

Adjusting items include costs that are one-off in nature and significant (such as significant restructuring costs, impairment charges or acquisition related costs) and the non-cash amortisation of intangible assets recognised on acquisition.

The adjusting items and share-based payments are included under the statutory classification appropriate to their nature but are separately disclosed on the face of the income statement to assist in understanding the underlying financial performance of the Group.

Associated with the acquisitions, the Group has recognised certain intangible assets related to customer relationships and order backlogs. During H1 FY2020, the amortisation charge on these intangible assets totalled $2,769,000 (FY2019 H1 $566,000, FY2019: $1,983,000). The amortisation of these intangibles is non-cash and split between Silcotec ($821,000), MC Electronics ($78,000), GTK ($824,000) and Servatron ($1,046,000). As at 29 September 2019, the attributed values of the intangibles related to Servatron and Ta Hsing are provisional.

Acquisition-related costs of $162,000 (FY2019 H1: $824,000, FY2019: $1,821,000) are split between $104,000 for Servatron and $58,000 for Ta Hsing. These costs cover legal fees associated with the transactions.

In the prior year, the Group incurred $1,942,000 (H1 FY2019: $ 1,939,000) of restructuring costs. Following a further decline in revenue with the Power Cords division's largest customer, further restructuring costs of $1,459,000 were incurred at our Shenzhen factory, primarily in relation to severance costs. In addition, during the prior period, the decision was taken to close the Indian factory. As part of this closure, the Group incurred $478,000 of closure costs, principally in relation to severance fees, retention bonuses paid to several key staff (in order that they remain and work on an orderly closure of the factory) and the write-off of assets no longer deemed recoverable. Following a review of the organisational structure, a number of senior roles were also made redundant, resulting in an expense of $270,000. Off-setting these charges was a $265,000 credit resulting from the release of a provision made several years ago for minimum order quantity commitments that became time barred.

During the prior year the Group recognised a one-off pension past service cost of $480,000 as a result of Guaranteed Minimum Pension (GMP) equalisation. This is a past service cost that pension schemes that had "contracted out" of the State Earnings Related Pension Scheme must now recognise following the Lloyds Banking Group judgement in October 2018. This judgement requires the equalisation of male and female members' benefits for the effect of unequal GMPs.

4. Tax charge 

The Group tax charge for the period is based on the forecast tax charge for the year as a whole and has been influenced by the differing tax rates in the UK and the various overseas countries in which the Group operates.

 

5. Earnings per ordinary share

The calculations of the earnings per share are based on the following data:

 

 

 

Earnings/(loss)

26 weeks to

29 September 2019

$'000

26 weeks to

 30 September 2018

$'000

52 weeks to

31 March

2019

$'000

Earnings for the purpose of basic earnings per share

7,754

3,313

9,206

Adjustments for:

 

 

 

Adjusting items

2,931

3,329

6,226

Share based payments charge

2,628

832

2,388

Tax effect of above adjustments and other adjusting item tax movements

(451)

(88)

(221)

Underlying earnings

12,862

7,386

17,599

 

 

 

 

Weighted average number of ordinary shares

No. shares

No. shares

No. shares

Weighted average number of ordinary shares for the purpose of basic earnings per share

          146,651,798

123,824,603

134,382,209

Effect of dilutive potential ordinary shares - share options

               5,807,934

3,503,812

3,892,712

Weighted average number of ordinary shares for the purpose of diluted earnings per share

          152,459,732

127,328,415

138,274,921

 

Basic earnings per share

Cents

Cents

Cents

Basic earnings per share from continuing operations

5.3

2.7

6.9

Adjustments for:       

 

 

 

Adjusting items

2.0

2.7

4.6

Share based payments charge

1.8

0.7

1.8

Tax effect of above adjustments and other adjusting items tax movements

(0.3)

(0.1)

(0.2)

Underlying basic earnings per share

8.8

6.0

13.1

 

 

 

 

 

Diluted earnings per share

26 weeks to

29 September 2019

$'000

26 weeks to

 30 September 2018

$'000

52 weeks to

31 March

2019

$'000

Diluted earnings per share

5.1

2.6

6.7

Adjustments for:

 

 

 

Adjusting items

2.0

2.6

4.5

Share based payments charge

1.7

0.7

1.7

Tax effect of above adjustments and other adjusting items tax movements

(0.3)

(0.1)

(0.2)

Underlying diluted earnings per share

8.5

5.8

12.7

 

The underlying earnings per share has been calculated on the basis of continuing activities before adjusting items and the share-based payments charge, net of tax. The Directors consider that this earnings per share calculation gives a better understanding of the Group's earnings per share in the current and prior period.

 

6. Share capital

 

 

 

 

 

 

26 weeks to

 29 September 2019

$'000

 

26 weeks to

 30 September 2018

$'000

(Audited)

52 weeks to

31 March

2019

$'000

Issued and fully paid:

149,868,439 (FY2019: 147,367,933) Ordinary shares of 25p each

 

59,566

 

58,111

 

58,792

 

On 31 July 2019, the Group issued 2,233,712 shares as part of the acquisition of Servatron.

On 7 August 2019, the Group issued 266,794 shares under the 2018 deferred share bonus plan.

7. Own shares

 

 

 

 

 

 

26 weeks to

 29 September 2019

$'000

 

26 weeks to

 30 September 2018

$'000

(Audited)

52 weeks to

31 March

2019

$'000

At the start of the period

1,890

867

867

Disposed of in the period on exercise of options

(381)

(75)

(75)

Purchase of shares

-

-

1,098

At end of the period

1,509

792

1,890

 

The own shares reserve represents the cost of shares in the Company held by the Volex Group plc Employee Share Trust to satisfy future share option exercises under the Group's share option schemes.

 

On the 26 and 29 April 2019, the Trust disposed of 748,294 shares to satisfy the exercise of share options. The number of ordinary shares held by the Volex Group plc Employee Share Trust at 29 September 2019 was 1,410,983 (H1 FY2019: 1,159,278, FY2019: 2,159,277).

 

8. Analysis of net funds/(debt)

 

 

1 April

2019

$'000

 

IFRS 16 Transition

$'000

 

Business combination

$'000

 

Cash

flow

$'000

 

Exchange movement $'000

Other

non-cash changes

$'000

 

29 September 2019

$'000

Cash and cash equivalents

20,593

-

(5,771)

(6,870)

(550)

-

7,402

Bank loans

-

-

(135)

97

-

-

(38)

Debt issue costs

97

-

-

592

(6)

(127)

556

Lease liability

 

(7,245)

(1,589)

1,335

216

-

(7,283)

Net funds

20,690

(7,245)

(7,495)

(4,846)

(340)

(127)

637

 

 

 

 

 

 

29 September 2019

$'000

 

30 September 2018

$'000

(Audited)

31 March

2019

$'000

Cash and bank balances

17,880

24,647

20,913

Overdrafts (included in short term borrowings)

(10,478)

-

(320)

Cash and cash equivalents

7,402

24,647

20,593

 

The carrying amount of the Group's financial assets and liabilities is generally the same as their fair value.

9. Acquisitions

Servatron Inc

On 31 July 2019 Volex plc completed the acquisition of Servatron Inc ('Servatron'), a North American-based manufacturer of printed circuit board assemblies ('PCBA'), box builds and complete sub-assembly solutions. Servatron's business is a complementary fit with Volex's strategy to maintain and build leading positions in niche sectors with structural growth drivers and defensive characteristics. Servatron adds complementary technologies including PCBA manufacturing, state-of-the-art test capabilities, and higher-level system integration.

Servatron brings expertise in test technologies, higher levels of system integration and PCBA assembly expertise. Combining our cable-assemblies expertise and R&D skills will drive revenues for the Group and strengthen our footprint in North America. The acquisition provides the opportunity to increase organic growth through value-added services for existing cable harness customers and incorporates into our business a skilled local workforce and management team.

The purchase has been accounted for as a business combination. Details of the purchase consideration, the net assets acquired and goodwill are as follows:

Fair value of consideration transferred

$'000

Cash paid

13,355

Ordinary shares issued

2,574

Contingent consideration

3,230

Total purchase consideration

19,159

 

The fair value of the 2,233,712 shares issued as part of the consideration was based on the published closing share price on 31 July 2019, the last trading date preceding the share issue of £0.93.

The contingent consideration is dependent upon certain EBITDA targets being met post-acquisition during the 2020 and 2021 calendar years. The fair value above has been based on the probable outcome of each based upon the information available at 29 September 2019. As more information comes to light, the fair value will be adjusted.

As part of the acquisition it was agreed 3,000,000 share options would be granted to incentivise and retain key local management. The options are dependent upon Servatron achieving certain profit and employment targets. As these options are conditional on continued employment these are accounted for as post-acquisition expense. 

The provisional fair value amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:

 

 

Provisional Fair Value

$'000

Identifiable intangible assets

10,500

Other intangibles

49

Property, plant and equipment

1,933

Inventories

5,483

Trade receivables

5,019

Trade payables

(1,040)

Other debtors and creditors

(2,461)

Overdraft

(3,677)

Bank loan

(135)

Deferred taxes

(2,490)

Lease obligation

(1,589)

Total identifiable assets

                       11,592

Goodwill

7,567

Consideration

19,159

 

An exercise has been conducted to assess the provisional fair value of assets and liabilities acquired. This exercise identified customer relationships and order backlog intangible assets.

The fair value adjustments are provisional and will be finalised within 12 months of the acquisition date. Any resulting changes in the fair values will have an impact on the acquisition accounting and will result in a reallocation between the assets and goodwill and a possible adjustment to the amortisation charge shown in the income statement.

The provisional goodwill balance recognised above includes certain intangible assets that cannot be separately identified and measured due to their nature. This includes control over the acquired business, the skills and experience of the assembled workforce, and the anticipated synergies arising on integration.

In H1 FY2020, Servatron contributed $6,282,000 to Group revenue and $466,000 to adjusted operating profit. Associated acquisition costs of $104,000 and intangible asset amortisation of $1,046,000 have both been expensed as adjusting items in the period. 

 

Ta Hsing Industries Limited

On 26 June 2019 the Group completed the acquisition of Ta Hsing Industries Limited ('Ta Hsing'), a supplier of power cables to the Power Cords division. Ta Hsing has a manufacturing site in Shenzhen, in the People's Republic of China, and is headquartered in Hong Kong. The acquisition allows Volex to vertically integrate through the in-house production of PVC resin and cable extrusion capabilities, while also expanding the design and manufacturing capability. The acquisition also brings a small number of new customers to Volex.

The purchase has been accounted for as a business combination. Details of the purchase consideration, the net assets acquired and goodwill are as follows:

Fair value of consideration transferred

$'000

Cash paid

3,575

Contingent consideration

1,822

Total purchase consideration

5,397

The contingent consideration is payable in three instalments across 2020 and 2021. The consideration has been measured at fair value, with one of the instalments being dependent upon a new lease agreement being obtained for the primary manufacturing site and any warranty claims.

The provisional fair value amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:

 

 

Provisional Fair value

$'000

Property, plant and equipment

584

Inventories

1,370

Trade receivables

5,472

Trade payables

(694)

Other debtors and creditors

(663)

Cash and cash equivalent

854

Short term bank loan

(2,948)

Deferred taxes

Total identifiable assets

3,975

Goodwill

1,422

Consideration

5,397

An exercise has been conducted to assess the provisional fair value of assets and liabilities assumed. This exercise included an independent external valuation of the machinery located in the Shenzhen facility. Following this review, a $574,000 increase to the book value of the property, plant and equipment was recorded.

Since Volex was Ta Hsing's largest customer, the Group has not recognised an intangible associated with the customer relationship or open order book that Ta Hsing had with Volex at the acquisition date due to the definition of an asset not being met, as no future economic benefits will be derived from outside the Group.

The fair value adjustments are provisional and will be finalised within 12 months of the acquisition date. Any resulting changes in the fair values will have an impact on the acquisition accounting and will result in a reallocation between the assets and goodwill and a possible adjustment to the amortisation charge.

The provisional goodwill balance recognised above includes certain intangible assets that cannot be separately identified and measured due to their nature. This includes control over the acquired business, the skills and experience of the assembled workforce, and the anticipated synergies arising on integration.

Immediately after the acquisition, the Group funded Ta Hsing with $2,948,000 in order that it could pay off its external loan. This funding has been recorded as an intercompany balance between Volex Cables (HK) Limited and Ta Hsing and therefore has been excluded from the consideration paid.In H1 FY2019, Ta Hsing contributed $762,000 to the Group's external revenue and $359,000 to adjusted operating profit. Associated acquisition costs of $58,000 have been expensed as adjusting items in the period.

Net cash outflow on acquisitions

$'000

Cash consideration

 

- Servatron

13,355

- Ta Hsing

3,575

Total cash consideration

16,930

Add: overdraft and short-term debt liabilities acquired

 

- Servatron

3,677

- Ta Hsing

2,094

Net cash outflow

22,701

 

10. Related parties

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

The Group has a 26.09% interest in Kepler SignalTek Limited which is accounted for as an associate. During the period the Group accrued financial income of $85,000 on the preference shares (H1 FY2019 $38,000, FY2019: $117,000). The balance due from the associate as at the period end date was $1,910,000 (H1 FY2019: $1,445,000, FY2019: $1,825,000).

The Group also has a 43% interest in Volex-Jem Co. Ltd. During the period the Group purchased $107,000 (H1 FY2019: $2,552,000, FY2019: $4,067,000) materials from Volex - Jem Cable Precision (Dongguan) Co. Limited, an entity controlled by Volex-Jem Co. Ltd. The balance due to the associates as at the period end was $88,000 (H1 FY2019: $1,316,000, FY2019: $1,141,000).

A number of share transactions with directors have occurred during the period in line with share awards outstanding at the prior year end and as disclosed in the annual accounts for FY2019 and in line with the director shareholding notices disclosed on the Volex website (www.volex.com).

11. Contingent Liabilities

As a global Group, subsidiary companies, in the normal course of business, engage in significant levels of cross-border trading. The customs, duties and sales tax regulations associated with these transactions are complex and often subject to interpretation. While the Group places considerable emphasis on compliance with such regulations, including appropriate use of external legal advisors, full compliance with all customs, duty and sales tax regulations cannot be guaranteed.

Through the normal course of business, the Group provides manufacturing warranties to its customers and assurances that its products meet the required safety and testing standards. When the Group is notified that there is a fault with one of its products, the Group will provide a rigorous review of the defective product and its associated manufacturing process, and if found at fault and contractually liable will provide for costs associated with recall and repair as well as rectify the manufacturing process or seek recompense from its supplier. The Group does not provide for such costs where fault has not yet been determined and investigations are ongoing.


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