Chairman's Statement
Overview
In my Interim Statement in June 2019 and in the subsequent Trading Update announced on 4th September 2019, I referred to delays in deliveries of major projects which would affect the outcome for the year ended 30th September, and new contract wins which would bolster output in the new financial year. This has proved to be the case. As expected, Sales and Profits for the year to September 2019 fell well short of that achieved in 2018, but record order entry was achieved, reinforcing our confidence in the future.
Sales for the year decreased 30.2% to £19.5m (2018: increase 24.5% to £28.0m) and operating profit before exceptional and non-underlying items declined 91% to £0.2m (2018: £2.2m). The Loss before tax, after exceptional costs of £0.40m (2018: £0.18), amounted to £0.24m (2018 profit: £2.0m). Basic earnings per share for the year were a loss of 0.43p (2018: earnings 14.34p). Gearing amounted to 19.6% (2018: 15.5%).
Order entry increased 33.5% to £27.0m (2018: £20.2m) resulting in the order book at the end of the year rising 53.3% to £21.3m (2018: £13.8m). The strong order entry performance has continued in the first quarter with a further £6.4m booked, and the orders pipeline and the prospects funnel remain encouraging.
Dividends
Despite the poor performance during the year your board remain sufficiently confident, subject to shareholder approval at the forthcoming annual general meeting to be held at the offices of LPA Lighting Systems at 12 noon on Wednesday 18th March 2020, to recommend the payment of an unchanged final dividend of 1.80p (2018: 1.80p), making a total for the year of 2.90p (2018: 2.90p). The dividend, if approved, will be paid on 27th March 2020 to shareholders registered at the close of business on 28th February 2020.
Shareholders are reminded that this final dividend is the last to be supported by cheque remittances. As set out in the document published and circulated, dated 5th July 2019, "The Digital Future", a copy of which is available at www.lpa-group.com, future remittances and tax confirmations will only be available electronically.
Corporate Governance
The Group adopted the Quoted Companies Alliance Corporate Governance Code from 28 September 2018, having closely followed the previous guidance. This places responsibility for oversight, adoption and communication of the Group's Corporate Governance Model with the Chairman.
The Board considers that the Group's Annual Report is a Document of Record and therefore eminently suited to be the repository of the Group's statements on compliance with the Code. These will be reviewed at least six-monthly and updated as necessary and are set out within the Annual Report.
Further the Board considers it helpful to have a statement on the Group's North Star or Guiding Light. This forms part of our Corporate Governance and is set out within the Annual Report. The Annual Report and other information is available on the Group's website www.lpa-group.com.
During the year the Group has continued to foster a culture which is consistent with the Group's objectives, strategy and business model, and which recognises the principal risks and uncertainties facing the Group, which are contained in the strategic report within the Annual report.
Board and Management
Board members' curriculum vitae and relevant experience are set out on page 30 of the Annual Report.
Following the forthcoming Annual General Meeting on 18th March it is anticipated that Paul Curtis will be appointed Chief Executive Officer (CEO) with effect from 1st April 2020, having successfully completed a period as Chief Operating Officer (COO).
Chris Buckenham remains Chief Financial Officer (CFO) and Company Secretary.
Len Porter remains Senior Non-Executive director and Chair of the Audit and Remuneration Committees.
Michael Rusch, Group President and Non-Executive Director expects to retire in June 2020 on reaching his 75th birthday, following over 50 years of invaluable service to the Group, including as Director, Managing Director, Chairman and President of the Group. We are most appreciative of his wise counsel and commitment to the Group.
Having taken on an additional executive role as Chairman of LPA Industries Pension Trustees Ltd with effect from April 2019, I will remain Executive Chairman for the forthcoming year and through to my retirement in September 2021.
We are actively recruiting and expect to appoint a further Non-executive director ahead of Michael's retirement in the middle of the year. Subsequently we shall be recruiting a further Non-Executive to provide a panel of candidates from which my successor as Chairman in September 2021 may be selected.
Our trading activities continue to be managed independently through local Executive Teams. Michael Raynor remains General Manager of LPA Channel Electric and John Hesketh, Managing Director of LPA Lighting Systems. During the year Paul Curtis, following the departure of the MD of LPA Connection Systems, assumed those additional responsibilities while a successor was recruited. A candidate has been identified who is expected to commence employment by the end of March 2020.
Employees
We believe people are the most important asset of any business. During the year we experienced significant challenges through project delays and temporary downturns, followed by surges in demand, which created significant challenges for management. We continue to benefit from our capital investment programme and enhanced capabilities, which we believe our customer base continues to recognise as exceptional in UK manufacturing in general. We continue to upskill our workforce as we seek to maintain and increase added value per employee. We maintain flexibility through a number of staff on temporary contracts. We have no zero-hour contracts. The underlying cost base is tightly managed. I should like to thank all of our employees for their hard work and diligence through the past, most challenging, year.
Outlook
The start of the current financial year was challenging, but, as the quarter progressed the pace of activity has accelerated. As previously reported, our order book has recovered strongly, and our order pipeline and our funnel of opportunities are encouraging at home and abroad.
We expect good progress throughout the rest of the year and beyond. We are pleased that uncertainty over Brexit has reduced. We have a strong long-term order book, a strong balance sheet, a skilled workforce and valuable experience in importing and exporting. We expect challenges, but we look forward to the future with confidence.
Peter Pollock
Chairman
27 January 2020
Chief Operating Officer's Review
Trading Results
Project delays impacted the 2019 financial year leading to a reduced sales level at £19.5m (2018: £28.0m) and a reduced operating profit of £0.2m (2018: £2.2m). During the period order intake increased 33.5% to £27.0m (2018: £20.2m), which exceeds the previous highs achieved of £26.8m in 2015 and £26.1m in 2017. Significant project wins on several new rolling stock platforms in the rail industry were fundamental to this and, as such, we enter the new financial year with a strong orderbook and many opportunities still to pursue.
The project delays previously communicated have all but worked their way through and, as new projects come on stream, we have seen activity increasing through the first quarter and expect this to continue and accelerate throughout the rest of the year.
2019 Summary
· Order entry up 33.5% at £27.0m (2018: £20.2m)
· Sales down 30.2% at £19.5m (2018: £28.0m)
· Operating Profit, before exceptional and non-underlying items, down 91% to £0.2m (2018: £2.2m)
Added value for the year increased to 49.3% (2018: 48.6%). A continuous drive to automate and gain efficiencies across all areas of the business are key to maintaining these levels and essential in mitigating the impacts of a competitive marketplace. These efforts will continue throughout 2020 to ensure the Group's competitiveness going forward.
Despite flexing the cost base, the Group maintained its capabilities to deliver the growing order book and future opportunities.
Markets
Rail, Aviation & Defence and niche industrial markets remain strong for the Group and will continue to be the focus for the coming year. These markets require quality products and service, which aligns with the LPA mantra of long-life reliability that features in the design philosophy across all our products.
Rail continues to be the Group's main segment representing 69% of sales for the financial year; aerospace and defence; 16%; other 15%. Solid progress has been made in the international marketplace with two significant export lighting rollingstock 'platform' orders, one of which being for a new European Tram, a first for LPA. These are significant wins with the potential to bring further business beyond that already announced and strengthens LPA's position as a world leader in LED technology.
The UK Rail market remains strong with full order books for some train builders and growing orderbooks for others providing activity for the coming year and beyond. Rail refurbishment and maintenance demands have suffered adjustment and consolidation but still provide opportunities for the Group and should continue to do so for the coming years. Rail investment increases worldwide, and with LPA's growing reputation for quality and innovation, this remains a key market.
Aviation & Defence continues to be a growth market for the world and remains a key focus area for the Group. We are launching Plane Power, our new range of aircraft Ground Support Equipment, during 2020 with an increased effort to grow global market share. The Group supplies components for aircraft such as A350 and C Series and is set to benefit from these for several years to come.
Other markets, where product quality is important, are a key focus going forward with efforts being made to broaden product ranges enabling increased success in these areas.
Design and development
During 2020 we will launch our new range of Plane Power connectors aimed at the aircraft ground power supply market, world leading smart lighting and, various other product developments and enhancements. The Group is focused on smart technology which it is including as options on all its products, where practical, as they are developed. Smart technology is of increasing importance to our customers and a key area of focus for product development, which is essential in maintaining our position as a world leader in the markets we serve.
The recently announced framework agreement with Siemens Vienna will deliver one of the most modern and complex train smart lighting systems in the world. This is testament to the growing confidence shown by customers choosing LPA.
The Group continues to be a leader in mobile device charging on trains and 2020 will see further product developments in this area, as consumer demands becomes ever more technologically focused.
Operations
During the year the Group adjusted resources and structures to accommodate the variable project workload and to increase efficiency and effectiveness.
Our lighting facility achieved ISO14001 compliance, which is a growing requirement for the international marketplace. Plans for our other facilities to achieve this standard are also underway. The Group retains its IRIS, AS9120 and ISO9001 certifications, which are key features of our operations.
There has been an increased effort in relation to data security as cyber threats become more sophisticated and more common. All businesses in the Group have strengthened systems, controls and procedures during the year, achieving Cyber Essentials certification and improved Business Continuity Plans.
There has been an enhanced focus on Health & Safety across the Group ensuring that the environment we provide for our workforce and visitors is safe and welcoming.
2019 operational highlights
· Integration of sheet metal manufacturing (Haswell Engineers) operating systems into LPA Connection Systems
· New Laser Cutting System installed at LPA Connection Systems increasing efficiency and capability
· Lean lift storage systems installed at LPA Connection Systems creating approximately 700 m2 of additional assembly space.
· New automatic Printed Circuit Board test equipment installed at LPA Lighting Systems improving efficiencies and quality of inspection
· Further work on improving flow of manufacturing cells
· 5S (lean processes) implemented at Electro-mechanical, already in place at LPA Lighting Systems
Outlook
The strong order entry for the year gives an excellent foundation for the future. The marketplace is stable and continues to provide opportunities for the Group. The drive for efficiency, product development, and worldwide customer awareness of LPA is continuous.
We look forward to the future with increasing confidence.
Paul Curtis
Chief Operating Officer
27 January 2020
Financial Review
Trading Performance
Revenue in the current year reduced by £8.4m (30.2%) to £19.53m (2018: £27.98m) with delayed rail project activity being the main factor, as previously announced. Gross margins fell 3.1% to 22.3% (2018: 25.4%), reflecting the higher proportion of fixed costs borne by the Group.
Gross profit amounted to £4.36m (2018: £7.12m). Added Value of 49.3% was achieved (2018: 48.6%), a Group KPI. Other operating expenses reduced by £0.71m (14.7%) to £4.16m (2018: £4.87m) - represented by decreased sales and distribution costs of £0.34m and reduced administration and overheads of £0.37m. Key administration cost changes comprised pension administration and governance of £0.10m (2018: £0.17m); grant credit of £0.09m (2018: nil); and employment costs of £1.50m (2018: £1.70m) inclusive of bonus awards of £8,000 (2018: £116,000) and share option related credit of £47,000 (2018: £17,000).
An operating profit before exceptional and non-underlying items of £0.20m (2018: £2.24m) was achieved, down £2.04m (-91.0%). After exceptional and non-underlying items, detailed below, a loss of £202k was incurred (2018: profit £2.07m).
In the first half of the year sales of £10.10m (2018: £13.93m), down 27.6%, produced an operating profit before exceptional and non-underlying items of £0.17m (2018: £1.12m), down 84.4% on the corresponding period last year. The second half delivered sales of £9.44m (2018: £14.05m) resulting in an operating profit before exceptional and non-underlying items of £0.03m (2018: £1.12m).
Exceptional and Non-Underlying Items
Net exceptional costs in the period totalled £0.40m (2018: costs £0.18m). Key items comprised:
(i) reorganisation costs of £70,000 (2018: £96,000) - associated with ongoing cost base reductions at the Group's Electro-Mechanical site;
(ii) £333,000 (2018: Nil) Guaranteed Minimum Pensions (GMP) equalisation recognition in line with the High Court ruling in October 2018, requiring all UK companies to remove inequalities between men and women in scheme benefits that arose under GMP. This is a historical cost which has been recognised in the current financial year as a change in basis, whilst going forward all movements will be recognised through the Consolidated Statement of Comprehensive Income alongside all other movements in the Defined Benefit Pension Scheme.
2018 also included (2019: Nil):
(iii) extra centre costs arising from Board succession planning including duplicated finance function costs - £74,000
(iv) professional and recruitment fees associated with the Board succession and establishment of the Group's Employee Benefit Trust and corporate advice - £5,000;
Finance Costs and Income
Within finance costs the interest on borrowings increased by 23.7% to £0.10m (2018: £0.08m). The weighted average interest rate increased from 2.7% to 2.9%, key drivers being:
· the flow through of two 2018 UK base rate rises
· refinancing of the loan borrowing at a higher margin of 0.3% and increased levels of borrowing. The term loan average rate increased with the base rate rises included by 0.45%.
Finance income, which comprises the net interest income on the pension asset, was £64,000, an increase of 83% (2018: £35,000).
Loss / Profit before Tax, Taxation and Earnings Per Share
Loss before tax was £0.24m (2018 Profit: £2.02m) resulting in a tax recovery of £0.19m (2018 charge: £0.25m). The effective tax rate in the year was -78.0% (2018: 12.5%), with the UK corporation tax rate of 19.0% (2018: 19.0%). The effective tax rate is largely the consequence of tax loss utilisation of 4.6% (2018: 1.2%); qualifying R&D expenditure of 32.9% (2018: 2.8%); prior year R&D expenditure claim increases of 20.7%; share option prior period recognition 8.2% (2018: nil); and defined benefit pension contributions 8.0% (2018: 0.9%). The effective tax rate on profit before tax, exceptional and non-underlying items was -92.0% (2018: 11.3%).
The loss for the year was £0.05m (2018 profit: £1.77m) representing basic earnings per share of -0.43p (2018: 14.34p).
Balance Sheet
Shareholders' funds decreased by £0.39m (-3.1%) in the year to £12.32m (2018: £12.71m) giving a net asset value per ordinary share of 97.4p (2018: 102.7p). The tangible net asset value per share (calculated excluding intangibles and pension asset, net of deferred tax) was 72.0p (2018: 78.3p). Net debt increased £0.45m to £2.42m (2018: £1.97m) with gearing (net debt as a % of total equity) increasing to 19.6% (2018: 15.5%).
Shareholders' funds include Investment in Own Shares at £0.33m including share premium (2018: £0.21m), representing ordinary shares held in the Company by the LPA Group Plc Employee Benefit Trust (EBT).
Intangible assets, which comprise goodwill, capitalised development costs and software purchases, were £1.36m (2018: £1.20m). Software previously capitalised as Tangible assets have been reclassified in the year as Intangible assets in accordance with IAS38. The corresponding depreciation transferred to amortisation, with no effect on the trading results or reserves. Software additions in the year were £0.02m. Goodwill relates to the Group's investment in Excil Electronics and was unchanged at £1.15m. Capitalised development costs, associated with the development of a new range of ground power connectors for the aviation sector, Plane Power, and electronic and lighting product developments were £0.12m (2018: £0.03m).
Property, plant and equipment at 30 September was £7.01m (2018: £7.22m), of which property made up £4.25m (2018: £4.34m) and plant and equipment £2.76m (2018: £2.87m). Additions in the year were £0.54m (2018: £1.02m). The depreciation charge increased 6.5% at £0.70m (2018: £0.65m).
The IAS19 actuarial surplus recognised at 30 September 2019 on the Group's closed defined benefit pension arrangement was £2.25m (2018: £2.41m). Changes over the course of the year comprised an income statement credit of £0.064m related to interest (2018: £0.035m) and within exceptional and non-underlying items, GMP cost recognition of £0.333m (2018: Nil). Employer contributions received of £0.10m (2018: £0.10m) plus an actuarial gain of £0.01m (2018: £0.96m) recognised in the statement of comprehensive income, benefits paid from the scheme totalled £0.51m (2018: £0.48m). The actuarial gain resulted from changes to demographic assumptions in line with market indices (primarily caused through overall life expectancy assumptions and GMP equalisation being included) and changes in financial assumptions (primarily reflecting the lower discount rate applicable at September 2019, 1.8% as opposed to 2.8%), a reduction in both RPI and CPI inflation measures of 0.1% to 3.15% and 2.45% respectively, providing a return on plan assets of £1.9m (2018: £0.06m), against which an experience loss of £0.005m is recognised (2018: £0.25m gain).
Net trading assets (defined as inventories plus trade and other receivables, less trade and other payables and current tax) were 3.2% higher at £4.42m (2018: £4.29m).
Cash Flow
Net cash from operating activities was £0.66m (2018: £2.45m) made up of a trading cash inflow of £0.87m (2018: £2.72m) a reduction in working capital of £0.10m (2018 increase: £0.14m), tax payments of £0.21m (2018: £0.03m) and defined benefit pension contributions of £0.10m (2018: £0.10m).
Capital expenditure outflows reduced to £0.4m (2018: £0.5m). Capitalised development expenditure amounted to £0.12m (2018: £0.03m), including expenditure at LPA Connection Systems to develop a new range of aircraft ground power support products and at LPA Lighting Systems, further product developments focussed on Smart Lighting and associated technologies.
Loan repayments of £2.2m were made (2018: £0.20m) which included the repayment of term loan and refinance ahead of the facility five-year term expiry in 2021. Draw down on a new term loan, also with a five year term and bullet repayment provided a cash inflow of £2.6m (net £0.5m refinance inflow). Hire Purchase repayments were £0.2m (2018: £0.1m). Interest payments on borrowings amounted to £0.03m (2018: £0.02m). Dividend payments increased 5.5% in the year to £0.36m (2018: £0.34m).
During the year, £0.08m (2018: £0.25m) was loaned to the Group's Employee Benefit Trust to facilitate the acquisition of LPA Group plc shares. The transactions associated with the Employee Benefit Trust are consolidated within these accounts. £0.11m (2018: £nil) was received from the exercise of share options.
Overall there was a net decrease in the cash position of £0.07m (2018: increase of £1.05m).
Net Debt
An analysis of the change in net debt is shown below:
|
Bank Loans |
Hire Purchase Obligations |
Cash and Cash Equivalents |
Net Debt |
|
£000 |
£000 |
£000 |
£000 |
|
|
|
|
|
At 1 October 2018 |
2,170 |
757 |
(956) |
1,971 |
New Hire Purchase Obligations |
- |
168 |
- |
168 |
Drawdown of Bank Loan |
2,626 |
|
(2,626) |
- |
Interest & Arrangement Fee |
31 |
- |
- |
31 |
Repayment of Borrowings |
(2,242) |
(201) |
2,443 |
- |
Cash Absorbed |
- |
- |
250 |
250 |
|
|
|
|
|
At 30 September 2019 |
2,585 |
724 |
(889) |
2,420 |
The Group's main bank finance, a £2.63m bank loan drawn down in 2019 is repayable over 5 years, including a bullet repayment in March 2024 (calculated on 15 year repayment terms). The loan was utilised to refinance the previous loan, drawdown in 2017 and repayable in 2021. As at September 2019 the amount outstanding was £2.58m (2018: £2.17m); the loan is to be repaid through 19 quarterly instalments of £0.06m from July 2019, with the residual balance of £1.794m repayable in March 2024. Interest is payable at base rate plus 2.25%.
A forecast breach of the bank loan covenant as at 30 September 2019 was identified and discussed with the Bank ahead of the year end. The Bank have expressed their intention to continue support for the Group and subsequently their intention to issue a covenant waiver, at the point of covenant measurement. The covenant is measured following publication of the annual accounts based on the financial position of the Group at 30 September 2019 and its financial results for the year then ended. These post balance sheet events, under IAS10, are deemed to be non-adjusting. As such, the bank loan has been presented as all falling due within one year.
In the year £0.17m of plant and equipment additions were financed through new hire purchase finance (2018: £0.52m). Interest on the £1.50m overdraft facility is payable at base rate plus 2.0%. Headroom within the facility at 30 September was £1.50m (2018: £1.50m).
Treasury
The Group's treasury policy remains unchanged in the year: further details on the Group's borrowings, financial instruments, and its approach to financial risk management are provided in the Annual Report.
Chris Buckenham
Chief Financial Officer
27 January 2020
Consolidated Income Statement
For the year ended 30 September 2019
