Hardide plc (LON:HDD), the developer and provider of advanced surface coating technology, has today announced its results for the six-month period ended 31 March 2020.
Highlights
Financial
· Record revenue for a half-year – up by 29% to £3.02m (H1 2019: £2.35m)
· Gross profit of £1.66m – up by 58% (H1 2019: £1.05m)
· Increased gross margin of 55% (H1 2019: 45%) as a result of a stronger product mix
· EBITDA of £0.03m* (after IFRS 16 and relocation costs the like-for-like H1 2019 would have been a loss of £0.37m)
· Over-subscribed fundraising of £2.50m (before expenses) to fund additional equipment, enhance new UK site and strengthen the balance sheet
· Cash at bank at 31 March 2020 of £4.88m (£5.35m at 31 March 2019)
· Sole material borrowing is the maiden asset finance agreement with Hitachi Capital over £0.40m against a new coating reactor
* Application of IFRS 16 has led to operating lease charges previously recognised within operating profit to now be partially recognised in interest costs, leading to an increase in EBITDA of approximately £0.14m. For reference, before IFRS 16 adjustments, EBITDA would have been a loss of £0.11m in H1 2020, compared with a loss of £0.44m in H1 2019.
Operational
· Relocation to the new UK site is on track for completion by end-September 2020; aerospace work will continue to be processed at the Wedgwood Road site until the new facility is fully approved by Airbus
· Encouraging progress continues to be made with Airbus and a supply agreement has been reached with one of their major Tier 1 suppliers
· Two projects grant-funded by the National Aerospace Technology Exploitation Programme (NATEP) were completed successfully
· International filing of UK patent for turbine blades has commenced
Post-period
· First production order received for Airbus A380 wing compression pads
· Honoured with a Queen’s Award for Enterprise in recognition of the outstanding growth in international sales
· No significant reduction in demand seen so far as a result of COVID-19. Encouraging dialogue is being maintained with customers regarding projected demand
· Both UK and US sites continue to coat product as normal and are following government safety directives
· Discretionary spending is under regular review and actions are being taken to maximise future cash balances
· New Finance Director, Simon Hallam, appointed on 20 April 2020
Commenting on the interim results, Robert Goddard, Chairman of Hardide plc, said:
“The Group is pleased to report another record for sales revenue for a half year. The phased relocation of our UK business to a larger, modern and high-spec facility is on time and budget. Meanwhile, our UK and US sites are operating effectively and continue to coat product during the COVID-19 pandemic.
“So far, trading in H2 2020 has started well and has not, to date, been significantly disrupted by the effects of COVID-19. There are grounds for cautious optimism, but in the current context, the Board must be mindful of the potential for order book disruption in the second half. The Group has a robust cash position and measures are being put in place to preserve cash, which positions us well in these uncertain times.
“The safety and well-being of our staff remain the Group’s main priority. The Board continues to observe and implement government safety directives that apply to its businesses in the UK and the US. These are unprecedented times and the Board wishes to thank our employees for their commitment, flexibility and resolve during this challenging period.”
CHAIRMAN’S STATEMENT
Introduction
In H1 2020, the Group reported another record sales revenue for a half year. Compared with H1 2019, sales to flow control customers increased by 49%, and to oil and gas by 30%. Demand from most of our oil and gas customers is currently not significantly affected by the COVID-19 situation. Discussions between the Company, Airbus and its Tier 1 suppliers on converting components from hard chrome plating to our Hardide-A coating continue, and after the period end, the Company was very pleased to receive its first production order for Airbus A380 wing compression pads.
Relocation of the UK facility to the new larger site nearby is on track, with internal fit-out work having been completed in March 2020. The plan to complete the move by the end of September 2020 remains achievable. Some staff have already relocated to the new site which has helped social distancing measures.
During H1 2020, the Group raised £2.50m (before expenses) in an over-subscribed share placing. The proceeds are being used to fund additional equipment, enhance the new site, improve environmental performance and strengthen the balance sheet. In addition, £0.40m in asset-backed finance was secured for a new coating reactor in the UK.
Financial Results
The Group is reporting H1 2020 revenue of £3.02m, an increase of 29% compared with the same period last year (H1 2019: £2.35m). An increase in sales, together with a stronger product mix, resulted in a 58% rise in Group gross profit to £1.66m (H1 2019: £1.05m), together with the gross margin increasing to 55%, compared with 45% in H1 2019.
EBITDA profit for the period was £0.03m. For comparison, before the IFRS16 adjustment, EBITDA was a loss of £0.11m which included £0.14m of costs relating to the new site (H1 2019: £0.44m EBITDA loss). EBITDA, excluding costs associated with the new site, has now been positive for the nine-month period from 1 July 2019 to 31 March 2020. In H1 2020, capital expenditure on the site relocation amounted to £2.90m.
Overheads increased to £1.63m (H1 2019: £1.48m), primarily due to recruitment and increased staff costs, building and equipment expenses and an adverse exchange rate on the revaluation and translation of cash balances.
During the period, we repaid the Virginia Tobacco Commission grant of $116k and released the provision of $170k, resulting in an exceptional credit of £42k to operating profit. The Martinsville-Henry County Economic Development Corporation in Virginia has converted the outstanding value of their loan, $182k, to a grant, with the Company released from all obligations under the loan agreement, with no further repayments due. This will be written-off to the income statement in line with the remaining life of the reactor installed at Martinsville in December 2018, for which the loan was originally made.
Operational Overview
Revenue increased from flow control (valves and pumps) by 49% and from oil and gas customers by 30%. Sales to a major global oil and gas customer returned to previous levels after they resolved a supply chain issue that caused delays to their supply of components and adversely affected our revenues in H1 2019. The growth in oil and gas revenues included a 210% increase in the sales of coated industrial diamonds used primarily in drilling tools. Demand has remained subdued from another major oil and gas customer that has been affected by the restriction on pipeline capacity in Canada. Sales to our major North American industrial pump manufacturer customer increased substantially as we coated parts for their new product ranges.
In March 2020, the first new coating reactor was delivered to the new Longlands Road site in Bicester and has now been installed and commissioned. The second and larger new coating reactor was delivered in April 2020 and transfer of the existing reactors from Wedgwood Road, Bicester will commence in May 2020. A programme of work has been agreed with Airbus for their approval of reactors and qualification of the new site by the end of calendar year 2020. Aerospace work will continue to be processed at Wedgwood Road until the new facility is fully approved. Additionally, another new coating reactor has been delivered to the Martinsville facility in the US, bringing the total there to four. This site continues to operate well with sales increased by 133% in H1 2020 compared with H1 2019.
Negotiations on a supply agreement with a major Airbus Tier 1 supplier have been completed and requests for pricing are now being received from a number of their other UK and European Tier 1 suppliers for various other components. Airbus is currently planning second-stage testing on further Hardide‑coated components for the A320 aircraft. The first, low volume production order for Airbus A380 compression pads was received post-period. These are to replace hard chrome parts on aircraft currently undergoing routine maintenance.
Final approval by Leonardo Helicopters of Hardide-coated parts of a transmission system has been delayed due to the unavailability of the customer’s test rig. Testing is expected to resume shortly. Regular production parts are now being received for Lockheed Martin’s F-35 Joint Strike Fighter and further components are in trials with other aerospace companies.
In the next stage of our long-term project for the development of a coating to extend the life of steam turbine blades, EDF Energy has supplied blades that will be coated at the new UK site once the large processing line has been installed and commissioned. This is expected to be during summer 2020.
The two NATEP projects carried out in collaboration with Airbus, Leonardo Helicopters and other industry partners were completed successfully. The first project demonstrated that our new ultra-low temperature coating can be applied on certain temperature-sensitive materials used in aircraft components without affecting their properties. The second project defined the machining parameters for the complex surface finish characteristics for these applications. Importantly, the success of this programme has widened the range of aerospace applications for Hardide’s coating.
Following the success of a technically-challenging application for a global oil and gas operator that has led to a high-volume supply agreement, the Company has been investigating users of similar components in areas other than oil and gas. We have received samples from two new customers for coating and testing. Since Hardide has the unique ability to coat components that are critical to the performance of particular types of filtration equipment, this application has exciting potential.
Summary and Outlook
The Group has announced record sales in the first half of the financial year and our underlying business is strong. Our order book going into the second half was strong and trading has started well and has not been significantly affected so far by the disruptive effects of COVID-19. That is pleasing in the current context, but we are mindful of the risks and challenges faced in the markets we serve, and are monitoring the situation closely.
The Group has a strong cash position following the recent fundraise and asset finance agreement. The Board continues to plan for a range of scenarios, including a likely worst-case assumption, and this gives confidence that the Group will be able to withstand the uncertain period ahead. Measures to protect the current cash position are being put in place, including very limited use of the UK employment furlough scheme and of the US Paycheck Protection Program (which the Company does not expect will lead to a material repayment). Discretionary spending cuts and cost savings are being continually reviewed and implemented where appropriate.
In January 2020, Peter Davenport advised the Board that he wanted to step down as Finance Director and pursue a new career in education. The Board is very grateful to Peter for his dedication and the role that he has played in the development of the Group over the last 15 years. We are sad to see Peter leave, but we welcome his successor Simon Hallam, who was appointed as Finance Director on 20April 2020. Peter has kindly consented to a suitable handover period until 22 May 2020.
The safety and well-being of our staff remain the Group’s key priority. The Group is observing government guidelines and ensuring compliance with those that apply to its businesses in the UK and the US. The Board thanks our employees for their commitment, flexibility, hard work and resolve during these unprecedented times.
Robert Goddard
Chairman
19 May 2020
